CERAWEEK: Freeport LNG expects to give Train 4 expansion go-ahead by early 2023

Freeport LNG expects to build enough commercial support to green light a 5 million mt/year expansion at its Texas export facility by early 2023, as the energy crisis in Europe puts a new focus on security of supply, CEO Michael Smith said March 9.

Challenges securing sufficient long-term contracts forced Freeport in recent years to delay a final investment decision on Train 4, but a huge run-up in European LNG prices following Russia's invasion of Ukraine has fueled a rapid shift in buyer sentiment.

"We are in very, very active discussions on Train 4 with a large number of potential buyers," Smith said during the CERAWeek by S&P Global energy conference in Houston. "The tone of the conversations and the pricing has changed in the last week to a level that I now believe we can hopefully build the facility, and reach FID by the first quarter of next year."

No more 'racing to the bottom'

Smith predicted the European crisis would undercut the trend of US LNG developers "racing to the bottom pricing-wise," even as sponsors of rival projects also describe an uptick in commercial talks. Cheniere, the biggest US LNG exporter and leader of the first wave of major US liquefaction terminals, took final investment decisions on its two existing projects with fixed liquefaction fees in the range of $2.75/MMBtu to $3.50/MMBtu. In more recent years, second-wave developers agreed to lower fees, in some cases below $2/MMBtu. Smith said he believed that because of current market conditions, developers can command higher fees than offered by the first wave of projects. He did not disclose his specific view of fair value.

At the same time, inflationary pressures on global supply chains threaten to become a headwind for the development of new LNG facilities, which involve large amounts of pipe infrastructure, Smith said. Steel prices are high and Russia is a major world supplier of nickel, an important component of pipeline materials.

"Who knows what they are going to cost now," Smith said.

But the Freeport chief expected buyers would be willing to pay more for LNG to support competitive projects that have stalled, as urgent demand in Europe presses buyers in Asia to compete to secure sale and purchase agreements supporting the buildout of new capacity.

Volatile prices

LNG spot prices have surged past LNG supplies indexed to oil -- the pricing mechanism that historically dominated the world's LNG trade. Those market dynamics underscore the benefits of the traditional structure of US LNG sale and purchase agreements as the most reliable model for security during times like these, Smith said.

S&P Global Commodity Insights assessed the Platts DES Northwest Europe Marker for April at $44.870/MMBtu March 9, down $16.055/MMBtu from its latest all-time high set the day before. Across the Atlantic, the US FOB Gulf Coast Marker for cargoes loading 30 to 60 days forward was assessed at $40.750/MMBtu March 9.

US LNG exporters have been running their facilities at full tilt for months, and project developers are limited in their ability to offer near-term relief to the European gas crisis. But the US could launch a major expansion of export capacity if buyers are willing to sign sufficient long-term supply deals to underpin financing for new export projects, Smith said.

Freeport expects Train 4 to come online about four years after it is commercially sanctioned.

"The one thing that this whole chaos has proven is that the US LNG model was designed for just what happened," Smith said.