Global gas rally to kickstart long-stalled U.S. LNG projects
High global natural gas prices are breaking a two-year logjam of new U.S. liquefied natural gas (LNG) projects with at least three of the multibillion-dollar proposals likely achieving enough supply contracts to start construction this year, said developers and industry experts.
A Louisiana project that received a green light in 2019 was the last wholly new U.S. plant to receive a go-ahead, benefiting from then-strong demand from China and utilities swapping to LNG from coal. A dozen others were stalled, first by the China-U.S. trade war and then by the COVID-19 pandemic and environmental concerns.
But super-hot demand for the fuel in northern Europe and China have pushed global gas prices to near record highs, reviving financing prospects for plants that chill natural gas into liquid for transport by seaborne tankers.
A key benchmark price for natural gas deliveries in northern Europe has more than quadrupled from a year ago, to about $30 per million British thermal units per day (mmBtu).
Europe's declining gas production and increased dependency on Russia for its supplies also has driven worldwide LNG prices higher and focused attention on the need for new LNG plants in the United States and Asia.
RETURN OF CHINA
China stopped taking most U.S. LNG by imposing a 25% tariff on imports in mid-2019 at the height of a U.S.-China trade war. But in November, top Chinese energy companies agreed to buy more U.S. gas than ever before through long term contracts.
Such contracts are key to winning financing for these $4 billion to $8.5 billion projects and breaking the development logjam, said Carlos Sole, an attorney at law firm Baker Botts who has been involved in the development and financing of multiple U.S. LNG export projects.
"Last year capital was not willing to deploy itself on a speculative basis without long-term contracts," Sole said. "Assuming those are achieved, which is the general expectation given current market conditions, then capital should be available."
Atop the list of proposals likely to get financial approval are Venture Global and Tellurian Inc (TELL) plants, both in Louisiana, and a Cheniere Energy Inc (LNG) project in Corpus Christi, Texas, said Craig Pirrong, a finance professor at the University of Houston and commodity trading expert.
“The banks are finally realizing that this is an existential issue,” said Tellurian Executive Chairman Charif Souki, referring to the recent lack of energy investments.
Construction on the first phase of Tellurian's Driftwood project that would export about 11 million tonnes per annum (MTPA) of LNG, or around 1.5 billion cubic feet per day (bcfd) of natural gas, could start this summer once financial hurdles are cleared, he said earlier this month.
The three new projects would increase U.S. export capacity by about a third at mid-decade. Plants already under construction should lift peak U.S. capacity to 13.9 bcfd by the end of this year, estimates the U.S. Energy Information Administration, a figure surpassing Qatar and Australia, now the two largest LNG exporters.
"This is the best macro environment that the LNG business has ever seen," Delfin LNG Chief Executive Dudley Poston said in an interview, adding he was "very confident" that Delfin's project off the Louisiana coast would be approved for construction this year.
Still, optimism has never been in short supply among project developers despite repeated setbacks.
Financial go-aheads for projects including Tellurian's Driftwood, NextDecade Corp's (NEXT) Rio Grande and Sempra Energy's (SRE) Port Arthur LNG plants were promised and delayed last year, in some cases for a second time.
Investors remain wary of investing in new projects in which the expected revenue stream is supported by inexperienced or untested buyers, said Tessa Davis, a partner at law firm Morrison & Foerster LLP who has been involved in financing LNG projects in Indonesia and Qatar.
The rise of LNG buyers in Southeast Asia, Africa and South America aiming to build smaller regasification facilities or LNG-to-power projects presents hurdles for new suppliers, she said.
The shift to "inexperienced and less-creditworthy offtakers will increase the uncertainty financiers may have relating to the risk profile of new LNG projects," Davis said.
But Roald Nashi, who represents investors in energy and infrastructure projects at law firm Kirkland & Ellis, said a cold northern hemisphere winter will be good for encouraging long-term contracts needed to finance plants.
Those long-term contracts "should continue to be available as last year," Nashi said.