As competition among LNG export developers becomes intense in the expanding world LNG market, projects in the U.S., Russia and Qatar will lead the small group that makes it to construction through 2020, according to a recent report from Fitch Solutions Macro Research.
Out of the many LNG export projects proposed globally, more than 10 have reasonable prospects of reaching a final investment decision, or FID, in 2019 or 2020, according to an October report by the research affiliate of Fitch Ratings, updating a 10-year forecast to 2028. The majority of the world's projects will not progress. And because access to traditional sources of project financing is becoming limited in the changing landscape of LNG buyers and sellers, many sponsors of the projects that do advance will need to assume a higher degree of risk.
Fitch Solutions reserved the most constructive outlooks for the U.S., Qatari and Russian projects because of a "combination of the quality of the companies involved, the importance of the project within those companies' overall portfolios and globally competitive project costs." In the near term, the research firm said the quality of project sponsors is the key determinant of whether or not a project progresses.
Traditionally, LNG developers have looked to project-level financing to provide the majority of funding for the multibillion-dollar export facilities. They would secure funding by selling the bulk of capacity under long-term sales and purchase agreements.
But several factors make that path to a final investment decision increasingly difficult, Fitch Solutions said. The firm pointed to a demand swing toward buyers in emerging markets, lower average creditworthiness of LNG buyers, and a growing preference for contracts that are smaller, shorter-term and more flexible, among other factors.
"Taken together, these pose significant headwinds to traditional project finance," Fitch Solutions said.
Projects sponsored by major portfolio players are well-positioned because of the financial and technical strengths of those developers along with their ability to absorb LNG offtake into their own businesses. But the involvement of major LNG buyers, such as large utilities and other state-owned enterprises in Asia, also improves the chances that an LNG project will be commercially sanctioned, Fitch Solutions said. Those players also tend to bring the backing of their governments and export credit agencies, which can ease project finance.
Of the eight projects that managed to reach a final investment decision in the past three years, only two reached that milestone through conventional means, Fitch Solutions said. Those projects were Venture Global LNG's Calcasieu Pass LNG terminal in Louisiana, which received a formal final investment decision in August, and an LNG terminal in Mozambique.
Other projects moved ahead without their developers announcing any long-term agreements beforehand. These included Golden Pass LNG in Texas, commercially sanctioned by majority-owner Qatar Petroleum and Exxon Mobil Corp. in February, and Royal Dutch Shell PLC-backed LNG Canada in British Columbia, which took a final investment decision in October 2018. But it is a select group of players that participate in the entire value chain and have strong enough balance sheets to pursue that strategy.
Meanwhile, large LNG portfolio players and trading houses have been playing an increasingly dominant role in signing up for offtake from new projects. These actors have been involved in around 65% of the contracts completed in 2018.
"While these companies will look to continue the expansion of their LNG portfolios, they do not have capacity to support FID on the majority of capacity currently targeting FID," Fitch Solutions said.
In the U.S., Tellurian Inc.'s Driftwood LNG in Louisiana was on a Fitch Solutions list of strong liquefaction projects. Tellurian struck a preliminary deal with Petronet LNG Ltd. that calls for the Indian company to negotiate an up to $2.5 billion stake in the holding company that includes Driftwood LNG in Louisiana and four related pipeline projects. If finalized in the first quarter of 2020 as planned, Petronet would get the rights to 5 million tonnes per annum of LNG, making it one of the largest single-volume commitments for any U.S. LNG project. Fitch Solutions also listed NextDecade Corp.'s Rio Grande LNG, Venture Global's Plaquemines LNG, and Energy Transfer LP's and Shell's Lake Charles LNG.
Fitch Solutions cited the proposed fourth train at the Freeport LNG Development LP facility in Texas as the expansion project with the best prospect for getting commercially sanctioned in the near term. Freeport has not contracted any of the capacity on the fourth train, which would add 5.1 mtpa of liquefaction capacity to the 15.3 mtpa of LNG capacity of the first three trains.
In a recent interview with S&P Global Market Intelligence and S&P Global Platts, Freeport's Chairman and CEO Michael Smith said the company is targeting contracting "the vast majority of the capacity" for train 4 before commercially sanctioning the project.
"We are going to get it done sooner than later," Smith said.
S&P Global Market Intelligence and S&P Global Platts are owned by S&P Global Inc.
