Global political change has set the scene for most of the big energy deals over the past decade. Societe Generale’s Katan Hirachand talks about what he’s learnt from risk and why the LNG model is changing. By Colin Leopold.
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When the lights went out across Cairo in October, Katan Hirachand was watching closely. Months earlier, the upbeat LNG specialist had closed one of the largest investments in the country’s history – the US$2.6bn Egyptian Refinery Company – so he was no stranger to the ins and outs of Egyptian politics.
“As an adviser, that’s the kind of stuff you have to keep in mind,” Hirachand says. “Whether it’s thinking about the domestic market obligation or whether 30% of energy sales will be directed domestically and factor in the price.”
Whether it’s revolution in the Middle East or euro malaise closer to home, a world lurching from crisis to crisis is all 37-year-old Hirachand and growing numbers like him can remember.
“It’s become my modus operandi,” he says. “Older colleagues often say ‘Oh a deal like this would have taken six months to get away because you would have had commercial banks flooding in’. That world has changed, and it’s structurally shifted as well.”
Oil and gas deals have always travelled a fraught political path but over the past 15 years that path has become considerably more bumpy. Due to its timing and the size of the ERC deal – in the middle of the country’s uprising – even the wisest around had written it off, says Hirachand, sitting high above the tourists in Tower Hill. “What shone through was a project rationale that grew stronger and stronger, despite the political and financial turmoil.”
As a result, he and his team saw the birth of new relationships and ways of working. In bringing together historic adversaries the ECAs and multilaterals to finally close the financing he had an epiphany: “[In times of crisis] everyone needs everyone,” says Hircharand. “When you’re devoid of choices people find a way.”
“When the sponsors first came to us, a lot of banks had turned it down,” he says. “We forged a whole number of new relationships who you ordinarily wouldn’t have done business with because of their own requirements. One of the great examples of that is how you actually bring pretty divergent sources together and how that’s going to work over a long period. ECAs and multilaterals did lock horns but we got over things that did seem insurmountable.”
Weighing up project risk in foreign lands may not appeal to everyone, but for the King’s College chemistry graduate it’s become a first thing in the morning, last thing at night consideration, along with a busy family life in west London with two young daughters. And from a structuring point of view, it’s fostered a discipline far beyond his time in Brazil as a graduate with BG Group.
“Twenty-five years ago you could get a major oil company going into an African country and making an absolute killing, and no one would be any the wiser. Now, you can switch the internet on and find out. It can lengthen the execution but I would rather have that than a deal that will unravel six months later because there is an uprising in the country, because all the gas is being exported and the population can’t keep its lights on.”
Given the duration of the ERC deal from its inception in 2010, it’s not surprising that execution time is also one of Hirachand’s key frustrations with the job. He is currently working on Nigeria’s US$15bn years-delayed Brass LNG along with a monster LNG project in Mozambique.
“Africa is a great example,” he says. “Politically, there’s a lot of two steps forward, two steps back. Unfortunately, there is all the potential but politics contrive in such a manner that they’re difficult to get moving.”
Fresh from a family holiday in Brazil and straight into a bitter London February, Hirachand talks sincerely about getting the small “p” politics right too. With time in Tunisia and Tehran under his belt, the Financial News “Rising Star” nominee boasts of his “good basic Japanese”.
“As an adviser, unless you invest the time to understand how those [social] dynamics work, I think your chance of success is a lot lower,” he says. With investment values often north of US$10bn, knowing some of the language and remembering what a client drinks with lunch clearly makes a difference.
“As a young guy, it gave me a terrific opportunity to open my eyes,” Hirachand says. “Being in those places for me was a phenomenal insight in terms of what makes the people tick and how they make decisions, what are their concerns, what will give them comfort. Everywhere, the drivers are different. In Japan or South Korea, people want to know you are going to be there for them tomorrow if there’s a problem. In North America, it’s about cutting a deal in the shortest possible time.”
For Hirachand the key selling point of the business is the global perspective; the buzz from dealing with clients all over the world and seeing the tangible results of your work. In the LNG sector, however, these results can take a long time to come to fruition. As a sector, it is much like the rich geeky student when compared with its unpredictable and often depressed cousin, oil refining. While many parts of the world are in flux politically, so is the LNG sector itself. There is now an increasing trend to see LNG as infrastructure, bringing infrastructure investors into the value chain and upstream into liquefaction, says the adviser.
“We are potentially on the crest of a massive wave because the underlying credits are so sound,” he says, but the bleak demand outlook around the world is also forcing a shift to a more short to medium-term model.
“Europe has fallen away, the US is going to be an exporter, so what are you left with? Asia, you can split into premium and emerging, which will be very challenging to off-take into and raise finance on,” says Hirachand. “I think there’ll be very limited development. The projects that will go ahead you’ll count on one hand.”
He points out that big aggregators such BG, Total and Shell are moving to a model where around 30% goes into the local market with enough reserves to export for 10 years. “Can you get financing off the back of that? Yes, you can and as a result you’re actually de-risking a bit more,” he says.
Meanwhile, there is also innovation taking place in terms of liquefaction and storage. Floating LNG has attracted a lot of attention, with Shell being one of its biggest champions. Never one to remain quiet, Hirachand has an opposing view.
“I’ve been quite disappointed by FLNG,” he says. “Commercially, there is a massive rationale to do this but it’s been talked about for six or seven years – how many projects do we have?” He argues that the commercial model should be changed so that the buyer absorbs more of the risk rather than the service provider – views that will no doubt be heard soon on the Gastech steering committee, where Hirachand was the first investment banker to win a seat earlier this year.
Despite the huge amount of scope for innovation in the sector, the spritely chemist seems reluctant to tie his anchor to LNG indefinitely. For the only time during the interview he shifts in his seat when asked about future ambitions.
“Perhaps leading a region is of interest to me,” Hirachand says. “Project finance is one element but improving the banking system and people’s access to liquidity [is another].” And what region might that be? “I love the way business is done is Asia because it’s very proper, it’s very courteous, people value good advice and opinions,” he says. Considering the relative stability of Singapore or Japan at the moment, Asia might not be a bad idea at all.