? Magnolia LNG is in "serious discussions" with Chinese buyer.
? US-China trade deal increased Chinese interest in Magnolia LNG.
? "You have to expect" companies like GAIL (India) Ltd. will renegotiate LNG contracts.
LNG Ltd. CEO Greg Vesey said the issue for U.S. LNG export developers is convincing buyers to sign long-term contracts.
Source: LNG Ltd.
LNG Ltd.'s Magnolia LNG project in Louisiana is one of four proposed U.S. export projects that are fully permitted but do not yet have a final investment decision. As the project seeks to move forward in an oversupplied market, the Australian company's biggest challenge is convincing buyers to pull the trigger on long-term contracts.
S&P Global Market Intelligence sat down with LNG Ltd. CEO Greg Vesey and COO John Baguley at Energy Dialogues' North American Gas Forum in Washington, D.C. The following is an edited transcript of the conversation.
S&P Global Market Intelligence: What is the biggest challenge right now in the current market?
Greg Vesey: The biggest challenge right now is buyers don't feel compelled to make a decision. You prove the project to them, you get someone comfortable around pricing models, and they look out there and say, 'OK, but don't I have a year to make a decision?'
I think what's happening, and the reason I'm a little more optimistic, is there seems to be some general coalescence that 2022, maybe early 2023, is when supply and demand switch, and you've got a shortage again. With that in mind, they are now kind of doing that math backward and saying: 'With construction time, a little bit of contracting time ... I probably need to make a decision within the next year.'
Magnolia has a nonbinding LNG contract with Vessel Gasification Solutions Inc. in India. Do you see it being able to meet the conditions?
Vesey: Yes. What we did with them is we set out parameters that they could work with. I think like any good marketer, if they get something close, they will come back to us and say, 'Well, we didn't quite get what you said, but how about this?' It gives us a pretty continuous presence in the marketplace, without having to put an office in place and all the infrastructure that surrounds that.
Have you seen interest from other companies in India?
Vesey: I would say it's pretty static. The issue you have with India is they don't like to pay. They want the cheapest price, and if prices get out of hand they just stop, which is a hard model to deal with. I think folks are willing to listen, but when it actually comes to signing a deal, that's when it takes a while.
It is very out of character for them what they did at [Cheniere Energy Inc.]. I was very surprised by that.
In what way?
Vesey: Prices at that time were still fluctuating in the U.S., and now I would say, 'Yeah, it's very stable supply and a very stable pricing model.' What we hear a lot is their interest from their management in Henry Hub has waned. What you're actually saying is you don't like the tolling agreement you signed, or the SPA you signed. It's not Henry Hub. It's that you signed a deal that was too expensive.
Does it worry you that GAIL (India) Ltd has looked to renegotiate its contracts with Cheniere's Sabine Pass?
Vesey: No. I think you have to expect it. [But] we feel very good about our technology and the competitiveness of our project. We really think we can offer about as good a price as anybody can in the marketplace and that it's going to come down to the terms.
We have talked before about the U.S.-China trade agreement and how the U.S. LNG industry hopes a formal proclamation will give Chinese buyers the confidence to sign long-term contracts. Have you seen that materialize in the form of more interest from China?
Vesey: Definitely. Fortunately for us, we had a team in the air when all that came out. They ended up with a lot more meetings than were originally scheduled.
John Baguley: It really stepped up the interest significantly.
"It really stepped up the interest significantly," LNG Ltd. COO John Baguley said of the U.S.-China trade agreement announced in May.
Source: LNG Ltd.
Vesey: Most of that has led to the usual first step of a [non-disclosure agreement]. And so now it's into serious discussions. I think they were well pleased that our administration would welcome those kinds of deals.
Are those 'serious discussions' the most advanced negotiations Magnolia is in at the moment?
Vesey: It's right up there with them.
Does China feel crowded for a U.S. LNG export developer right now? A lot of LNG companies are putting pressure on Chinese buyers.
Vesey: They are getting a lot of attention. And I'm actually hopeful that if anyone gets the party started, let's get it started, right?
Baguley: It is certainly, in my opinion, the highest potential growth market right now. The combination of the new people coming into the market, combined with the switching of coal to clean energy, is a huge opportunity.
One of LNG Ltd.'s big pushes is a patent for technology that would be used at Magnolia. Has it been difficult to convince buyers to sign up when you cannot point to another project to show them how it works?
Vesey: For a long time, it was a handy excuse [for buyers]. When we actually got them inside to dig under the covers and look at it, there was no problem at all.
Baguley: I'm responsible for the technology, and it's an innovated use of existing technologies. There is nothing new. There's nothing unproven. There is no technology risk.
Just as a couple of examples, our [engineering, construction and procurement] contractor — which is KBR together with SK E&C — they take full, unlimited-liability production capacity risk for the plant. So they have to build the plant, start it up and run it at full design capacity, and they face unlimited liabilities associated with failing to do so. And they are willing to stand in front of this. To me, that's a great testament.
And the trains that liquefy the gas are still going to be built offsite, right?
Baguley: Yes. The U.S. Gulf Coast has quite a bit of pressure on labor, and labor productivity has emerged as an issue on some of these projects that are currently under construction. So we will do a lot of the work offshore. That will isolate us from some of these issues.
You are also developing the Bear Head LNG export project in Nova Scotia. Are you expecting Magnolia or Bear Head to come online first?
Vesey: Right now, it's clearly Magnolia. We have to work out some gas supply issues up at Bear Head. I think they can be worked out, but that's going to take a little more time. We're trying to convince those Western Canada resource holders: since LNG going out the West is not going to happen, we're showing them a business model that brings it to the East.
We saw three Western Canadian LNG export projects canceled in six months. Does that get rid of some of your competition?
Vesey: In the global marketplace, it does. Those are volumes that have disappeared.