[NGW Magazine] Editorial: Financing the Future of LNG
In the last year or so, much importance has been attached to new LNG export projects to fill an expected 150mn metric tons/year (mt/yr) of anticipated demand after 2025.
New demand has been left pretty much to Australia and the US to fill, with varying degrees of financial success. Australian projects, for example, have suffered from massive cost over-runs, while demand in key Asian markets softened in the wake of the 2008 recession.
China’s recent surge in demand helped the Australian projects to a certain extent, and signalled that those projects, and others in the US that are close to being complete, could fare quite well.
But what comes next? The 16th Americas Summit of the CWC World LNG & Gas Series in March set out to answer a few key questions: How will new North American projects impact the global industry over the next two years? In the longer term, how will new LNG sales contracts evolve? How will new projects be financed? How will new technologies impact the LNG business? Will LNG as a transportation fuel ever become a relevant demand source? Finally, how will a developing spot market for LNG impact prices and pricing hubs?
The first of those is pretty obvious. Cheniere Energy’s new export terminal at Sabine Pass, Louisiana, only began delivering fuel to global markets in 2016, but already it has delivered more than 300 cargos to 25 countries. By 2020, with a fifth train at Sabine Pass and the 2019 commissioning of the first two trains at its Corpus Christi terminal in Texas, Cheniere expects to be delivering 70 LNG cargos every month to about 24 FOB customers – meaning many of those cargos can be delivered to virtually any market in the world, from Europe and the Middle East to Asia or South America.
Dominion Energy’s Cove Point terminal is also expected to begin making global deliveries this year, along with Kinder Morgan’s Elba Island terminal in Georgia and Sempra’s Cameron LNG terminal in Louisiana. Freeport LNG in Texas is expected to join the market in 2019.
Beyond 2020, however, the supply picture is murkier, even though as much as 1bn mt/yr of new capacity has been proposed, in the US, in Canada, in Russia and in Africa. Whether all of those projects will ever be built, and which, remain open questions, in part because there are no clear answers to any of the other questions the Houston conference addressed.
Tomorrow’s LNG sales and purchase agreement (SPA) contract, for example, is likely to look vastly different than yesterday’s long-term, oil-indexed agreement between one seller and one buyer. Buyers with long-term contracts that will begin to expire in 2020 are not interested in rolling over those long-term arrangements – instead, they want shorter terms, smaller volumes and flexible pricing. New buyers, many of whom lack the credit resources of the first tranche of LNG buyers a decade ago, are not in a position to accept the risks associated with a 20-year sales and purchase agreement – they will want to purchase largely on the short-term or spot market.
That, of course, raises the next question: Who will finance new LNG export projects? In the past, long-term SPAs based on remarkably high global gas prices linked to soaring oil prices made it easy for banks to extend project financing. In the new LNG world, 10-15 years is the new long-term and more and more contracts are for even shorter periods, in some cases only five to seven years. And many of those contracts are with buyers considerably less credit-worthy than state-owned gas or power utilities.
Few banks are willing to offer project financing under those conditions, leaving developers and traders to take on more of the financial risks associated with greenfield export projects. Some of today’s pre-FID projects, in the US, in Canada or elsewhere, may never see shovels in the ground.
And new technologies? What will be the impact of floating LNG, for either liquefaction or re-gasification? Floating liquefaction technologies offer flexibility in siting and the potential for reduced EPC costs. Mid-scale, land-based liquefaction trains are also gaining traction, suggesting that future export projects will be more closely tied to market need, with new, smaller trains added as demand warrants.
And what of LNG as a fuel? The existing global LNG market is based primarily on LNG as natural gas, providing heating fuel for residential, commercial and industrial customers or fuel to generate electrical power. In today’s carbon-constrained world, it would seem obvious that LNG as a transportation fuel would offer limitless future demand, but there appears to be little prospect that LNG will make any meaningful penetration into land or marine fuel markets for at least the next decade or more.
Last, but certainly not least, is the development of a spot market for LNG. Projections suggest that up to half the 400mn mt/yr of global LNG trade could be done on the spot market by 2020. But without the liquidity offered by a single, globally-traded marker price – like Brent in the oil business – there is some question whether a viable spot market, with cargos bought and sold with the touch of a button on a computer, will ever come to pass.
There is no doubt that tomorrow’s LNG business will not look much like yesterday’s. But the biggest question – what exactly will it look like – remains unanswered.