? Baker McKenzie's head of LNG tells international buyers to look beyond day-to-day drama in U.S.
? The overall regulatory framework for LNG projects 'has not seen dramatic change.'
? 'We'll have to see' whether U.S. projects are able to take on buyers with lower credit.
In addition to the 9 Bcf/d of U.S. LNG export capacity expected by the end of 2019, more than a dozen other U.S. projects are seeking to enter the market. Veteran energy lawyer David Lang advises companies in the U.S. and overseas that are looking to operate in that space, whether it be liquefaction, marketing and shipping, or regasification. Formerly with Vinson & Elkins, Lang recently moved to Baker McKenzie, where he will head the law firm's global LNG practice.
S&P Global Market Intelligence talked with Lang about the U.S. regulatory environment, the global gas market and challenges in financing multibillion-dollar export projects. The following is an edited transcript of that conversation.
David Lang, global head of LNG at international law firm Baker McKenzie, has advised energy clients in Houston and Hong Kong.
Source: Baker McKenzie
Most industry watchers seem to agree that the real challenge for additional U.S. LNG export projects is the market. Is there anything these developers need from the Trump administration that will help them out?
The administration has been very supportive of LNG projects so far. At least their statements have been very supportive. The biggest challenge with the new administration was the fact that [the Federal Energy Regulatory Commission] was not fully staffed — didn't have the commissioners necessary to meet a quorum. They have that now, and so I believe that we now have a FERC that is going to be supportive of these projects, as FERC historically has been of gas infrastructure in the United States. So I think from a regulatory perspective, we have the things in place necessary to support getting these projects off the ground.
Do White House trade proclamations or support for increased exports to countries such as India, South Korea and China have any substantive effect on whether we see any more of these contracts signed soon?
There was some concern from off-takers in the past few years about the certainty of the regulatory regime in the United States, and I think there is less concern about that.
I guess I would exclude from that the statements that are being made about our trade arrangements with various countries. I think there is legitimate concern about what [President Donald] Trump's views are on some of the existing free trade pacts that help support LNG exports. But while the administration has generally made comments that are concerning regarding trade, their specific comments on LNG have been very supportive.
Are buyers getting whiplash? You have the U.S.-China agreement that promotes exports to China, and then the administration threatens trade with China over North Korea.
In the past when I was advising Chinese buyers on regulatory matters in the United States, I advised them to look beyond the day-to-day. At that time, there were concerns about whether Chinese investment in the United States would be blocked by [the interagency Committee on Foreign Investment in the United States] and whether they could have equity stakes in LNG export projects in the U.S.
I would give the same advice [now]: look beyond the tweet storms, and look at the overall regulatory infrastructure in the U.S., and it is very stable. Whatever the statements, there has not been dramatic change. So while you can certainly get the sense of whiplash seeing the day-to-day, I think the reality of what law applies ... has not seen dramatic change.
So what is it going to take for the next U.S. project to reach a final investment decision?
Demand. The challenges to U.S. projects, in my view, are purely commercial. The regulatory challenges are there, but they are not insurmountable. The big challenges for U.S. projects are signing up long-term customers to underpin the financing. I will say that has been a serious problem for the past few years, but most analysts think we're probably five years out from supply and demand rebalancing. If that's the case, then it is about time to start getting these projects going, because five years is how long, at a minimum, it takes to get a project off the ground.
With buyers calling for shorter-term contracts, how does that challenge U.S. developers, many of which cannot sign such contracts because they need guaranteed cash flows over 15 to 20 years to get financing?
It certainly is a challenge, in particular for the greenfield projects, and [even more so] the larger greenfield projects. But if you look at the projects that have been successful at getting off the ground in the U.S. in the past few years, they have been largely piggybacking on existing infrastructure, and so that has been helpful. But as far as securing long-term contracts to underpin financing, that has been a real challenge the last few years.
How does the credit of potential buyers play a role in their ability to sign contracts?
Credit is obviously an issue, particularly for long-term deals. For short-term deals, credit can be provided through letters of credit and other liquid credit support.
That is one of the challenges of the developing markets that are out there. There are a lot of supply projects that are targeting those more marginal buyers, and one of the things that they are looking to do is diversify their off-takers so that they are not overloaded with only low-credit or questionable-credit buyers. So if you have half a dozen off-takers for your project, and they are not all AAA-rated entities, you're still at least getting protection from having a diversity of customer base.
Will U.S. projects be able to take that on?
Those that are being project financed, we'll have to see. I think there are challenges to getting that to happen. If equity financing is being provided, that's less of an issue, obviously.
With contracts moving toward shorter-term and maybe less creditworthy buyers, do you think the project finance model will have to change? Or are they going to always depend on 20-year contracts to guarantee cash flows?
I don't think that in the next couple of years things are going to change, but the more liquid the market becomes, the more active the traders are in the LNG space, and the more outlets for demand that there are, the easier it will become for lenders to look at a project that doesn't have the entirety of its output under long-term contracts and finance those projects. But it's certainly a challenge in the next couple of years at the least.