LNG-TO-POWER PROJECTS IN VIETNAM AND KEY LEGAL ISSUES

A short overview of the market landscape for the LNG-to-power projects as well as the key legal issues that would have to be taken into consideration, such as bankability, PPA, security assets, government guarantee and undertaking and equity contribution timeline.

29 Dec 2020

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LEGAL UPDATE

The concept of LNG-to-power (using liquified natural gas for electricity production) is gaining a lot of momentum in Vietnam with many investors lining up to develop large-scale gas-fired power plants using LNG as fuel.

This update will provide a general look into the current LNG-to-power market of Vietnam and some key legal issues for interested investors.

1. Market Landscape for LNG-to-Power Projects

1.1 Vietnam’s LNG-to-Power Policy Development

On 11 February 2020, the Political Bureau (Politburo) issued Resolution 55/NQ-TW on the national energy development strategy until 2030 with a vision to 2045. In this Resolution, the Politburo set out the goal of developing infrastructure with sufficient capacity to import about 8 billion m2 of LNG in 2030 and 15 billion m 2 of LNG in 2045.

1.2 The importance of LNG-to-Power Projects

Vietam is intent on developing LNG-to-power projects due to an anticipated power shortage in southern Vietnam from 2021-2025. The power shortage can be attributed to the following reasons.

1.2.1 Delay of Approved Projects

The gas-mining projects Block BO Mon and Blue Whale are making slow progress, while some thermal power projects are delayed and cannot generate power on time.

1.2.2 Depleting Fuel

Domestic coal and gas supply is insufficient and being depleted, and reserves for hydro power are running out. Wind and solar power, while renewable and being encouraged, cannot by themselves provide the needs for power due to production uncertainties and limited capacity.

1.2.3 Environmental Concern

Coal-fired and hydropower plants present environmental problems, resulting in the Government seeking other cleaner sources of energy, with LNG emerging as the best suitable candidate.

1.2.4 Lack of Financing for Coal-Fired Power Plants

These days foreign lenders generally do not lend to coal-fired power projects, deterring potential sponsors from developing new coal-fired plants.

1.3 What Makes LNG-to-Power Projects Unique

There are some factors that distinguish LNG-to-power projects from other types of power projects in Vietnam. Firstly, the necessary infrastucture is more complex. An LNG-to-power project is composed of both onshore and offshore components which include the offshore terminal, pipeline, onshore LNG terminal and regasification equipment as well as the power plant. This results in each component being governed by different master plans, regulations and authorities. In terms of financing, licensing and operation, the Sponsors will need to integrate all the compenents as seamlessly as possible to achieve project success. Furthermore, LNG-to-power projects are currently more exposed to fuel supply risks and practical and logistical issues than other types of power projects. Also, the size of LNG-to-power projects is larger than with other type of projects which is necessary to ensure commercial and operational efficiency. Therefore, the transmission grid capacity must be sufficient to avoid grid overload and potential downtime of the power plant and the development and thus the financing costs are much higher. So far, no LNG power plants have begun commercial operation in Vietnam.

1.4 High-Profile LNG Power Plants

The following large scale LNG-to-power projects are included in PDP VII:

- Bac Lieu: The Prime Minister approved the inclusion of the 3,200MW LNG-to-power project in Bac Lieu in PDP VII in December 2019. The project is developed by Delta Offshore Energy Pte. Ltd. as an independent power producer ( IPP) (i.e. a private entity owning power plant and facilities to generate power for sale) as the first power plant to be developed as an IPP under the Law on Investment.

- Long An: In August 2020, the Prime Minister approved the conversion of Long An I and II coal-fired power projects into LNG-based projects, with a capacity of 3000 MW.

- Binh Thuan: Son My 1 and Son My 2 with a total capacity of 4,500MW will use imported LNG from Son My terminal.

- Vung Tau: On 23 April 2020, the Prime Minister issued a decision to include the Long Son LNG power centres with a capacity of 1,200-1,500MW for the 1 st phase in PDP VII.

- Ninh Thuan: On 23 April 2020, the Prime Minister issued a decision to include the Ca Na LNG power centres with a capacity of 1500 MW for 1 st phase to in PDP VII.

- Dong Nai: Nhon Trach 3 and 4 LNG power plant with a total capacity of around 1,500MW, using LNG imported from Thi Vai terminal.

- Ho Chi Minh City: Hiep Phuoc LNG power plant (1st phase) with a capacity of 1,200MW was approved for inclusion in PDP VII in September 2020. The 2 nd phase will likely be included in PDP VIII.

There are also other large capacity projects being proposed for inclusion in PDP VIII, such as Ch an May LNG-to-power project in Chan May-Lang Co Economic Zone, Hue with a capacity of around 4,000MW and multiple LNG power plants in Nam Van Phong Industrial Zone, Khanh Hoa province.

2. Key Legal Issues for Investment in LNG Power Projects in Vietnam

2.1 Developing LNG legal framework

There are few regulations on LNG business and they remain largely undeveloped. Other than general laws regulating foreign investment, the Government has only issued Decree 87/2018/ND-CP ( Decree 87 ) to regulate business activities (trading, import, transport) related to LNG, LPG and CNG. Under Decree 87, companies engaged in gas importing activities must satisfy business conditions, such as, among others, (i) being a company incorporated in accordance with the laws of Vietnam, (ii) meeting firefighting and fire prevention conditions, and (iii) owning or having a wharf lease agreement with a minimum lease term of 5 years, and these wharves must be included within the Vietnamese port network/system . For some activities, a certificate needs to be obtained from the relevant authorities certifying that such conditions are met. The conditions to trade, import and transport LNG in Decree 87 are general and need further guiding regulations for practical implementation. Of note, Decree 87 also does not mention the use of floating storage and/or regasification units or facilities (i.e. FSRU, FSU) in LNG activities, which is a notable omission, since it is not clear how the Government would manage and regulate such facilities.

2.2 Potential Structures and Investment Process

Sponsors of an LNG-to-power project may choose from 2 regulatory frameworks to develop the project, being Public-private partnership ( PPP) laws and the Law on Investment. If selected as the developer of a PPP project following the tendering process under the Law on Tendering, the sponsors and a competent governmental authority will enter into a concession agreement (most commonly in the form of BOT) to allocate project risks. For non-PPP IPP under the Law on Investment, the sponsors will apply for regulatory licenses under the Law on Investment to develop the project without a concession agreement. Because of the heavier involvement of the government and the requirements in a tendering process, sponsors choosing the PPP BOT framework typically must wait a much longer time to be officially selected as the developer than the non-PPP framework. But in return, PPP developers are able to use a bankable PPA and may receive better government support, especially government guarantees which are required to obtain non-recourse project financing from foreign lenders. This is discussed in more detail below.

The fundamental difference between PPP projects, which are nearly always Build, Operate and Transfer projects, and IPP projects under the Law on Investment will be that under a PPP BOT project Vietnam Electricity ( EVN) will end up owning the power plant facilities whereas under the IPP project EVN is simply buying power and this has an impact on what is included in the PPA for an IPP project.

2.3 Competitive Electricity Market and Potential Equitisation of Vietnam Electricity

EVN is traditionally the sole off-taker for power plant projects. However, the issuance of Decision 63/2013 of the Prime Minister setting out the roadmap to implement fully competitive power market for Vietnam ( Decision 63) opened the door for power plants to sell power directly to power corporations, electricity retailers and large customers and not just to EVN or its affilia tes. Under Decision 63, the final stage of power market liberation, the competitive retail market, will be fully operational from 2023 onwards. Undoubtedly, Decision 63 will give rise to new LNG-to-power business models in the future. Furthermore, Resolution 55 also mentions the intention to equitise state-owned enterprises in the power sector. As such, LNG-to-power developers should prepare for the eventuality that EVN and its affiliates may not necessarily be the counterparty in the power purchase agreement ( PPA).

2.4 Regulatory Approvals for Full Project Chain

Because of lacking LNG infrastructure, developers of LNG-to-power projects may need to invest in all components of the project, thus lengthening the investment process. In addition, local Vietnamese law requires many regulatory approvals in different fields such as power, environment, and corporate. The final decision heavily depends on discretion of the licensing authorities. Finally, developers may also be required by lenders to comply with the lender’s requirements. In Table 1 we have set out the major regulatory approvals required.

2.5 Equity Contribution Timeline and Requirement

After issuance of the investment registration certificate for non-PPP IPP projects or signing of concession agreement for PPP BOT projects, the sponsors must set up a project company in Vietnam to start implementing the project.

For non-PPP projects, the equity or charter capital amount normally must be no less than 15% (for projects using more than 20 hectares of land) or 20% (for projects using less than 20 hectares of land) of the project’s total capital in compliance with Decree 43/2014 guiding the Law on Land. By law, the sponsors must contribute the entire charter capital amount of the project company within 90 days from the incorporation date of the project company.

For PPP projects, under the 2020 Law on PPP Investment, the owner’s equity amount must be at least 15% of the project’s total investment capital and must be contributed following the schedule provided in the concession agreement.

Consideration will therefore be needed on how to phase equity contributions to avoid having to fund a very large amount upfront for a very expensive project that will take several years to construct.

2.6 PPA

Power projects under the PPP BOT umbrella have in the past been able to use a relatively detailed and sophisticated PPA containing terms necessary to achieve bankability acceptable by international lenders.

However, for non-PPP IPP projects, strictly speaking, the contents of the PPA should follow the template PPA issued by the MOIT under Circular 56/2014 dated 19 December 2014 ( Circular 56 ). Unfortunately, the template PPA in Circular 56 is designed for local financing and is not sufficiently detailed nor bankable to obtain non-recourse project financing from foreign lenders. It is certainly not suitable for use in an LNG-to-power project which requires much more sophistication on many issues. Although Circular 56 suggests that the developer and EVN can agree on amendments and additions to the template PPA the extent to which it can be amended and acceptable to the Vietnamese authorities remains to be seen and we are not aware of any Circular 56 PPA that has been signed which matches the sophistication and detail of the PPA granted to PPP BOT projects. Whether a non-PPP IPP developer can have a detailed, sophisticated, and bankable PPA that satisfies foreign lenders will depend heavily on the cooperation of EVN, MOIT and the Government.

2.7 Circular 56 PPA Bankability Problems

Major gaps in the bankability of the template PPA under Circular 56 which are generally accepted as being necessary to make the PPA acceptable to international lenders in order to obtain non-recourse financing include the following:

2.7.1 Take or Pay Obligation of EVN

The template PPA contains no take or pay obligation on EVN nor any deemed commissioning and deemed dispatch provisions. The State has a monopoly to develop the transmission grid while the actual development of the grid is carried out by EVN. There are proposals to allow the private sector to develop a transmission grid but these have not yet been approved. If EVN delays the development of sufficient transmission grids to receive the power from LNG power plants (e.g. due to a lack of funding), the power plants will be subject to curtailment risk, which would normally be mitigated with take or pay provisions in the PPA.

The take or pay obligation in a LNG-to-power PPA also needs to be carefully tailored to address the logistical issues presented by the timing of shipments and the storage limitations of LNG.

2.7.2 Governmental Force Majeure

The template PPA does not differentiate between governmental force majeure and natural force majeure. Bankable PPAs will allow project companies to terminate the PPA and/or include take or pay provisions in certain circumstances if certain governmental force majeure arises. In addition, the shipping of LNG carries with it its own set of force majeure issues that international lenders will need to be reflected in the PPA.

2.7.3 Choice of Governing Law

The template PPA uses Vietnamese law as the governing law. While the choice of Vietnamese law as the governing law is supported by Vietnamese authorities and State-owned enterprises being counter parties in project agreements, foreign lenders will require using well-developed foreign law such as English or Singaporean law as the governing law to avoid the unpredictability of Vietnamese law. However, the choice of foreign law may not be technically enforceable under Vietnam law.

2.7.4 Dispute Resolution

The PPA template allows the parties to agree on the dispute resolution agency. However, if the parties select foreign arbitration to resolve disputes, the developer should consider the risk of the arbitral award being refused recognition and enforcement in Vietnam by the Vietnamese courts due to the award being non-compliant with “the fundamental principles of Vietnamese law”, which is not clearly defined and left to the discretion of the Vietnamese court. However, there may be possible legal solutions to the problems of using foreign governing law and foreign arbitration.

2.7.5 Termination Payment

If the project company terminates the PPA due to EVN’s default then under the PPP BOT PPA the project company can make a claim against EVN for direct and actual damages for breach of contract and EVN is also contractually obliged to make a termination payment directly offshore to repay all project indebtedness, early termination penalties under other contracts and possibly provide for a return on equity which is commercially acceptable since the intention under a BOT project is for EVN to end up paying for and owning the power plant anyway. Such termination payments are a necessary requirement to be bankable and acceptable to international lenders. But the Circular 56 PPA template does not contain such termination payments and it is unclear as yet how willing the Government/EVN is now to accept such payments politically, especially for an IPP project which is not intended to be transferred to EVN. Care will therefore be needed to structure these obligations in a way that is acceptable to EVN and the Government e.g. through the use of a put/call mechanism

2.7.6 Lender Step-in Rights

There is no provision in the Circular 56 template allowing the developer’s lenders to take over the developer’s rights and obligations in the PPA.

2.7.7 Change in Law

There is no provision in the Circular 56 PPA template to protect the project company from changes in the law and to the tax regime. Circular 56 only provides that in the event of a change in law adversely affecting the off-taker and seller, the parties may renegotiate the tariff or amend the PPA, subject to MOIT’s approval.

2.7.8 Fuel Price Pass-Through

Because of the possible fluctuation of imported LNG prices, LNG-to-power project developers should ensure, and international lenders will require, that all LNG prices and related costs will be reflected in the tariff paid by EVN (as well as the usual Capex, Opex and funding costs) and then passed through to end user. Circular 56 has a mechanism to adjust tariffs following changes in fuel price but such mechanism is not designed for LNG pricing. Vietnamese law as of now does not have clear guidelines for the LNG price pass-through in electricity tariff. Under Resolution 55, Vietnam will encourage development of integrated projects, from supply and storage of fuel to construction of power plants based on power prices determined via a tendering process. However, the tendering process has not been detailed anywhere. It is expected that MOIT will prepare guidance on LNG price pass-through soon. Until then, it is up to the developers to negotiate a pass-through mechanism with EVN to be included in the PPA.

Developers of LNG-to-power plants will need to carefully negotiate long term LNG supply agreements. These agreements and the PPA will need to contain detailed and complex provisions that address the unique aspects of LNG supply and use in the power plant.

2.8 Other Bankability Issues and Problems
2.8.1 Sea Area Allocation

Integrated LNG-to-power projects will inevitably require sea or coastal areas to place vessels (FSRUs, FSUs), terminal and underwater pipelines for transporting LNG. Due to the need to use sea, coastal areas and other offshore resources, the developer will be required in order to satisfy international lenders to obtain written opinions of the competent authorities on the use of natural resources and sea or coastal areas of the proposed LNG-to-power projects in order to be able to propose the inclusion of the project in the PDP.

Subsequently, the developer must - as part of the feasbility study - have approval from or an agreement with the competent authority on the sea area and natural resources for use for LNG-to-power projects, as well as a written confirmation or approval of the competent authorities on the location of pipelines and other offshore facilities.

To obtain the title to use sea areas offshore projects, the developer will need to apply for approval to use the sea areas in accordance with Government’s Decree No. 51/2014/ND-CP ( Decree 51). Note that the MONRE is in the process of drafting a new decree to replace Decree 51.

Decree 51 and its guiding regulations are not clear in determining the sea use fees, sea areas and licensing regulations to use sea areas. This all results in a lengthy process to allocate sea areas to a developer and brings with it additional expenses for developers. Decree 51 also does not contain any provisions on whether the developer can use the allocated sea, coastal area and offshore facilities as security assets for project financing. It is expected that the decree replacing Decree 51 will resolve the shortcomings in Decree 51.

2.8.2 Security Assets for Project Financing

The Law on Land allows both local and foreign-invested companies to mortgage both land use rights in Vietnam and the assets that are attached to that land as security assets to obtain financing. However, the land use rights can only be mortgaged if the project company uses the land with land rent being paid in full and upfront. For project companies that pay land rent annually or are exempted from land rent as part of project incentives (which will be treated the same as paying rent annually), the project company can only mortgage assets, such as buildings, attached to land.

It is highly likely that lenders will require a project company to mortgage both land use rights and the assets attached thereto, and therefore the company will need to pay the land rent in full and up front.

However, the Law on Land only allows companies to mortgage land use rights and assets attached to land to credit institutions operating in Vietnam. Up until now, foreign lenders have used a bank in Vietnam acting as the security agent on behalf of the lenders to receive the mortgage and foreclose the mortgaged assets if required. While this has been accepted practice in the past, the legality of the onshore security agent arrangement has yet to be confirmed by the authorities and there are doubts as to its legality under Vietnam law. Since this is likely to be an important issue for foreign lenders consideration will be needed to explore ways that this problem can be legally solved e.g. have a local bank included as one of the lenders.

Lastly, as mentioned above, Decree 51 has no provision specifying that companies being allocated sea area can mortgage the sea area for financing. As such, the right to mortgage sea area remains to be clarified in future regulations.

2.9 Government Guarantee and Undertaking

To enhance the bankability of the project to receive non-recourse financing from foreign lenders, sponsors would usually need to seek a government guarantee and undertaking on the following issues:

2.9.1 Foreign Currency

Under Vietnamese laws on foreign exchange control, the tariff under the PPA must be quoted and paid in VND. The project company may need to pay foreign lenders, contractors and suppliers (e.g. EPC contractor, LNG supplier if LNG is imported) in USD. In doing so, the project company is exposed to VND-USD currency devaluation. The availability of USD in Vietnam may also be not enough to cover USD payment obligations. In the past, these concerns have been mitigated by a governmental guarantee and undertaking.

Under the new Law on PPP Investments to take effect from 1 January 2021, PPP projects can only receive a guarantee for conversion of 30% of a project’s revenue in Vietnamese Dong (after deducting all VND expenses). Politically, the Government is also keen to avoid issuing any such guarantee and undertaking.

Whether the Government will accede to the requirement of foreign lenders to have such a guarantee and undertaking remains to be seen.

2.9.2 Guarantee for Buyer SOE’s Obligations

With EVN receiving BB credit rating and electricity retail prices not being sufficient to cover investment costs, there are concerns by foreign lenders of non-recourse project financing about EVN’s creditworthiness and ability to fulfill its payment obligations to the project company. As such, foreign lenders typically require that the government guarantees all EVN’s payment obligations, including tariffs, liquidated damages and termination payments.

In principle, Vietnam law does not permit the State to refuse to enforce the applicable law against itself or its wholly owned entity. That said, the 2014 Law on Investment which is applicable until 31 December 2020, provides that the Prime Minister may decide to guarantee contractual obligations of a State agency or State-owned enterprise involved in the development of (i) investment projects which are subject to the authority of the National Assembly or of the Prime Minister of the Government to make the decision on the investment policy and (ii) other important investment projects for development of infrastructure. However, from 1 January 2021 onwards the 2020 Law on Investment only refers to investment assurances and no longer expressly provides the same mechanism as the 2014 Law on Investment, although there is a draft decree guiding the 2020 Law on Investment which clarifies investment assurances to include a government guarantee for contractual obligations.

2.9.3 Change in Law

Changes in law and tax regime (such as applicable tax rate) may adversely affect the profitability of the project. General assurances under the law only protect against change in investm ent incentives. As such, foreign lenders have typically required in the past that there be a government guarantee to protect against adverse change in law. It remains to be seen if the Government will be willing to issue such a guarantee for an LNG-to-power project.

2.9.4 Sovereign Immunity Waiver

Vietnamese law appears to suggest that the State of Vietnam, central and provincial State authorities, are immune from civil liabilities contracted with foreign counterparties. As such, foreign lenders have typically required in the past that there be a waiver of all sovereign immunity by the Government, EVN and any other relevant Government affiliated parties.

In the past, such a government guarantee and undertaking has only been granted to large BOT power projects, the Nghi Son refinery project and some other old upstream oil and gas projects. It is expected that it will be difficult and time-consuming for non-PPP projects to negotiate and obtain such a government guarantee and undertaking. Moreover, the Government shows an intention to limit giving government guarantees due to certain drawbacks on the government side (such as the possibility of litigation, damaging the reputation of the Vietnam government).

2.10 Foreign Ownership Limits

There is, generally, no limitation on foreign ownership for activities related to LNG-to-power projects, such as power generation, LNG regasification and pipeline transportation of regasified LNG. However, there are still some activities with foreign ownership limit, such as LNG tanker towing services, with a foreign ownership cap of 49%. LNG project developers should carefully check whether there is any foreign ownership imposed on their proposed business activities in the project.

3. Conclusions

Without a doubt, LNG-to-power projects will play a major role in the power market of Vietnam in the future. Although, to ensure sustainable development and interest of investors, there is work to do, such as development of a more concrete and streamlined legal framework and provision of better support to developers. Certainly, pioneer developers will need heavy support from the authorities to successfully develop a LNG-to-power project.

Until the LNG market in Vietnam becomes more developed, pioneer sponsors and financiers will face certain legal and practical issues in developing and financing an LNG-to-power project. However, these are not insurmountable, and it will be interesting to see how the current LNG-to-power projects currently working their way through the system fare.

For more information, please contact:

Mark Oakley / Managing Partner

mark.oakley@acsvlegal.com

Tim Dobson / Of Counsel and Head of Energy Practice

tim@acsvlegal.com

Hieu Pham / Special Counsel

hieu.pham@acsvlegal.com

Duc Tran / Associate

duc.tran@acsvlegal.com

© 2020 ACS Legal Vietnam Company Limited – All rights reserved

This legal update is not an advice and should not be treated as such

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