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Challenges confront the growth of North American LNG export projects

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Challenges confront the growth of North American LNG export projects

As the North American LNG export industry develops, companies are facing hurdles such as excess supply, increased price risk and growing competition.

Uncertain conditions in the world market and the need for new pipeline capacity are among the challenges for the "next wave" of U.S. and Canadian LNG export facilities, according to Wood Mackenzie's top natural gas analyst Kristy Kramer. A glut of LNG supplies will remain a risk in 2020 and 2021, and proposed projects will not have the benefit of existing pipelines that can be easily reversed to get their product to the U.S. Gulf Coast, said Kramer, the head of markets, gas and LNG research at the U.K.-based consultant.

Pipelines that have been proposed to take away natural gas produced in shale oil fields in Texas and Louisiana will likely help meet the needs of those export projects, Kramer said on a Sept. 4 GasTalk webinar, an online discussion among gas industry professionals.

"A lot of the reversal opportunities and expansion opportunities have largely been taken," she said. "We would expect to see additional infrastructure needed to support" proposed Gulf Coast facilities.

Companies like Venture Global LNG are looking at gas transportation infrastructure to support their export projects. The company proposed the Calcasieu Pass and the Delta LNG liquefaction facilities in Louisiana, including plans to build a 270-mile pipeline to move gas to Delta LNG when it starts operation sometime around 2023. Venture Global announced in August its final decision to build the Calcasieu Pass facility, which also would include a pipeline. Other companies, such as Kinder Morgan Inc. are developing pipelines from the Permian Basin in Texas that would boost supplies to LNG projects.

Project financing challenges have emerged as the global trade of LNG transitions into a fully liquid commodity market, according to a report from Fitch Solutions Macro Research, an affiliate of Fitch Ratings. The changing landscape of LNG buyers and sellers has bolstered competition among LNG export developers. LNG sellers will likely face rising price risks as a glutted global gas market and a crowded field of LNG export hopefuls skew contract terms and pricing structures in favor of LNG buyers, which increasingly prize shorter-term and more flexible contracts, according to an Aug. 27 report by the research firm. Demand growth is also shifting to emerging markets, where buyers often have different needs and are less creditworthy than the counterparties that export developers have traditionally sought.

These trends have important implications for project financing and development. These include the potential for higher financing costs and limited access to traditional project finance vehicles for some companies, the Fitch Solutions analysts said. The analysts said the price risk is exacerbated by the near-term market oversupply that emerged amid the ramp-up of new LNG facilities, which is especially pronounced in the U.S.

Cheniere Energy Inc. added to the growing number of LNG facilities in the U.S. on Aug. 28, substantially completing the second gas liquefaction train of its Corpus Christi LNG export terminal, the second of the company's U.S. export terminals. Commissioning is also complete and the project contractor Bechtel Oil Gas and Chemicals Inc. has turned over care, custody and control of the second train to Cheniere, according to a Sept. 3 news release. The export company received authorization from the Federal Energy Regulatory Commission to begin commercial export activities on Aug. 28.

Elsewhere in Texas, Freeport LNG Development LP shipped its first LNG commissioning cargo from the first liquefaction train at the Freeport LNG terminal. The first cargo, transported aboard the LNG Jurojin vessel, contained approximately 150,000 cubic meters of LNG, according to a Sept. 3 news release. The facility's commercial operations are expected to begin later in September, Freeport LNG Founder, Chairman and CEO Michael Smith said in the statement.

Another LNG developer, Tellurian Inc., has identified — but not revealed all of the partners needed to secure sufficient funding for the first phase of its proposed Driftwood LNG export project in Louisiana. Work still needs to be done to finalize agreements, CEO Meg Gentle said Sept. 4. During a Barclays energy conference webcast from New York, Gentle worked to allay investor concerns. While the project is backed by a major industry player in France's Total SA and developed by a team that includes many of the key people who got Cheniere's Sabine Pass facility off the ground, Gentle has had to fend off worries that Driftwood will not be able to get the money for construction.

A Tellurian investor presentation released last month held to the company's expectation of reaching a final investment decision, or FID, by the end of this year. Slides accompanying Gentle's presentation did not address FID timing. A spokeswoman, however, said in an email that the developer was still targeting a decision in this year.

"We know our customers for phase one at this point, and we are finishing documentation with them to reach a positive FID," Gentle said. "We'll see where we get to in the next couple of months."

Gentle did not name the other partners besides Total, although India's Petronet LNG Ltd. is among the companies said to be exploring the possibility of making an equity investment in Driftwood.