Governments around the world are promising to embrace green energy and withdraw support for fossil fuels to help curb global warming. But the lucrative financial package for a huge LNG project in Mozambique, supported by eight state-backed export credit agencies, has raised the question of whether or not governments are taking sustainability seriously, writes Maddy White.
When French energy giant Total secured US$14.9bn – the majority of the finance required – for its liquified natural gas (LNG) project in Mozambique with support from eight government agencies in July, concerns grew amongst industry professionals that lending practices are not aligning with sustainability pledges made by governments.
The oil major says it is Africa’s biggest project finance deal ever, with the funding made up of direct and covered loans from eight export credit agencies (ECAs), 19 commercial bank facilities, and a loan from the African Development Bank (AfDB).
The agencies involved in the deal are Atradius, the Export Credit Insurance Corporation of South Africa (ECIC), the Export-Import Bank of Thailand (Exim Thailand), the Export-Import Bank of the United States (US Exim), the Japan Bank for International Corporation (JBIC), Nippon Export and Investment Insurance (Nexi), Italy’s Sace, and UK Export Finance (UKEF).
Export finance projects of this size take years to develop. US exploration and production (E&P) company Anadarko first discovered sizeable reserves in Mozambique a decade ago. Total, which bought out Anadarko for US$3.9bn last September, will now develop the Golfinho and Atum offshore natural gas fields and construct a two-train liquefaction plant with an annual capacity of around 13 million tonnes. The project will supply gas for LNG exports, mainly to Europe and Asia, and domestic consumption.
“These projects take a really long time to build and a lot of the pencilling out of the economics of the Mozambique project was done nearly 10 years ago,” Ted Nace, founder of Global Energy Monitor, an energy-focused NGO, tells GTR. “Being such a massive project, I’m not sure it has been reviewed under current economic realities. It is a completely different economic comparison right now between renewables and fossils than it was even a few years ago. It is really hard to steer these massive ships, as it were, to change direction.”
A “major” impact
The mammoth project is expected to raise greenhouse gas (GHG) emissions in Mozambique. An April 2019 report by the AfDB on the effects of the project found that pre and post-development the fields would have a “major” impact on GHG emissions.
“Impacts from this activity [construction and operation phases of the LNG facility] could result in the project accounting for nearly 10% of Mozambique’s annual national GHG emissions. These impacts are expected to be of major significance. With good practices in place, this impact significance will remain at major. Compensation measures will be developed,” reads the AfDB report.
Natural gas has been hailed a ‘bridge fuel’, allowing the world to move away from coal, until renewable energy becomes a cheap and reliable option. This argument has been based on the fact that compared with using coal, burning gas releases about half as much carbon dioxide (CO2), the primary GHG responsible for warming the planet, finds a report by Global Energy Monitor published in July. However, the fossil gas system suffers from the major problem of leakage. Fossil gas is mainly methane, a GHG far more potent than CO2, and it leaks from various parts of the natural gas system, including extraction wells, compressors and pipelines.
“The International Energy Agency, the leading forecaster on energy, has been bullish on gas. It wasn’t so long ago that the environmental movement itself was bullish on gas until it looked more carefully at methane emissions, studying it more closely,” says Nace.
Not their mandate
Export credit agencies have been criticised by NGOs for their support of projects that do not align with the 2015 global Paris agreement to keep GHG emissions below 2°C above pre-industrial levels. With some governments being particularly vocal on climate change, for agencies to support brown projects overseas that increase GHG emissions is contradictory to the agreement.
UKEF is one such agency that has come under fire from NGOs for this. Over a five-year period, it spent £2.6bn supporting the UK’s global energy exports, of which 96% went to fossil fuel projects, according to an independent report by the Environmental Audit Committee (EAC), a cross-party group of MPs, published in June 2019. Adding to the confusion in terms of the country’s stance on the matter, UK Prime Minister Boris Johnson announced an end to UK government support for overseas coal projects in a speech in January 2020. But the UK hasn’t funded an overseas coal plant since 2002.
Meanwhile, the Japanese government is the “worst offender” when it comes to issuing official export credit support for fossil fuels through its agencies JBIC and Nexi, reveals a January report by NGO Oil Change International. However, in July, the government made the decision to tighten its lending criteria for overseas coal-fired power plants. Despite this, it has said it will continue supporting coal projects if they use highly efficient technologies, and plants that it has already committed to will still go ahead, locking in fossil fuel-based energy for decades.
Nevertheless, the role of an ECA is not necessarily to choose to support green projects over brown ones: its mandate is to help domestic companies win export contracts by providing attractive financing terms to their buyers, fulfil contracts by supporting working capital loans, and get paid by insuring against buyer default.
Erik Hoffmann, global head of export and agency finance at Santander, says that export finance as a product is falling behind some others in the trade space when it comes to sustainability. “The simple question is why? It’s because ECAs have a specific mandate; they are there to support their domestic exports – that does not necessarily mean picking greener projects. Within the export finance working group of the ICC, we are working on a study to investigate where we are against other products, how we can promote export finance to become a leader in sustainable development generally,” he tells GTR.
Charles Donovan, executive director of the Centre for Climate Finance and Investment at Imperial College Business School, and a former head of structuring and valuation for alternative energy at BP, tells GTR: “The challenge for a lot of banks and export and development agencies is that they don’t see enough green opportunities. This is the problem across commercial banking: for every green asset out there, there are 10 dirty ones.”
Green export finance projects in the energy sector can be either inherently environmentally friendly – a wind farm, for example – or they can be more complex in terms of how they are green: a country dependent on coal that is moving to a cleaner way of generating energy, but which may not be considered sustainable elsewhere, for example. In such a case, the benefits should be quantified over the project’s lifetime.
However, there are three parts to sustainability: the environment, social aspects and governance, known as ‘ESG’. Conflict can arise within ESG, as what may benefit a community socially, may not be environmentally friendly. While Total’s LNG project is arguably not good for the environment, the company claims that it is offering “transformational opportunities” for the people of Mozambique, for example. “The project and future operations will fuel economic growth, improve local infrastructure and increase local content for decades to come,” reads Total’s website. Because of these differences and a lack of standardised definition of what ‘sustainable’ export finance actually means, knowing what counts and does not count as sustainable, or how sustainable a project is, is tricky.
Richard Wilkins, Emea head of export finance at JP Morgan, tells GTR that export finance follows sustainability trends because it needs to have a project or a contract to finance. However, it also has the ability to lead, as guarantees are state-backed and so governments can incentivise financing, making it more attractive for sustainable projects or exports.
Wilkins says that in the oil and gas sector, other than projects that are already underway, there are reviews as to whether investments should go ahead in the current context. “There is a general trend globally away from fossil fuels, with increasing pressure on export credit agencies and governments not to support them. It is difficult to know how quickly this trend will move.”
With many large oil and gas projects on hold because of the Covid-19 pandemic and the oil price crash, lenders may be rethinking their investment decisions. A July report by Reuters found that out of 45 major LNG export projects in pre-construction development across the globe, at least 20 – representing a capital expenditure of around US$292bn – are now facing delays to their financing.
Global Energy Monitor’s Nace says that as well as slowing down projects, the pandemic has also proven that governments can act when they want to. Taking the US government as an example, he says: “When it saw the severity of the economic downturn, it was not very hard to mobilise bipartisan support for multitrillion dollar packages to avert a widespread social crisis. That is a demonstration of how governments can mobilise when they want to. What has to happen around climate change is not that different. You have to do a lot of things and you have to do them quickly. They may be expensive in terms of upfront investment, but they may pay off very big later on.”
Export credit agencies have their own mandate, which, as public agencies, is linked to the interest of their respective governments. Whether they will continue to support the volume of overseas fossil fuel projects they did pre-pandemic is yet to be seen.
“There is no good argument for government-sponsored agencies to spend a single pound more on fossil fuels, from a pure financial risk point of view,” says Donovan at the Centre for Climate Finance and Investment. “The solution to climate change is investment-led and without lenders doing their job appropriately, we have no chance of getting to it [net zero].”
While export credit agencies have the power to decide which projects receive finance, convincing them to act against their short-term national interest in favour of long-term global gain is difficult. No clear definition of what sustainable export finance means is also not helping. However, as large fossil fuel projects are delayed by investors, this could prove a pivotal time for the transition to more green lending practices.