Brave New World: Emerging Trends in Vietnam’s LNG-to-Electricity Sector

Vietnam’s energy transition has been closely watched in recent years. The highly anticipated Power Development Master Plan 8 (“PDP8“), which will outline Vietnam’s plans to secure its anticipated electricity needs from 2021 to 2030, is expected, when finalized[1], to mark a significant transition from coal to cleaner forms of energy. This political tendency was highlighted by the Prime Minister (“PM”) Pham Minh Chinh’s announcement of net zero emissions by 2050 at the 2021 United Nations Climate Change Conference (“COP26“).

The conversion of LNG into electricity remains an important part of the history of Vietnam’s energy transition and investors – national and global – continue to show immense interest in the sector, as the calls for tenders and the award of Projects by the Vietnamese government continue despite persistent challenges from COVID-19. Despite these promising favorable winds, no international developer-led project has started construction or reached commercial operations to date and the market is still finding its place in this new ground. Drawing on our experience of advising on early stage LNG projects in Vietnam and abroad, this article includes some of our key observations, key challenges for investors, as well as potential strategies to address these issues. .

Adopt the right model

Finding the right legal regime

In the past, large energy projects in Vietnam have generally been developed under Vietnam’s public-private partnership (“PPP”) Investment regime,[2] given the various incentives and government support given to investors along this path (including government guarantees and a highly developed power purchase agreement that was generally viewed as bankable by international financiers). Initially, many market players anticipated that the currently proposed wave of LNG to power conversion projects in Vietnam would also be developed as PPP projects. However, the perception of the attractiveness of the PPP route is changing, especially in light of the introduction of the latest law on public-private partnership in January 2021 (“New PPP law“). As has been widely commented in the market, the new PPP law appears to signal a shift in the Vietnamese government’s approach to foreign investment, marking a significant reduction in the scope of investor protections and the support offered. compared to what had been provided under the previous regime. In addition, since its entry into force, the Vietnamese government has shown an apparent reluctance to approve large PPP projects under the new PPP law.

In this context, despite initial expectations, a number of international investors are increasingly looking to develop their Vietnamese LNG projects into electricity under Vietnam’s General Investment and Business Laws (often referred to as in Vietnam the “IPP“), given, among other reasons, its potentially shorter lead time, and seek to negotiate their additional investor and bankability requirements with the PM, Ministry of Industry and Trade ( “MOIT“), Vietnam Electricity (“EVN“) and other relevant stakeholders in the hope of obtaining a favorable outcome, although early indications from pioneer projects and some of the government’s initial project bidding processes suggest that, as could be Expect it, such negotiations in themselves are likely to be long and complex matters (for some of the reasons set out below).

Figure 1: PPP projects vs IPP projects

Choosing the right business structure

Since an LNG-to-power project consists of multiple components (including the LNG terminal and power plant), in Vietnam, as in other jurisdictions, investors continue to look at various integrated and non-integrated business models. integrated to structure the ownership of these components. To determine which business structure is most appropriate for their project, no ‘one-size-fits-all’ approach emerges in Vietnam and investors need to assess Vietnamese government and regulatory requirements, tax considerations, funding / bankability considerations. , LNG / gas sources and markets as well as their own specific and project-specific business and other requirements. Figure 2 below shows some ownership models that we see being considered by investors for their Vietnamese LNG power projects, as well as the pros and cons that these investors identify with each structure in the Vietnamese context.

Figure 2: Company structures (assuming a floating regasification unit (“FSRU”) LNG installation)

Model	Structure diagram	comments
Separate ownership model		§ Simplest structure, but creates the highest level of risk for the whole project. § More difficult to allocate risks along the value chain and to those parties best placed to manage the risks. § Treated as two separate projects and the protections available under the PPA or the IPP / PPP regime may not extend to the FSRU project. § Potential bankability issues with lenders; difficulty in obtaining funding for the FSRU and the power plant project. § No more consents required as this model will be treated as two separate projects – a particular challenge in Vietnam’s regulatory environment.
Hybrid ownership model		§ Allows a better alignment of the interests and motivations of the parties. § Disadvantages similar to the separate ownership model due to the existence of two separate projects.
Consolidated model		§ Overall risk is reduced by spreading risk more optimally and reducing competing interests. § Avoid the pitfalls of the split / hybrid ownership model. § The PPA model under the IPP route assumes that a consolidated model will be used.

Persistent regulatory challenges

The regulatory environment (or lack thereof) in Vietnam continues to present a challenge for LNG power developers, especially for international investors new to the market. The regulatory approval process for LNG power projects in Vietnam remains long, complex and highly dependent on the discretion of the licensing authorities, which is further complicated by the involvement of many licensing authorities / government agencies. Additionally, Vietnam is making slow progress in developing its legal framework for LNG-related businesses, with few signs of dramatic improvement in the near future. For example, as the LNG market in Vietnam is in the early stages of development, limited legislation (i.e. Decree 87/2018 / ND-CP) has been enacted to specifically regulate the import, transport and trade of LNG, without detailed regulations to provide. guidance on practical implementation (and in particular existing regulations are silent on the use of floating storage / regasification).

Land issues in particular remain a major concern of investors for a number of reasons, including challenges stemming from the ban. private ownership of land and the lengthy process of land allocation, as well as the complexity and uncertainty surrounding granting tenure security to financiers (including, in light of recent developments in the PPP and IPP regime, how well-established issues such as restrictions on land use rights mortgaged to foreign lenders will be addressed, as well as newer issues arising in the context of LNG power projects, such as how security of rights use of the sea can be granted).

Conclusion

As a number of LNG-to-electricity projects in Vietnam begin to move from design phase to early-stage implementation, it is perhaps not surprising to market watchers that developers face major question marks as to the optimal path forward, even as they prepare to pay their sizeable bid or investment deposits.[3]. Despite this, momentum remains palpable as investors vying to be at the forefront of this game-changing sector, supported by teams on the ground or local partners, move forward by developing good investment models for their projects by navigating regulatory complexities and engaging governments and other stakeholders on the bankability landscape that awaits them. The race is on and, with the variety of players and approaches taken in the market, it will be a thrilling race to the finish line.