Spending for US LNG approaches $80B by year-end
Spending commitments since 2012 for liquefied natural gas export projects on the U.S. Gulf and East coasts could total more than $80 billion by the end of this year, with an additional $30 billion or more possible in the next year.
When the construction dust settles by the mid-2020s, the United States could be No. 1 or No. 2 in the world in LNG export capacity, depending whether Qatar completes its expansion before then.
The $80 billion will buy close to 100 million tonnes a year of U.S. liquefaction capacity, about five times the volume of the proposed Alaska LNG Project.
It’s been a busy early spring for U.S. LNG project developers:
Construction work has started on Louisiana’s third LNG export terminal. Venture Global’s co-CEO announced April 4 that work had started on the Calcasieu Pass project, at 10 million tonnes of annual capacity. It’s only the second U.S. Gulf or East Coast LNG export project not built at the site of an unused or underused gas import facility.
The partners in Texas’ third export terminal made a final investment decision in February to proceed. ExxonMobil and Qatar Petroleum’s $10 billion Golden Pass LNG export project will have almost 16 million tonnes of annual capacity. Start-up is planned for 2024.
The Louisiana hopeful has cut its price for liquefaction services to attract customers. Australia’s LNG Ltd. is offering liquefaction contracts for as little as $2.35 per million Btu, about 20 percent below the prevailing rate as it works to sign the first long-term contract for its $6 billion Magnolia LNG project, CEO Greg Vesey said April 2 in an interview of the LNG2019 conference in China. At the current U.S. price for feed gas, that would put Magnolia’s output at $5.74, plus shipping.
“It’s very tough right now on the commercial front,” Vesey told S&P Global Platts.
The developer signed up French major Total for a $700 million investment as it tries to put together financing for its LNG project in Louisiana. Total invested $500 million in the parent company, Driftwood Holdings, and bought $200 million of stock in Tellurian, developer of the $30 billion LNG terminal.
Total also signed a non-binding agreement to take 2.5 million tonnes a year from Driftwood LNG for 15 years. The gas will be priced off the Japan-Korea Marker for Asian LNG, a fast-developing spot-market benchmark and the first use of the price index for a U.S. project.
Tellurian has said it plans to make a final investment decision this year, with phased completion between 2023 and 2026.
This developer became the first to sell U.S. LNG pegged to global oil prices instead of Gulf Coast natural gas prices. Developer NextDecade said April 2 it had signed a 20-year deal to supply Shell with 2 million tonnes of LNG per year from the proposed $17 billion Rio Grande LNG export project in Brownsville, Texas. Three-quarters of the LNG will be indexed to Brent crude oil prices, and the rest will be indexed to domestic U.S. gas price markers.
Houston-based NextDecade was founded in 2010 and now has 36 employees. It has no operations and is funded by investors. The company has not announced a final investment decision for Rio Grande LNG.
With multiple LNG projects in the United States and elsewhere vying for financing amid a crowded market, developers are competing to offer flexible pricing options to potential offtakers. With most Asian LNG contracts priced off oil, U.S. projects that can offer a diversity of price indexation beyond U.S. gas prices may be able to capture more market, Saul Kavonic, an analyst with Credit Suisse, was quoted by Reuters on April 1.
However, Total CEO Patrick Pouyanne said he doesn’t understand the logic of linking U.S. LNG to oil prices.
“Continuing to price gas linked to oil is somewhat old world,” Pouyanne told Bloomberg News. “I was most surprised to see new contracts linked to Brent, especially from the U.S. Someone will have to explain this to me.”
One more project in Louisiana and another in Texas report that they, too, are moving toward final investment decisions, though both are still working on signing up enough customers for a go-ahead. That includes Sempra Energy’s proposal in Port Arthur, Texas, which would be the company’s second Gulf Coast project. Its Cameron LNG terminal in Hackberry, La., is scheduled to start shipping before June. 30.
Outside the United States — in a move away from LNG contracts linked to global oil prices or natural gas prices — Japan’s Tokyo Gas said April 5 it had signed a 10-year deal for LNG supplied from Shell’s global supply portfolio, partly using a coal-linked pricing formula. It’s believed to be the first time a Japanese buyer is using a coal-based pricing index in an LNG contract, industry observers said.
“Coal remains the largest competitor to gas in the power sector in Asia. If the index is competitive, this could be an important step for enabling LNG and utilities to better compete with coal,” Nicholas Browne, a Wood Mackenzie analyst, was quoted by Reuters.
“Coal indexation in LNG contracts will be particularly relevant for Japanese buyers, not least because coal is an integral part of Japan’s power-generation mix,” said Abhishek Kumar, head of analytics at Interfax Energy in London.
It’s “a risk management strategy for somebody who is competing with coal-fired generation,” said Christopher Goncalves, chair of the energy practice at Berkeley Research Group.
And while developers are trying different pricing structures to attract buyers and reach their investment decisions, one area of agreement is that banks are largely unwilling to finance new U.S. LNG capacity without developers having commercial deals in place.
“My favorite model is the one where I take the least amount of risk and get the highest rate of return,” Roberto Simon, a managing director at French investment bank Societe Generale, told S&P Global Platts on April 4.
Larry Persily is a former Alaska journalist, state and federal official who has long tracked oil and gas markets and projects worldwide.