US LNG's second wave
More US LNG export projects are nearing a green light just as earlier developments debut
The first quarter of 2019 seemed a counterintuitive time for enthusiasm over US liquefaction FIDs. Asian LNG prices were depressed. Trade tensions lingered between the United States and China. More US liquefaction projects were about to come onstream, bringing even more volume to sea. So, with all that as a backdrop, why the enthusiasm?
"It all starts with demand," says Ben Nolan, an analyst at investment bank Stifel. "There had been an expectation that it was going to take a while for the market to absorb all the new liquefaction capacity, but over the last few years, the market has more than absorbed it. Three or four years ago, the expectation was that there would be ample LNG supply until 2024-25. Today, that window has moved up to 2021-22.
"The demand has been far more robust than expected. As a consequence, there needs to be more infrastructure to feed that demand and there has been more willingness to sign long-term contracts," says Nolan.
"What is helping the FIDs to be taken is the fact that we are starting to see a lot more long-term sale-and-purchase agreements [SPAs] being put in place," says Paul Wogan, CEO of LNG shipping firmGasLog, on his company's latest conference call. "That is giving people confidence."
Madeline Jowdy, senior director of global gas and LNG at consultancy Platts Analytics, agrees that demand strength is the key driver, but she has a different view on the importance of long-term SPAs. "Fundamentally, what is driving the push for LNG developments globally is spectacular Asian demand growth. But I don't believe the general narrative [about SPAs] is entirely right," says Jowdy.
New world order
"I would say we are at a critical juncture in the LNG business overall and things are fundamentally changing. The normal way to finance liquefaction is with long-term SPAs, but what we are starting to see now is a new world order in which LNG projects are being sanctioned without those SPAs. And if I was a buyer and I was seeing all these projects get sanctioned without me having to sign a long-term take-or-pay contract, then why would I?" she asks.
According to Nolan, another important driver of US LNG FIDs is the risk inherent in sourcing cargoes elsewhere. "The single biggest advantage for the US is the lack of political risk," he maintains.
"If you look at the other places where big projects are being developed at the moment—Russia, Mozambique, Senegal, Papua New Guinea—you do not want to put all of your eggs in those baskets. If you are buying in the US, there is a relatively high degree of confidence that you are going to get your gas, come hell or highwater."
These buy-side factors create a 'pull' in favour of US FIDs, which is being complemented by a 'push' from US liquefaction developers seeking first-mover advantage. As US project developer Cheniere CEO Jack Fusco told analysts on his company's latest quarterly call: "We were a first mover, and we have executed extremely well. I think you see a lot of other folks out there who want to have a position like Cheniere's."
"It matters," says Nolan on being earlier in the FID queue. "The volume of the projects being proposed is probably three times what the market can bear either from a gas-supply or a gas-demand perspective. You could have the best project in the world, but if you are too far behind the curve, somebody else is going to take your customer."
A substantial amount of fresh US liquefaction capacity appears set to reach FID in 2019 as a result of these factors, complementing projects that are already in service or in motion.
The story so far
The first wave of US LNG comprised 66.25mn t/yr in capacity: Cheniere's Sabine Pass in Louisiana, trains 1-5 (4.5mn t/yr each); Dominion Energy's 5.25mn t/yr Cove Point in Maryland; Kinder Morgan's 2.5mn t/yr Elba Island facility in Georgia; two initial trains (4.5mn t/yr each) at Cheniere's Corpus Christi facility in Texas; three trains (5mn t/yr each) at Freeport LNG in Texas; and three trains (4mn t/yr each) at Sempra's Cameron LNG in Louisiana.
Of those initial trains, 23.25mn t/yr, or around a third, was online as of mid-April. During the rest of 2019, a considerable portion of the remaining volume is scheduled to debut: Sabine Pass train 5, Elba Island, Corpus Christi train 1, Freeport LNG train 1, and Cameron LNG trains 1 and 2. That equates to an additional 19.5mn t/yr—almost doubling the current US export capacity versus mid-April levels.
The next chapter
The second wave of US FIDs appears set to add significantly more volume on top of that. It began in May 2018, with the go-ahead for Cheniere's Corpus Christi train 3 (4.5mn t/y). That was followed in February by the high-profile FID for the 15.6mn t/yr Golden Pass project, a joint venture between ExxonMobil and Qatar Petroleum that will feature three 5.2mn t/yr trains, with LNG exports scheduled to begin in 2024. Golden Pass exemplifies the kind of FID highlighted by Jowdy—one that does not require long-term SPAs to be financed.
"Oil majors don't need long-term contracts. They are building for their own portfolios," says Stifel's Nolan, adding that China-US trade tensions probably slowed the FID pace for projects in need of Chinese SPAs, but it "kind of opened the door for someone like ExxonMobil to step in".
Two other FIDs appeared imminent as of mid-April: Cheniere's Sabine Pass train 6 (4.5mn t/yr) and Venture Global's 10mn t/yr Calcasieu Pass project. If they both go forward, as expected, total US export capacity online or under development would rise to 100mn t/yr.
There are numerous other projects in the wings, several of which are scheduled to reach FID this year, including Next Decade's Rio Grande project in Brownsville, Texas (phase 1 is 13.5mn t/yr via three 4.5mn t/yr trains, with FID expected the in third quarter); and Tellurian's 27.6mn t/yr Driftwood project in Louisiana. In addition, Freeport LNG could greenlight train 4 (5mn t/y).
"If you put together all of the projects that will likely go forward in 2019, you are already at around 28mn t/yr. Then if you look at everything else that could potentially happen this year, including some of the smaller ones, I think you could actually get to 50mn t/yr [in additional capacity reaching FID in 2019]. If you consider that global LNG consumption is around 320mn t/yr and you add an incremental 50mn t/yr, that is definitely not nothing," says Nolan.
Jowdy sees the FID decisions on Rio Grande and Driftwood as pivotal. "If both of those massive projects go through, the implication would be a sustained lower-for-longer LNG price at a level well under what we have in our forecasts—and, if that happens, there would be a lot of implications in terms of demand creation and competitiveness with coal."