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Next wave of US LNG export projects faces credit risk, S&P Global Ratings says

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Essential Energy Insights - September 17, 2020

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Next wave of US LNG export projects faces credit risk, S&P Global Ratings says

Abundant U.S. natural gas supplies and forecasts of growing global LNG demand early next decade are not enough to ease the uncertainty facing the next wave of U.S. export projects due to high construction costs and challenges securing long-term supply contracts, according to an S&P Global Ratings report.

The main concern is that as developers along the Gulf, Atlantic and Pacific coasts seek creative ways to finance liquefaction units, they will be open to shorter agreements with smaller quantities and more flexible terms, raising questions about their ability to repay debt as contracts come up for renewal more often.

Applications for more than a dozen LNG export projects are being considered by U.S. regulators, though across the industry, almost no final investment decisions have been announced over the last 18 months, and some developers have delayed their decisions into 2018 or beyond. Few firm supply purchase agreements have been announced for the projects that have yet to commit to moving forward.

"The repayment of project finance debt is from cash flow generated by long-term LNG off-take agreements with investment-grade companies; however, for a variety of reasons, these contracts are increasingly difficult to procure," the Oct. 17 report said. "The credit quality of new facilities could suffer if project finance structures are used but backed by shorter-term agreements (which introduce re-contracting risk) and/or merchant sales (and associated market risk) or include revenue counterparties that we rate below investment grade."

Cheniere Energy Inc.'s Sabine Pass terminal in Louisiana is the only U.S. facility currently exporting LNG produced from shale gas. The four liquefaction units, or trains, it is currently operating were financed with 20-year take-or-pay contracts with creditworthy buyers, setting a standard for the industry. Dominion Energy Inc.'s Cove Point export terminal in Maryland, which is expected to start shipping LNG later this year, has similar deals in place, as do the several other projects being built, including facilities in Freeport and Corpus Christi, Texas.

But for projects still going through the regulatory approval process, the well has been running dry. Bank decisions also are in the mix. Earlier this month, French bank BNP Paribas SA decided to stop doing business with companies that are primarily involved in oil and gas production from shale, a potential impediment to project developers' ability to pay for construction if more banks follow suit.

"This isn't to say that liquefaction facilities will no longer be built in the U.S.," the report said. "However, the nature of these facilities could change. For example, we expect to see a greater number of smaller, more modular units, and potentially shorter-term contracts up to five years in length, with gas procurement arrangements changing as well."

"We think these changes will likely introduce a host of new credit issues, such as market and recontracting risk, while possibly eliminating others, such as counterparty risk," the report said.

Cheniere recently told regulators it has decided to change the design of a stage of its LNG export facility in Corpus Christi to incorporate midscale LNG trains, instead of large-scale units. The Houston-based company has been considering new midscale liquefaction opportunities as a way of reducing per-train construction costs and making it easier to find offtakers to buy the capacity.

Harry Weber is a reporter for S&P Global Platts, which like S&P Global Market Intelligence and S&P Global Ratings is owned by S&P Global Inc.