A change to expansion plans for Cheniere Energy Inc.'s Corpus Christi terminal shows the U.S. LNG export pioneer is looking for ways to bring new capacity to market even as buyers demand shorter-term contracts for smaller volumes, analysts said.
In meeting notes posted at the Federal Energy Regulatory Commission on Oct. 10, the agency outlined a conversation in which Cheniere officials said the company was swapping out its original expansion plan, two natural gas liquefaction trains that could each produce 4.5 million tonnes per annum of LNG, for seven modular units that would together produce about 9.5 mtpa. Executives had disclosed in conference calls and presentations over the last year that the company was considering a midscale project, but they had not said it would take the place of the planned Corpus Christi expansion, referred to as the Stage 3 project.
Cheniere, which announced it was weighing a midscale LNG project in November 2016, said modular trains can produce smaller incremental volumes.
Source: Cheniere Energy Inc.
"I think the decision is a reaction to not being able to sign long-term contracts of a size sufficient to cover the costs of a 'normal' LNG train," Richard Langberg, a director at S&P Global Ratings, said in an Oct. 11 email. "We believe that offtakers are looking at shorter and smaller contracts, so it makes sense that LNG plants would also have to get smaller."
Cheniere is already building two liquefaction trains at the Corpus Christi site, both set to enter service in 2019. A third is fully permitted but has not yet received a final investment decision, a limbo shared by train 6 at the Cheniere's flagship Sabine Pass terminal and four other U.S. LNG export projects that are waiting on long-term contracts.
"In the currently oversupplied market, they aren't getting contracts to move forward on 4-5 mtpa of new capacity," said CreditSights analyst Andy DeVries. "The smaller trains allow them to move forward with smaller contracts while still giving the company some growth after 2019."
Final investment decisions for U.S. LNG export projects have slowed in the last few years as the market works off a supply glut spurred in part by a ramp-up of export capacity in the U.S. and Australia. Venture Global Calcasieu Pass LLC in late September became the first developer this year to announce a new binding contract, a 20-year sales and purchase agreement with Italian energy company Edison SpA for 1 mtpa from Venture Global's proposed Calcasieu Pass export facility. The Louisiana facility is one of a handful of planned projects that would use modular trains, including Kinder Morgan Inc.'s small Elba Island LNG terminal, under construction in Georgia.
Developers have said modular trains lower the overall risk of LNG export projects. Because the units can be prefabricated offsite, there is less of a chance that labor hiccups will delay the project, as in the cases of two terminals under construction along the U.S. Gulf Coast.
Others have said the benefit of using modular trains is overstated and that new problems can arise, such as marine traffic at the pier as more ships come in for smaller volumes.
As far as Cheniere's Corpus Christi expansion is concerned, S&P's Langberg said it is too early to tell what impact the switch to modular trains will have on the project. "We think it changes the risk," he said. "What if only two of seven get commercial contracts? Will the cost still be economical? Lots to think about."