US LNG is best positioned for near-term investment decisions
US has dominated global LNG sanction activity
In 2014, the liquefied natural gas (LNG) market finally began to see new sanctions from the initial wave of US export projects looking to capitalize on the abundance of unconventional production, following a hiatus after the sanctioning of the Sabine Pass liquefaction project in 2012. Three projects that had been fully contracted since 2013 were able to complete the US regulatory process and secure financing before the end of the year. Cameron LNG was first, reaching a final investment decision (FID) in August. Cove Point and Freeport LNG followed in October. These projects resulted in a total of 26 million metric tons per annum (MMtpa) of sanctioned US capacity in 2014. Out of all international opportunities, only one other project (PETRONAS' second floating project, PFLNG 2) was sanctioned, but prior to the start of US activity at the beginning of the year. Other contenders for a 2014 FID were held back by geopolitical developments (such as Sakhalin-2 T3 in Russia) or simply fell victim to the market's hesitance to invest in non-US capacity until after the initial wave of investment is over.
Ambitious global proposals are at high risk of delay resulting from cost cutting
Since 2010, over 20 MMtpa of liquefaction capacity has been sanctioned each year. As this supply starts to hit the market in 2015 and 2016 and drives LNG prices lower, it will become increasingly difficult to justify additional FIDs. Operators of over 150 MMtpa of proposed liquefaction projects have announced FID targets for 2015, though many of these dates have likely slipped since their last announcements given the lack of contracting activity and regulatory progress. The high costs of many projects outside of the United States-which tend to be primarily integrated greenfield projects that require dedicated upstream investment and are often situated in remote locations that pose expensive logistical issues-make them targets for capital spending cuts or delays being made by energy firms given the recent collapse in oil prices. In contrast, the extensive US gas grid and, in most cases, existing regasification terminal infrastructure gives US projects more attractive brownfield economics.
Securing financing for LNG projects could become a growing problem if the low oil price environment persists. Capital is still there for the right project, though indications are that individual banks may be looking to reduce exposure to large projects; therefore more banks may be needed to take on investment debt, with each at a lower level than in past financing packages. Alternative sources of funding, such as the capital markets, will continue to be used to raise debt. US projects are relatively advantaged because financing in the United States tends to happen much faster than elsewhere, owing to higher liquidity and access to funds. Project sponsors may also consider bridge financing, if possible, if timetables get tight.
As a result, the best candidates most likely to reach FID in the remainder of 2015 are located exclusively in the United States:
- Freeport T3: After Freeport sanctioned the first two LNG production units [trains] in October 2014, it announced that it would follow with the third train in Q2 2015. The train is fully contracted to SK E&S and Toshiba, and like Trains 1-2, has received full regulatory approval. Most notably, Freeport awarded an EPC contract for T3 to CB&I, Chiyoda, and Zachry Industrial in late March 2015. The final hurdle for the project is to complete financing; to that end, IFM Investors (already an equity investor in T2) reportedly committed another $1.1 billion toward the project in January 2015.
- Corpus Christi T1-2: Over the past year, Cheniere has pushed steadily forward with its first greenfield liquefaction project, hitting several major milestones. Since January 2014, it signed 7 MMtpa of sales and purchase agreements (SPAs). It received FERC approval, signed an engineering, procurement, and construction (EPC) contract with Bechtel, as well as securing $2.5 billion of equity funding (conditional on the completion of due diligence and other milestones). Many of the SPAs have conditions precedent (CP) that must be met by June 30, 2015 otherwise either party can terminate the agreement.
It is unlikely that Cheniere will want the risk of remarketing volumes, should any of the buyers seek to renegotiate their deals following the change in market conditions since the first half of 2014, and thus it is expected that Cheniere will prioritize FID in the first half of 2015.
Although these two projects are best positioned out of all new global liquefaction opportunities, they are by no means guaranteed to reach FID this year. The longer it takes to finalize remaining barriers to FID, the gloomier the outlook becomes for even relatively low-cost US projects as low oil prices persist and more LNG from Australia hits the market.
Posted on April 14, 2015
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