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CERAWEEK: Buyers said to renew interest in supplies from Freeport LNG Train 4

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CERAWEEK: Buyers said to renew interest in supplies from Freeport LNG Train 4

Highlights

Expansion needs commercial support to be sanctioned

Market volatility shows benefit of long-term contracts: CEO

Houston — Freeport LNG has recently seen renewed interest from buyers in long-term contracts tied to a proposed fourth liquefaction train at its Texas export facility, CEO Michael Smith said March 3.

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The discussions follow significant volatility in benchmark prices during 2020 due to supply disruptions, the coronavirus pandemic and strong winter demand.

During a panel at the CERAWeek by IHS Markit energy conference, Smith said the swings showed that the "market is much more balanced than previously thought."

"There has been an overreliance on spot cargoes in our industry," Smith said. "You can't just live on spot. We're seeing interest again in long-term contracts for Train 4 because of it, and I think others will, too."

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He did not elaborate on the commercial talks, though his comments were his most bullish publicly in some time about the prospects of being able to sanction the expansion.

Freeport LNG currently operates three trains at its facility south of Houston. It has delayed a final investment decision on the proposed fourth train amid past challenges securing sufficient long-term contracts to finance construction. A preliminary agreement signed in 2018 by Japan's Sumitomo for the purchase of 2.2 million mt/year of LNG from Train 4 expired without being finalized.

The general consensus among analysts was that the price swings, shipping constraints and supply outages at terminals outside the US last year could support a higher level of commercial engagement tied to new projects as buyers look to ensure security of supplies for the the long term. Relatively little new LNG production capacity is expected to come globally in the next few years.

Smith described 2020 as a year of "feast and famine" that demonstrated the role of the US as the world's swing producer and the critical importance of US LNG for the portfolios of world buyers because of the flexibility of the US supplies.

"Few countries can manage a 70% reduction in demand followed by a 400% increase in capacity," Smith said. "While 2020 was an impressive year for the LNG market, It proved how critical the US is to balancing the global market."

The CEO also addressed the record cold snap during mid-February in Texas that impacted operations at Gulf Coast liquefaction terminals, including Freeport LNG. The terminal shut down two trains after the Texas governor asked Smith to conserve power ahead of the coldest day of the weather front. The third train also went down when the freezing weather forced widespread blackouts across the state, Smith said.

Utilization has since rebounded, with the facility operating at near capacity March 3 based on feedgas demand, S&P Global Platts Analytics data showed