Tough LNG market could shift Cheniere midscale expansion FID timing

Houston — Cheniere Energy's confidence in being able to advance its midscale liquefaction project in Texas by the end of June seemed to dim Tuesday as the company acknowledged difficulties securing enough new long-term supply purchase agreements amid significant weakness in the global LNG market.

The near-term outlook from the biggest US LNG exporter reflects a combination of low international prices, relatively tepid demand in Asia and the ongoing impact on trade flows from the coronavirus outbreak that first erupted in China in late December. Two LNG cargoes for April loading from Cheniere's terminals were recently canceled by customers.

Houston-based Cheniere remains in the strongest position among US producers to capitalize on LNG growth opportunities, due to its footprint and full suite of options at its terminals near Corpus Christi and at Sabine Pass in Louisiana. It will not build, however, a project such as the proposed up to 9.5 million mt/year Stage 3 expansion at Corpus Christi until it has sufficient commercial agreements in place.

"I do think the market, because of all the issues – be it the coronavirus, the warm winter – the whole urgency among customers to sign long-term contracts has dropped," CEO Jack Fusco said during a conference call with investors. "I do think that the market will be tough to continue to get our fair share of contracts and continue to commercialize Stage 3 at this point."

That was a shift in tone from November when Fusco said Cheniere expected to make a positive final investment decision on the midscale expansion during the first half of 2020. The company did not repeat that language Tuesday, saying only that it was targeting an FID sometime this year. And it raised the possibility the timing could be pushed back further.

In a presentation accompanying its latest financial results, Cheniere said it will redeploy capital to other initiatives such as share buybacks if certain parameters for the project, including commercialization, are not achieved. To date, Cheniere has announced two small offtake agreements tied to the expansion project.

"It's our intent, and always has been, to make sure we fully meet our investment criteria before we go forward with FID," Fusco said.

For the three months that ended December 31, Cheniere reported a significantly larger profit than in the year-ago period, as it boosted export volumes as a result of additional capacity coming online and recorded certain tax benefits and gains related to interest rate derivatives. The company said that during the most recent reporting period a decrease in LNG prices was offset by lower natural gas feedstock prices for its LNG sales.

Europe remains a bright spot, while consumption has dropped in Japan, South Korea and Taiwan, Chief Commercial Officer Anatol Feygin said during the conference call. Chinese demand growth has slowed amid slower economic growth, he added.

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The initial trade agreement between the US and China announced in January and China's recent decision to offer temporary exemptions from certain import tariffs, including on LNG, were being viewed as positives for the market, Feygin said. But, he added, more clarity for the market is needed, especially in light of the impact from the COVID-19 coronavirus outbreak.

"While much attention is given to the possibility of supply curtailments, particularly in the US, there are factors that could balance the market," Feygin said.

He said Cheniere acknowledges that "some LNG on the margin may not be lifted from the US this year," though the company does not expect that to develop into a long-term trend. Based on Tuesday's feedgas flows, utilization of the six major US liquefaction facilities remained robust, though about 800 MMcf/d below record levels, S&P Global Platts Analytics data show.

Fusco said the short-term bumps in the road can still impact future project development by dampening buyers' urgency.

"We find ourselves in a unique time in the LNG market and we do acknowledge market headwinds and our customers' needs," the CEO said.