Momentum, headwinds and opportunity

The ‘shale revolution’ has kicked off an ‘LNG revolution’ in the US. The phenomenon came to fruition in February 2016, when the first shipment of LNG departed for Brazil from the recently completed Sabine Pass terminal in Louisiana. Since then, the US LNG supply market has grown exponentially.

The US Energy Information Administration (EIA) estimated in December 2018 that US LNG export capacity then was at 27.4 million tpy, and they expected then that the export capacity would more than double in 2019 and reach 67.6 million tpy. The rapid growth rate is likely to continue; when all planned and announced projects are considered, US capacity additions could reach 215 million tpy by 2023, nearly eight times the estimated capacity in December 2018.

Moreover, the EIA continues to forecast ample natural gas supply in the US and relatively stable US pricing for domestic natural gas over the next few decades, making LNG priced against US markets a predictable market for end-users.

Project financing is available for this growth – but on what terms?

The capital costs of LNG projects are quite large. Even with the sponsorship of major energy companies, the availability of project financing was key to funding construction and startup of the first wave of LNG projects in the US. Because of the willingness and experience of project finance lenders in assessing and managing construction risks, this remains the most appropriate form of financing for the next wave of projects as well.

There is good news, in that the experience in engineering, procurement and construction (EPC) gained from the first wave of LNG projects should result in the next wave benefitting from lower costs of construction. Such lower costs can be derived not only from the modularised construction proposed in some of the next wave of projects, but also from accumulated knowledge and expertise that will reduce the need for ‘gold-plated’ engineering practices and will allow for more modest sizing of project contingencies and EPC guarantees.6 And, of course, scheduled expansions of the first-wave LNG plants will benefit from the infrastructure that has already been constructed.

But construction costs are only one of the critical components of the overall calculus for a project financing. Another critical component is the offtake arrangement made with purchasers of the LNG. Following traditional project financing metrics, the first-wave projects leveraged long-term take-or-pay offtake contracts that minimised market-risk exposure to the vagaries of the energy markets. Such contracts did not, and do not, reflect a normal energy market practice. They were possible only due to the existence of strong demand for US LNG, priced against a domestic US natural gas market index.

Securing project financing for the next wave of projects requires that we update our analysis of the market demands to assess whether similar offtake contracts will be available to support the next wave of projects – or whether the financing markets will need to adapt to a different economic model in assessing some of the next-wave projects.

This is an abridged version of an article that was originally published in the September 2019 issue of LNG Industry. The full version can be read here.

Read the article online at: https://www.lngindustry.com/special-reports/16092019/momentum-headwinds-and-opportunity/