Intense competition between developers and escalating costs are complicating efforts to bring new liquefied natural gas projects online in the US, even as the fallout from Russia’s invasion of Ukraine creates huge appetite for American fuel exports.
A new wave of multibillion-dollar LNG projects on the US coast of the Gulf of Mexico has gathered pace over the past year as the energy upheaval triggered by the war prompts a global dash to secure fossil fuels from vast Texas shale fields.
Since Moscow began its full-blown invasion of its neighbour 14 months ago, four projects, together worth $40bn, have reached the crucial final investment decision (FID) milestone.
But others have faced repeated delays as they vie with each other to secure the long-term purchase agreements needed to underwrite their projects and contend with sharply escalating construction and financing costs.
“It’s dramatically more expensive,” said Charif Souki, who pioneered the development of the US LNG export industry more than a decade ago. “There are fewer and fewer construction companies that can actually handle these kinds of loads. But you have to confront . . . your supply chain issues and all the cost inflation.”
Souki, who now heads up developer Tellurian, has seen his $25bn Driftwood development flounder after a fundraising failure last year led pivotal buyers to abandon the project. This month it announced plans for the sale and leaseback of land as it scrambles to raise funds.
Two other projects that developers had hoped would reach FID by the end of March — Energy Transfer’s Lake Charles conversion and Next Decade’s Rio Grande terminal — have been delayed to later in the year.
The Biden administration and European Commission have made the expansion of US LNG exports a cornerstone of securing energy supplies in Europe as the continent looks to purge Russian gas from its national economies.
Projects under construction or entering service will increase US capacity by roughly 70 per cent once they all come online by 2027, making the country the world’s pre-eminent LNG superpower: this year the US will leapfrog Australia and Qatar to boast the world’s biggest export capacity.
If every potential project in the pipeline was to come online, they would triple US capacity by 2030, according to Wood Mackenzie. But analysts expect many of these to fail, as a race to build them in time intensifies and funding for long-term fossil fuel projects in a decarbonising world becomes harder to secure.
Reaching the FID stage requires securing enough solid deals to underwrite the financing needed to pay for its construction. As costs rise, that is proving tricky.
“You’ve seen a really competitive market among different developers,” said Giles Farrer, head of LNG research at Wood Mackenzie. “So to secure customers, companies have bid right down to the margin.”
Now many have to contend with rampant supply chain inflation pushing up the cost of construction, while rising interest rates have increased financing costs. That would probably force some to renegotiate offtake deals, said Farrer, delaying projects and allowing others to muscle in.
But even as some struggle, other more established players have been successful in capitalising on the thirst for US molecules and locking in contracts that have allowed them to plough ahead with big new projects.
Sempra Energy last month pushed ahead with a plan to build a 13.5mn tonnes a year plant in Port Arthur, in south-east Texas; a week earlier Venture Global moved forward with the second phase of its 20mn tonnes a year Plaquemines facility in Louisiana, having given the green light to phase 1 in May; last summer Cheniere Energy gave approval to a 10mn tonnes a year expansion of its facility at Corpus Christi in Texas.
“You have three leaders in the clubhouse, if you will, that have made the most of the moment — and others would like to grab some of that success,” said Kyle Wamstad, a partner at law firm Holland & Knight. “It’s one of those things where success follows success . . . if you don’t get that first one in the door, it can linger.”
While an increasing number of so-called portfolio players — interested in trading LNG rather than consuming it — has broadened the scope of potential buyers, securing the necessary commitment from offtakers has proved increasingly tricky.
Financiers have been forced to weigh up the need for long-term fossil fuel infrastructure as the world looks to rapidly decarbonise and stem climate change. The UN’s Intergovernmental Panel on Climate Change warned last month that global warming was “more likely than not” to reach a 1.5C rise since pre-industrial time in the near-term.
Many European buyers, anxious to pin down near-term LNG supplies, are hesitant to lock in the sort of multi-decade contracts that developers need in order to secure financing for their projects.
“I think buyers would love to sign deals for five years, but projects get financed on 20-year deals for sellers,” said Ira Joseph, global fellow at the Center on Global Energy Policy at Columbia University. “Each side is perceiving their needs very, very differently of what they deem as energy security.”
The US government has been keen to emphasise that a lack of permitting is not the hold-up. There are more than 100mn tonnes a year of projects fully certified to move forward. US energy secretary Jennifer Granholm last month boasted of a “plethora of opportunity for the liquefiers to be able to export”.
But securing offtake agreements to underwrite financing has become a much tougher challenge than getting permits — once the golden ticket to getting a project off the ground.
“They used to be viewed as what was necessary and would trigger everything else that comes afterwards — whereas now that’s not enough,” said Wamstad at Holland & Knight.
“[A handful of] FIDs and substantial debt financing for recent LNG projects does not mean a green light for everybody,” he said. “As soon as you look more like a driftwood or you have some hiccups or issues, there’s always somebody else that’s at least advertising themselves to be better positioned to step into those shoes.”
