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Annova LNG seeks to break out of crowded export field with marketing pitch

Annova LNG's backers will sanction the company's proposed $4.5 billion South Texas LNG export project after two-thirds of the capacity is sold, and they are willing to offer buyers a gas charge with a lower premium than typical for existing terminals, Annova CEO Omar Khayum said.

The target and pitch reflect the realities of a crowded marketplace. More than a dozen developers of U.S. liquefaction facilities scheduled to start in the next decade have struggled to secure sufficient long-term offtake contracts to finance construction.

What was supposed to be a breakout year for final investment decisions, or FIDs, has largely disappointed as 2019 draws to a close. Only two new projects and an additional train at an existing facility have advanced to construction. With pressure building, several developers, including Annova LNG, have pushed off the decisions until 2020 or later. Some have stopped talking about FID timing altogether.

"At some point, you have to have contracts to take FID," Khayum said in a Dec. 4 interview with S&P Global Platts. "We have a high degree of confidence that we're going to get there."

Exelon Corp.-led Annova LNG has set its threshold for advancing to FID. It must secure commercial contracts covering 4 million tonnes per annum of LNG out of the 6 mtpa capacity of the terminal. That is a lower bar than what some other developers with larger facilities must reach. The gas liquefaction fee it is pitching is in the range of $2-$2.50/MMBtu, in-line or toward the lower end of peer offerings. Where it sees room to be extra competitive is on the variable gas charge. It is willing to come down from the traditional 115% of Henry Hub, though it generally wants to maintain some premium.

It was four years ago that officials from Annova LNG, NextDecade Corp. and Texas LNG LLC gathered with community leaders in Brownsville, along the Gulf of Mexico, to talk up their three liquefaction projects and the good location that has access to cheap feedgas.

Since then, only one of the three projects has announced a firm offtake deal. NextDecade's long-term agreement with Royal Dutch Shell PLC for 2 mtpa of LNG, alone, is short of what its Rio Grande LNG will need to take FID. In November, NextDecade delayed its target for FID on the first two or three trains until the first quarter of 2020, from the fourth quarter of 2019. Texas LNG has pushed FID to 2021.

Cost comparisons

The Brownsville projects have left behind regulatory uncertainty, at least. The Federal Energy Regulatory Commission in November granted certificate approvals to all three. That sign-off could give commercial momentum to Annova LNG.

"This is the beginning of the ramp-up to get to FID for us," Khayum said.

By comparison, LNG Ltd.'s Magnolia LNG has had its FERC permit since 2015 and has yet to announce a firm offtake deal or take FID in Louisiana. Lake Charles LNG, backed by Energy Transfer LP and Shell, also has had certificate approval since 2015 and has not taken FID in Louisiana or announced any commercial deals.

Annova LNG has secured a county tax abatement and de-risked its project by beefing up its equity ownership group. Beyond Exelon, equity partners now include midstream operator Enbridge Inc., engineering firm Black & Veatch Corp. and construction contractor Kiewit Energy Group Inc. At $750/tonne, the estimated all-in cost of the project is higher than what some of its second wave U.S. peers have promised. NextDecade has promised $543-600/tonne depending on a two- or three-train FID, while Tellurian Inc.'s Driftwood LNG in Louisiana has promised $550/tonne.

Khayum questioned how realistic some of the other developers' figures are and whether they include all costs.

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Trade tensions

U.S. LNG projects face challenges including the U.S.-China trade war, depressed global gas prices, and oversupply concerns. They must also jockey with existing exporters. On Dec. 6, Freeport LNG Development LP in Texas began producing from its second liquefaction train, while in Georgia vessel-tracking data showed an LNG tanker anchored offshore as Kinder Morgan Inc.'s Elba Liquefaction was preparing to export its first cargo.

Also in the mix are deep-pocketed portfolio players that can advance projects without firm offtake agreements tied to their terminals. In the U.S., Qatar Petroleum and ExxonMobil did that with Golden Pass LNG in Texas in February.

Still, the Brownsville projects have location on their side, said Michael Webber, managing partner of investment research firm Webber Research & Advisory. He rates NextDecade as the most likely of the three to advance in some form because of its positioning and upstream focus.

"Next year we're expecting a continued transition toward supply-push dynamics, and away from demand-pull," Webber said. "That simply favors the Texas area projects located in such close proximity to the Permian."

Khayum acknowledged the market questions heading into 2020. "What the customer's challenge is ... they're asking, 'Which ones of these guys are going to go?' Because I want to bet on the right horse if I'm the customer," the CEO said.

Harry Weber is a reporter with S&P Global Platts. S&P Global Market Intelligence and S&P Global Platts are owned by S&P Global Inc.