Welcome to the 2023 Refinitiv Project Finance International (PFI) Yearbook. The Yearbook is our annual publication in which we look at the events of 2022 through case studies and the PFI Awards, and look forward into 2023 with a range of themed articles and profiles in the Global section of the book.
Transition was the buzz word this year. Transition from the low interest rate, low inflation economic conditions of the last decade to the less benign conditions of today. Transition to the net-zero era of tomorrow. Transition to allow oil and gas projects to be funded in the meantime, particularly given the demand for new energy sources following the Russian invasion of Ukraine.
Transition to higher interest rates seemed to be very painful – although in terms of interest rates, levels are still below those prevalent before the global financial crisis in 2008 and life was not so bad then. But sponsors had a decade of ultra low rates. Not only did they get use to them but long-term assumptions were made on the back of them, which now have to be rethought. Ouch. In addition, the debt capital markets, as opposed to the still liquid loan markets, took a dive early in the new year with project bonds along with all other bonds suffering. An important point in terms of recycling bank loan capital for new projects.
As long as the DCM markets settle, sponsors will be able to make more informed decisions in the new year – particularly sponsors with new projects. Those needing refinancing will be caught between the devil and the deep blue sea but sentiment appears to be that rates will not be going down for some time.
Sponsors with new projects will of course be torn on rising inflation rates. The inflation jump appears to be lessening but once the inflation genie is out of the bottle, it is difficult to put it back in. Careful deliberation will be needed, although in some sectors, such as LNG and renewables, rising energy costs are encouraging sponsors to race ahead.
Transition to net-zero has been on the agenda for some time. It appeared to come to a head last year with the COP26 conference in Glasgow. Maybe for me that was because I live in the UK. But early this year Russia invaded Ukraine and suddenly European governments were off looking for gas. The Italian PM flew to Algeria that weekend, and the German SDP/Green coalition said it would start to build new LNG terminals immediately.
The discussion at COP27 in Sharm El-Sheikh, Egypt, this year was more nuanced. Egypt is making a big play for hydrogen but much of the discussion at the end of the conference focused on richer countries paying out for climate change impacts. African countries argued for continuing new oil and gas developments to support their economies.
There appears to be a growing consensus about the need for transition to a net-zero future rather than a headlong rush. Transition finance, funding low carbon based projects such as LNG to reduce carbon emissions overall, is gaining traction in some banks. However, commercial banks, under pressure from climate change arguments, are still regularly putting out press releases about stopping coal funding, stopping oil funding, etc.
Hydrogen is a great hope for the future and the first major hydrogen scheme is being financed this year. However, many of the projects in development are planned to start in the 2030s. Transition to a lower carbon future is the sensible answer now.
Rod Morrison, Editor, PFI
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