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US LNG export stampede faces challenges

Innovative commercial and pricing models will be needed to get more projects over the line

More than 30mn t/yr of new US LNG export capacity has been sanctioned so far this year in the so-called second wave. But projects yet to reach final investment decision (FID) are now in a race against the clock.

This is the central conclusion of a report assessing the emerging price offerings from second-wave US LNG export projects, published on Monday by law firm King & Spalding in association with Petroleum Economist.

The US is likely to overtake Qatar and Australia as the world's largest LNG exporter by the mid-2020s, the report concludes. But the success of developers in bringing on stream more second-wave projects is key to if and when.

First wave US projects are challenging long-held industry truths: by disaggregating gas supply from liquefaction, by indexing prices to Henry Hub, by eschewing destination restrictions, and by allowing buyers to choose whether or not to lift LNG, so long they paid a fixed liquefaction tariff. These projects will add 73mn t/yr of capacity by 2021.

Second wave projects may need to offer buyers an even wider set of options. "They are going further in diversifying price indexation, facilitating access to upstream gas supply rather than depending on just the pipeline grid for supply, and in some cases making big investments in new pipelines to connect gas basins with export projects, enhancing gas supply optionality," says the report.

The three second-wave projects that have reached FID this year have tried-and-tested commercial models: Golden Pass with equity lifting; Cheniere Energy's sixth train at Sabine Pass with the same sales and purchase agreement (SPA) approach as its first-wave projects; and Venture Global's Calcasieu Pass LNG, with project financing based on offtake mostly covered by long-term SPAs.

"It is the projects following in their wake—amongst which there is intense competition—that have been coming up with fresh ideas," says the report.

China crisis

But, while LNG is moving towards commoditisation, ventures seeking project finance still need to sign up bankable off-takers for most of their capacity. It is therefore extremely unhelpful that the US tariff dispute with China has locked them out from the world's fastest-growing market, at least for now.

"Moreover," says the report, "there is considerable competition for the supply-demand gap expected to open up four to five years from now, from credible projects in Qatar, Russia, Africa and elsewhere, and indeed from other second-wave projects in the US.

"It remains to be seen which of the new US commercial/pricing models will be successful. But the picture will become clearer over coming months as second-wave US LNG projects either reach FID—and move into their construction phase—or find that their windows of opportunity begin to close as other projects move ahead."

The report will be launched to a select audience by King & Spalding and Petroleum Economist in Houston on Monday, and will be subsequently available to access through the Petroleum Economist website.

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