Are long-term contracts still essential for multi-billion dollar LNG export plants? It depends on who you ask.
Executives working on various North American LNG export plants who gathered at CERAWeek by IHS Markit this week butted heads over the evolution of project financing models and how quickly liquefied natural gas is becoming a liquid commodity.
Tellurian Inc. co-founder and chairman Charif Souki on March 13 said the long-term contracts that LNG exporters have traditionally used to secure construction financing are all but dead. He pointed to the company's planned Driftwood LNG project in Louisiana that relies on equity partners who would buy stakes in the proposed terminal and get LNG from the U.S. Gulf Coast that they could use for their own purposes or resell at a markup.
"On a global basis today we don't see any [new] full long-term contracts. [LNG] is a commodity. Other commodities don’t trade on long-term contracts," Souki said. Souki founded U.S. LNG export pioneer Cheniere Energy Inc. and served as CEO until late 2015. Under his watch, Cheniere largely relied on 20-year contracts to underpin its Sabine Pass liquefaction and export facility that started operating in 2016.
If the current rate of export capacity development continues over the next five years, there will be no more need for the traditional sales and purchase agreements that the first wave of U.S. LNG projects relied upon, according to Souki. "You're going to [look] very similar to the oil business," he said. "It's moving very, very rapidly."
Peter Coleman, CEO and managing board director of Australia's Woodside Petroleum Ltd., disagreed that one model will work for all companies. He said companies' appetite for risk and ability to hold debt will decide which companies still rely on longer contracts.
"You might see a few projects move forward this year on that [equity model] basis, but there is a point in time where that model just can't keep going. The risk profiles of these companies will get full. … You can only top up that amount of supply without a home for so long," he said. "[If] people want to put away their checkbooks and think that the long-term contract is dead ... then we're going to come in for another supply shortage."
Coleman also hedged LNG's transformation into a global commodity. "At some point you'll get true liquidity in the market," he said. "These things generally require some disruptive force whether it be a geopolitical event … for example to start to force the hand, but otherwise it will just take its time."
LNG Canada CEO Andy Calitz, who spearheads the Royal Dutch Shell PLC-joint venture export project in western Canada that recently reached a final investment decision, said in an interview that long-term contracts will remain relevant even as more developers do their own financing.
A recent Shell report concluded that LNG buyers were warming back up to long-term contracts after signing shorter, smaller and more flexible contracts from 2014 through 2017. The average length of contracts signed in 2018, according to the supermajor, more than doubled from those in the previous year to about 13 years.
Roberto Simon, managing director at Societe Generale and head of natural resources and infrastructure for the Americas, said banks will not be sidelined from LNG project development by companies buying equity stakes. "I think we're far from the demise of project finance," he said.
Planned expansions of U.S. Gulf Coast terminals like Cheniere's Sabine Pass, the Sempra Energy-led Cameron LNG and Freeport LNG Development L.P., according to Simon, are utilizing long-term contracts to secure funding.
Global Infrastructure Partners partner Salim Samaha said private equity can come into play if developers selling equity in projects need to mitigate counterparty credit risk.
"If Bangladesh really needs the gas and you can sell it to them at a very competitive price, and maybe you can charge enough premium because you're taking additional credit risk as an equity investor, that may be a trade-off that you're willing to ... over-equitize a project," he said. "That plays into the hands of large funds like us that have the balance sheet in order to do that in the context of there really being far fewer funds … that can play at that scale."
Global Infrastructure Partners has an equity interest in Freeport LNG, which is expected to ship its first cargo in July.