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Vietnamese plant seeks flexible LNG contracts after 2 mtpa deal with LNG Ltd.

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Vietnamese plant seeks flexible LNG contracts after 2 mtpa deal with LNG Ltd.

Hanoi-based Delta Offshore Energy, which is constructing an LNG-to-power project in southern Vietnam, is seeking more flexible LNG contracts after tying up with U.S.-based Magnolia LNG LLC for 2 million tonnes per annum of supply when it starts operations, said Ian Nguyen, Delta Offshore Energy's managing director for origination and stakeholder relations.

Delta’s power plant in Vietnam's Bac Lieu province will have a generation capacity of 3,200 MW fueled in large part by the 2-mtpa sale and purchase agreement with Australia's LNG Ltd., which is building the Louisiana-based Magnolia LNG terminal. The Delta project is notable for a few reasons: it has been converted from a coal-fired to a gas-fired power plant, it is the first private investment in a market controlled by state-owned companies, and it plans to use U.S. LNG as baseload fuel.

"We will need more LNG suppliers involved to cover gaps in timelines, aggregate volumes and optimize logistics," Nguyen said in an interview. "The full capacity of 3 GW of power generation can use up to 3 [mtpa] of LNG."

Nguyen expected a final investment decision on the plant in 2021 and commercial operations in 2024.

"We are also in discussion with other LNG suppliers for flexible supply to support spot market power trading opportunities, given South Vietnam's imminent power shortages and electricity market liberalization," Nguyen said.

He said Delta's project, based on current spot LNG prices, can bid competitively for spot power prices in Vietnam's electricity market. U.S. exporters offer flexible destination clauses, and Delta is talking with traders and portfolio players on delivery and optimization of its U.S. LNG cargoes.

Preference for US LNG

Nguyen said U.S. LNG was picked as a long-term baseload fuel over conventional options like Qatar or Malaysia because of its abundance, security of supply, and low price volatility over oil-linked and spot prices. The Henry Hub Index, or HHI, has a stand-alone gas price decoupled from the volatility of crude oil prices, while Brent-linked contracts are exposed to geopolitical risks, he said.

"Long-term contracted LNG ... on HHI offers a relatively stable delivered price," Nguyen said. "Stable fuel prices are preferred for long-term baseload power projects such as LNG-to-power. Most of the value-chain — like liquefaction, transport and regasification in the fuel price can be fixed when using HHI-linked contracts."

He said other U.S. gas indexes, such as the Waha Hub, linked to Permian shale, are priced competitively, and West Coast supply will reduce shipping distance to Asia.

The biggest challenge for Asian end users in procuring U.S. LNG has been the shipping cost. But Nguyen said U.S. Gulf Coast shipping costs are manageable in long-term contracts, and delivery risks can be mitigated through contract flexibility.

"Short-term spot market cargo supplies in Asia are abundant," Nguyen said. "We can also optimize deliveries through swaps and other arrangements. From a cost perspective, LNG transport costs are a small proportion of the overall fuel price on a contracted basis."

Another challenge for Asian buyers is that U.S. LNG can be more expensive than spot prices. But Nguyen said LNG spot rates are "subject to market dynamics that are still uncertain and thus risky for the contracted fuel supply in long-term baseload power off-take agreements."

"Banks are unlikely to finance projects dependent on LNG spot market prices, which is difficult for LNG-to-power given the leverage involved," he said, adding that Vietnam's power market does not allow merchant models to be feasible.

LNG over coal

Delta's eventual LNG supply structure will depend on its 25-year power purchase agreement with national power utility, Electricity Vietnam, which controls the county's electricity markets, as it impacts the project's bankability.

"This is the first and only private and 100% foreign-owned LNG-to-power independent power producer in Vietnam and thus will require a rate of return that achieves the respective hurdle rates required by international investors," Nguyen said.

The use of LNG over coal also makes the project cost-competitive, especially considering environmental costs, which is why it was converted from a coal-fired project.

Nguyen said the Bac Lieu province's thriving shrimp industry targets $1 billion in exports in 2025. The industry needs a clean and reliable energy source instead of the high carbon emissions and cash costs linked to less competitive and dirtier fuel sources.

"From an energy security of supply perspective, coal is risky in the long-term," he said.

The Delta project, which will use a floating LNG receiving terminal, also benefits from its location in South Vietnam. The region faces imminent power shortage as it consumes half of the country's electricity but has just one-third of installed capacity. The plant would be Vietnam's first project that can procure its own fuel instead of relying on state-run PV Gas, and it will be able to supply excess power to Ho Chi Minh City in future, Nguyen said.

Eric Yep and Dao Dang Toan are reporters with S&P Global Platts. S&P Global Market Intelligence and S&P Global Platts are owned by S&P Global Inc.