Luca Tonello is Deputy General Manager and Head of Project Finance Asia at Sumitomo Mitsui Banking Corp. Luca has more than 15 years of experience in arranging transactions and advising clients in energy, natural resources and infrastructure, of which seven years were spent in the Asia Pacific region and based in Singapore and Tokyo.
He heads the project finance team of SMBC in Asia, one of the most established and respected in the region. Before moving to Singapore in 2008, Luca was a Director in the Natural Resources team of RBS in London during 2006 to 2008 and was involved in a number of financings in the oil & gas sector in Africa and the Americas. He started his career with GE Capital in London.
Luca holds an MSc (Hons) in Energy and Mechanical Engineering from the University of Turin (Politecnico), Italy, and a Master in Finance from the London Business School. He is a member of AIPN and APLMA.
1. What are your thoughts on the SIEW 2016 theme “New Energy Realities”?
We have indeed entered a new era of energy markets. Crude prices took a plunge in 2H 2014 and have yet to recover to above-$60 level. Consumers, however, have benefited from the availability of cheaper fuel by driving more miles on the road and switching to bigger vehicles such as SUVs. On top of that, with technical advancements and improving economies of scale, the cost of owning an electric or hybrid vehicle has been vastly reduced. This could catalyse a switch from fossil fuel to electricity in the transportation space, and potentially disrupt the oil industry.
The concern is how quickly companies would be able to ramp up production and add new reserves down the road with the ongoing cuts to development and exploration expenditure. Some majors have already failed to replace 100% of their depleting reserves last year, and at some point they need to spend capital again to bring new production online. As financiers, we are looking to support energy companies with necessary funding to help meet the world’s growing need for energy.
2. How are these realities impacting SMBC’s energy portfolio and strategies?
SMBC thrives on its integrated global banking platform to manage its energy portfolio. With market expectation of a “lower-for-longer” oil price outlook, it is pragmatic to rationalise our assets towards energy projects with more robust economics, cost competitiveness, and favourable legal and regulatory profile.
Despite IMF’s recent downgrade of global growth forecast to 3.2%, Asia will continue to grow its economy at a relatively rapid pace and correspondingly, its energy demand. Providing access to power to a wider population is consequently a key part of Asia’s energy future. On that note, we are determined to play an active role in financing energy and infrastructure projects to fuel economic development, as well as to improve the well-being of communities in the region. We also expect to see more solar and wind projects in Asia given their increasingly attractive economics.
We are also an Equator Principles (EP) compliant bank and require that the project financed adhere to international EP standards. Our adoption of the latest EP III framework further vindicates that SMBC is at the forefront of responsible environmental and social management practices among international banks, and we are committed to providing both economic and development benefits to communities through responsible financing.
3. Which are the most promising growth markets in Asia Pacific for energy projects?
As a region overall, Asia Pacific is expected to be a promising market for energy projects, in comparison with developed economies with deflated demand outlook. However, it is hard to pin down a particular segment in the energy industry that fits with the whole region as each country has its own natural resources, geology, and climate conditions. For instance, geothermal projects have huge potential in countries such as Indonesia and the Philippines. Solar and wind are increasingly significant in the power mix of China and India. LNG has started to make inroads into frontier markets such as Pakistan, and possibly Bangladesh and the Philippines in the not too distant future.
On the other hand, coal will remain an anchor fuel for power generation in Asia Pacific for the foreseeable future – in both emerging markets such as China, India, and Indonesia, as well as in developed economies such as South Korea and Japan. In spite of its stated ambition to tackle overcapacity, China is still expected to build one new coal-fired power plant a week on average until 2020. South Korea, one of the world’s top LNG importers, is also calling for more coal in the country’s power generation mix. Countries will need to balance consumer views with security of supply and rationale of economics in developing their policy for the future energy mix.
Regardless of the type of energy projects, reliable cash flows and proper risk allocation among different stakeholders are fundamental drivers to procure funding. Additionally, government, investors, and financiers should also take into account a number of considerations specific to the host countries, such as tariff affordability, access to resources and infrastructure, alignment with existing projects, and standardisation of technology and specifications.
4. What are the challenges and opportunities for energy infrastructure financing in the region?
The region has an enormous need for capital to fund its infrastructure projects, as a significant part of the population still lack ready access to electricity and water.
On the positive side, there is no shortage of capital in the market as more institutional investors, sovereign wealth funds, multilaterals, and development finance institutions are putting money into play in this space. Infrastructure projects are particularly attractive to investors who crave stable returns over a long time horizon, and aim to make a concrete development impact in the meantime.
Given the nature of long-term investment, infrastructure projects require a stable legal and regulatory environment. Along the same line, financiers providing long-term funding to infrastructure assets that often last 20 to 30 years would also need to get assurance that political and regulatory risks are well covered over the entire life of the assets.
Furthermore, in order to attract private investors, tariff and price set for infrastructure assets should reflect realistic economic costs, and offer a reasonable return. This might be challenging for low-income, developing countries. Historically, the government assumes the offtake risk and offer subsidies to bridge the gap between price paid to infrastructure developers and that set for ordinary consumers. To alleviate this burden on public treasuries, the government could explore ways to reward developers for proposing low-cost solutions, and to assess the feasibility of transferring operation and maintenance cost risk to relevant parties with the best expertise to manage it.
Lastly, developers and financiers should also brace for unexpected market fluctuations over the long life of infrastructure assets. Financing should be structured to take into account a certain level of uncertainty and allow for sufficient cash flow buffer to meet debt service amid interim disruptions. Operational availability should be obtainable and cost assumptions should be grounded in reality. All relevant parties need to be prepared when a black swan arrives.
5. How do you think Asia’s rising interest in small- to mid-scale LNG will impact gas market dynamics?
We noticed that a number of emerging players are taking a plunge into this business. From a financier’s point of view, project bankability always takes precedence over market interests and innovative concepts. Without a long-term underlying offtake contract, it would be very challenging to raise typical non-recourse project financing for these small-to mid-scale LNG projects. Projects need to have certainty around supply, costs, and bankable offtake arrangements to be considered financeable by the banking community.
These small-to mid-scale LNG projects, however, possess some unique advantages over traditional capital-intensive, large-scale LNG projects. Firstly, with a lower requirement for capital, more players could potentially enter the field to compete. Secondly, the smaller scale also helps to ease the land acquisition problem that hampers LNG project development. Finally, the shorter construction time allows developers to collect revenues and realise returns in a faster investment cycle.
With well-designed project structure and clarification of risks and policy uncertainties upfront, small-to mid-scale LNG projects could grow to be a striking force in the global gas market. We probably would see more balance sheet based financing for this kind or projects, and more diversified funding sources from investors such as private equity, energy funds, traders, and utility companies. This model is beneficial for bringing gas and power to remote and isolated parts of Asia Pacific.