These are heady days for the global LNG industry. Here in the U.S., the so-called “second wave” of LNG export projects is upon us. Elsewhere around the world, Qatar is proceeding with awarding contracts for different elements of its North Field Expansion Project, Anadarko and its partners took FID on the Mozambique Area 1 LNG Project (with other projects in Mozambique and elsewhere in East Africa in various continuing stages of development), and construction contracts are being signed for the Novatek-led Arctic LNG-2 project in Russia’s West Siberia.
The industry is continuing to find success in identifying new world-class natural gas discoveries, such as ENI’s discoveries in Egypt. Floating LNG and LNG-to-Power projects continue their strong penetration, facilitating the transition of emerging market (and other) jurisdictions to a cleaner and more sustainable source of energy to replace coal and fuel-oil based power generation, while also easing the transition of countries to and from the LNG exporting to LNG importing clubs.
As the LNG industry gathers in Houston next month for Gastech 2019, this is an opportune time to examine where the US LNG sector is today and assess current developments, trends and issues affecting the LNG industry as a whole.
First, a few key global data points:
In the U.S., nine LNG trains have been commissioned and are operating and producing LNG: five trains at Cheniere’s Sabine Pass LNG, two trains at Cheniere’s Corpus Christi LNG, one train at Sempra’s Cameron LNG, and one train at Dominion’s Cove Point LNG. All of these are part of the first wave of US LNG export projects designed to take advantage of the great shale revolution in the U.S. and its resulting upheaval in the supply/demand dynamics of the natural gas market in the U.S. This activity has led the way for the U.S. to already become the fourth largest LNG supplier globally (behind Qatar, Australia and Malaysia).
As these first wave projects emerge from their development and construction phase and solidify their operational stages, we can already see the “second wave” of US LNG export projects becoming a reality. Earlier this year, Golden Pass LNG, the joint venture between Qatar Petroleum and ExxonMobil undertook FID. Shell and Energy Transfer signed a project framework agreement for the Lake Charles LNG project earlier this year as well; the two joint venture partners are proceeding with tendering for construction bids on the project. In just this past July, Tellurian Inc. obtained $500 million in an equity investment from Total for its Driftwood LNG Project and also executed a 1.5 mtpa SPA with Total for Driftwood LNG, while Venture Global LNG obtained binding financing commitments from financial institutions of over $10 billion for its Calcasieu Pass LNG project.
The emergence of US LNG has likely been the most significant development affecting the global LNG trade over the last several years. The de-coupling of LNG and crude oil with the introduction of Cheniere’s Henry Hub-based pricing formula, combined with the elimination of destination restriction clauses from US LNG SPAs (removing restrictions on jurisdiction destinations and on diverting cargoes) undoubtedly contributed to the accelerated growth and liberalisation of the global LNG trade, including the spot trade market in LNG, which accounted for 31% of the total global LNG trade in 2018.
Other key recent developments include the emergence of new industry players, with more than 20 countries selling LNG to more than 30 different markets, the penetration of traditional commodities trading houses such as Trafigura, Vitol, and Gunvor, shorter-term and smaller volumes of LNG SPAs, and the rise of the LNG aggregators (entities that focus on developing a portfolio of both supply and sales contracts on short and long term basis, have access to liquid markets to manage long positions, as well as access to flexible fleet of LNG vessels) that emphasise flexible contract terms and prioritise the trading business alongside having capital tied up in owning LNG infrastructure across the value chain.
Understanding the supply/demand and buying trends impacting LNG SPAs, including pricing trends and how to deal with non-investment grade counterparties, will be critical for industry participants as LNG continues to evolve into a truly globally traded commodity. Some of the more innovative recent developments in LNG SPA structures and pricing include the long-term LNG SPA announced earlier this spring by Shell and Tokyo Gas, under which the LNG price is based partly on a coal-linked pricing formula. Another example is the natural gas feedstock and LNG sales arrangements between a Cheniere subsidiary and Apache Corporation that were announced earlier this summer by Cheniere. According to Cheniere, Apache has agreed to sell 140,000 MMBtu per day of natural gas to Corpus Christi Stage III for a term of approximately 15 years. The LNG associated with this gas supply, approximately 0.85 mtpa, will be marketed by Cheniere. Apache will receive an LNG price, net of a fixed liquefaction fee and certain costs incurred by Cheniere, for the natural gas delivered to Corpus Christi Stage III under their agreement. The LNG price is based on international LNG indices.
All of these developments have tremendously impacted the landscape of the LNG industry. In fact, in some respects, it is hard to distinguish between cause and effect to explain the changes experienced by the industry. However, a remaining unknown is the implication of all of these changes for the financing of new liquefaction projects. Without the safety net of long-term LNG SPAs with investment-grade buyers at prices that can support debt service coverage ratios at customary accepted levels, both project sponsors and their financiers will need to become more creative and adopt new and flexible financing structures for these large-scale, capital intensive projects. Dare we contemplate merchant LNG …?
Gastech 2019 is fast approaching (17-19 September). Register now to join 35,000 international attendees and 700+ international exhibitors across the entire energy value chain. Or book your delegate pass now to join the world-renowned gas, LNG and energy conference!
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