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Commonwealth LNG in late-stage talks with customers for US project: CEO

Highlights

Deals would cover more than half of target: CEO

Gyrations in global prices incentivize fixed contracts

Commonwealth LNG is close to finalizing supply deals that would cover more than half of the developer's target for what it needs to be able to build the 8.4 million mt/year export project in Louisiana, though it has delayed making a final investment decision until early 2023, CEO Paul Varello said during an Oct. 7 interview.

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Talks with end-users in Asia, Europe and other parts of the world picked up in recent months after a dry spell that was largely due to demand and price uncertainty because of the coronavirus pandemic. Amid economic recovery that has coincided with a big run-up in global gas prices, more buyers are reengaging, Varello said. The timing of when Commonwealth LNG expects to receive key permits from US regulators was the main reason for the FID delay to the first quarter of 2023, from a previous goal of late 2022.

"What we're not talking is traders," Varello said on an installment of the S&P Global Platts Capitol Crude podcast that will air Oct. 11. "We're talking end-users. They're really waking up to the fact that with the volatility in the market, long-term contracting makes a lot more sense."

The Platts JKM for November was assessed at $35.604/MMBtu on Oct. 7. Just the day before, the benchmark price for spot-traded LNG delivered to Northeast Asia hit a fresh record, surpassing $50/MMBtu for the first time ever. The gyrations have come as the gas price crisis in Europe grows more severe, increasing global competition for LNG cargoes.

The extreme volatility in gas prices has helped spur greater interest among non-traditional LNG offtakers, Varello said. In particular, US gas producers are more interested in marketing some of their output to end-users in Asia and Europe. Commonwealth LNG is in talks with several producers about such contracts to support its project, Varello said. Cheniere Energy, the biggest US LNG exporter, has already signed agreements with several US producers to sell some of their supplies to global markets.

The indexes are "getting to be very attractive," Varello said. "Henry Hub, although it moves, and recently moves, the delta between it and these other indexes is so attractive to the producers, the owners of the gas here in the US, that they're willing to bet a portion of their portfolios."

He quickly added, "They're never going to bet the farm on it."

Strong price trends in end-user markets continue to support near full utilization at existing US liquefaction facilities. For new facilities that are being proposed, some have seen a lift in commercial activity, though others have continued to struggle. Some projects have been delayed, paused or scrapped.

Elsewhere in the market, New Fortress Energy, a growing player in supplying LNG to power plants and industrial customers in the Caribbean and Latin America, plans to invest more heavily in floating LNG, seeing the storage capabilities as a way for producers to ease the impacts from the "massive" shock that global gas markets have been experiencing, CEO Wes Edens said during a call with analysts Oct. 7.

"You are going to get these 100-year floods happening more than every hundred years," Edens said, referring to extreme price volatility.

Along with its operations in Puerto Rico, Jamaica, Brazil and Nicaragua, New Fortress is positioning itself as a provider of clean energy solutions to smaller LNG customers than the big end-users in Europe and Asia. Moving LNG by containers, trucks and rail are part of its endeavors to enable more power producers to switch from oil-based fuels to natural gas. In the US, New Fortress has talked about a project to move LNG by rail from a proposed liquefaction plant in the Marcellus shale region in Pennsylvania to a small export facility on the East Coast.

Commercial efforts

As for Commonwealth LNG, in August it signed a preliminary agreement with Bangladesh's Summit Oil & Shipping to potentially contract for up to 1 million mt/year of LNG from its proposed facility. That deal still needs to be finalized.

To date, Commonwealth LNG has not announced any firm supply delays, though Varello said the developer is making "substantial progress." He said a handful of contracts are in the final stages of negotiation. Commonwealth LNG needs supply deals covering about 7 million mt/year to 7.5 million mt/year of the facility's nameplate capacity to be able to take FID, Varello said.

"These contracts represent more than half of our target collectively," he said.

The developer issued a tender for terminal supplies in January with plans to execute contracts by the end of June, a targeted deadline that came and went without results being announced. Summit was among the companies that participated in the tender process. While the tender did not result in firm agreements on the timeline the company had set for itself, the process raised the project's profile with credit-worthy customers with whom it is the final stages of negotiations, Varello said.

"Where I think we probably were a little too optimistic was with the duration," Varello said. "We had hoped to announce in June. Things just took longer."

FERC process

Many of Commonwealth LNG's competitors in the US, although they have not sanctioned their projects, already have permit certificates from the US Federal Energy Regulatory Commission in hand. At the moment, Commonwealth LNG does not. While acknowledging his project got a slower start than the others, Varello said he believes the process is moving forward well.

At the same time, he said that with FERC not expected to grant his project's permit certificate until late 2022 and several subsequent approvals also required, Commonwealth LNG needed to adjust its FID target.

"It's hard to continue to hang on to that date," he said. "We thought it was better to be a little more conservative on the kickoff."

The CEO added, "It didn't seem to impact the buyers."