Galileo

Mechero will need to run the project until 2030—which adds an additional five years beyond the original end date. Further headwinds from the input side include the high associated gas price under the gas supply agreement and unhedged exposure to currency risk.

Takeaways

This case study highlights the challenges in achieving attractive internal rates of return and net present value in some FMR projects. Specifically, while negotiating good power prices in the power purchase agreement (in the context of the highly competitive Colombian electricity market), Mechero had to deal with high associated gas prices (the result of tight Colombian gas supply), unhedged local currency exposure, and project delays. The project is also exposed to the risk of renewal of the gas supply agreement in 2025—both well within the targeted 2030 project completion date. This risk explains, in part, why debt was a relatively low 55 percent of the capital structure.

The foreign exchange risk is challenging in Colombia and hedging longterm is not viable. There is a currency mismatch because all electricity in Colombia is sold in pesos and all gas (included associated gas) is sold in US dollars. The currency risk is very large, and long-term hedges are not available in Colombia because of the high volatility of the currency. The project’s debt is in pesos, so creditors therefore take the risk that a sudden depreciation of the peso negatively affects cash flows as the peso-equivalent cost of associated gas rises significantly. For example, the US dollar to Colombian peso rate was 2,902 at the start of 2018 (when the TMM project began) compared to 3,742 in May 2021.

The existing mismatch between developer and private equity investor funding thresholds in FMR projects can deprive otherwise bankable projects of the necessary financing to proceed. Private equity investors prefer that projects be EPCready and all contracts be in place before investing. However, developers may not have enough capital to achieve EPC-ready status, and thus projects do not move forward. In the case of the TMM project, Ashmore assumed development risk, which is not typical of private equity investors in FMR projects in Colombia.

GALILEO

Background

Galileo Technologies is a manufacturer of modular technologies for the production and transportation of liquefied and compressed natural gas. The company was founded in 1987 and exports 90 percent of its products to clients in 70 countries.9 Galileo is partly owned by Blue Water Energy, a midmarket private equity firm based in London and specialized in the energy sector.

One of Galileo’s core proprietary technologies is the Cryobox, a portable, plug-and-play LNG production station capable of producing approximately 15 tons of LNG per day. The size of a 40-foot container, a portable Cryobox can be delivered in a single trail and easily relocated. Galileo also manufactures a mobile Cryobox-Trailer that can be used in virtual pipeline applications. Installation requires only concrete pads for the Cryobox erection and connection to gas sources, electricity, compressed air, and internet. Galileo also manufactures gas

conditioning units to remove liquids and impurities from gas before injection into the Cryobox (one unit can upgrade natural gas for up to four Cryobox units). According to the company, Cryobox and conditioning units can be installed in as little as six months, compared to an average of two years for mini-LNG plants.

LNG produced by Galileo’s Cryoboxes is transported on ISO (International Organization for Standardization) containers and used, after regasification, for a variety of applications, including power production, heating of industrial facilities, and other industrial processes. On average, LNG can be stored in standard ISO containers for up to three months,10 allowing it to be transported potentially very long distances (hundreds or thousands of kilometers). Galileo also manufactures regasification units and has started including in its turnkey package 3.5–4.0 MW gas turbines supplied by the leading manufacturers in the market.

Galileo’s FMR solution

Because of its modularity and portability, Galileo’s technology is particularly suited to use in FMR projects. Cryoboxes are currently in operation at flare sites in Argentina, Australia, Colombia, and the United States. Galileo will soon deploy another 34 Cryoboxes in Brazil. The minimum flare size required to install a Cryobox is 1 mmscf/d, of which 0.8 mmscf/d on average is converted into LNG and the remainder is used to power the Cryobox. Multiple Cryoboxes can be installed to use associated gas from large flares or from clusters of small flares. The equipment can be easily redeployed to different locations, seconding flare patterns at a given field. A Cryobox has a very long useful life (decades), which allows Galileo to amortize equipment across multiple projects over time. Galileo estimates that one Cryobox reduces emissions from flaring by 13,000 tCO2e per year, converting 5,000 tons of associated gas into LNG and also eliminating methane emissions from incomplete flaring at the same time.

In FMR projects, LNG produced with Galileo’s equipment is usually delivered to the oilfield operator as anchor customer; the remainder is sold in the market, for instance to industrial users, gas station operators, and independent power producers. The operator uses LNG (after regasification) for captive power production. Once regasified, LNG from one Cryobox can support 3 MW per day of power generation capacity. This model is particularly applicable in oil basins where power production is centralized in a given location and electricity is transmitted via power lines to individual wells. In Argentina, for instance, the average distance between wells and the power generation unit is 700 km. In Galileo’s Brazil project, the well is 1,300 km away from the power plant. Captive power production from LNG is currently competitive with diesel generation— the default power source for oil operators—in the oil basins targeted by Galileo. For example, Galileo’s ZPTS upgrading/treatment module and Cryobox liquefaction project in North Dakota comprise one Cryobox that captures 1.1 million standard cubic feet per day (mmscf/d) of previously flared gas from six wells, and converts it into 0.7 mmscf/d (14 tons per day) of LNG. Galileo’s gas treatment solution is also installed, capturing 0.2 mmscf/d worth of natural gas liquids.

Galileo relies on three revenue models for its FMR projects, depending on client preferences:

1. Straight OEM (original equipment manufacturer) model. In this scenario,

Galileo sells its equipment, including installation and operations and maintenance, to the FMR project developer.