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LNG projects stare at financing woes and delays amid eluding term talks

Highlights

LNG projects in need of financing will find it tough: Platts Analytics

Oil volatility to protract negotiations between LNG buyers, sellers

Dynamics changing in favor of spot pricing, buyers' risk appetite rising

Singapore — Unnerving volatility in crude oil prices may increasingly prompt leading LNG buyers to drag their feet in signing term import deals, and instead boost dependence on spot cargoes, a trend, if sustained, could squeeze the financial muscle of projects and result in painful delays.

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Analysts told S&P Global Platts that project owners may find it hard to move ahead with their plans as per schedule because the current price environment will result in a lack of offtake commitments.

"LNG projects requiring financing will find it that much harder to find backers, particularly if long-term contracts continue to elude them," said Ira Joseph, global head of gas and power analytics at Platts. "For companies addressing multiple investment priorities, delays will inevitably occur on new projects scheduled to start in the 2024-2027 time frame."

Joseph further pointed that LNG projects are particularly important for US gas producers because they are a major source for gas demand growth and also critical to oil production growth, as the wet gas needs an outlet.

Analysts said that although low oil prices are unsustainable because it does not balance the budgets of OPEC members and threatens US shale output, it could take time for prices to recover amid a global crude inventory stock build.

"We do see some potential for the oil market crash to protract price negotiations between buyers and sellers, which could result in some FID (first investment decision) delays, pushing back project start-ups," said James Waddell, senior global gas analyst at Energy Aspects.

SPOILT FOR CHOICE

As spot LNG prices hover at record lows and oil-indexed LNG prices are on course to weaken in the coming months if low crude prices sustain, the odds are in favor of LNG buyers at the moment.

"The dynamics are changing in favor of spot contracts," said an LNG trader in a leading Asian oil and gas firm. "There is enough risk appetite among buyers to go for spot pricing and take the onus of price fluctuations on themselves."

In addition, LNG linked to Henry Hub prices are also relatively low given the weakness of US prices this year.

Energy Aspect's Waddell opines that traditional pricing terms -- that ensured producers enough revenues to finance new LNG export projects -- look unattractive to buyers against the current spot LNG market.

"The real danger for future LNG projects being built is the growing option for buyers to rely on the spot market rather than signing up to long-term offtake, with associated take-or-pay obligations," he added.

Analysts said trade flow shifts and uncertainty that the coronavirus outbreak has created weighed heavily on every aspect of the LNG sector and, more broadly, on the outlook for near-term supply and demand for natural gas.

The potential impact from the COVID-19 pandemic should not be understated according to Jeff Moore, manager at Asian LNG Analytics at Platts.

"So far the impact on natural gas demand has largely been contained in a relatively small number of countries and centered around industrial demand," said Moore. "However, if global economies start to slow any further, it could weigh on demand centers around the world."

Industrial and power demand in Japan and Korea combined is forecast to average just over 310 Mcm/d from April to July.

Even a turn-down of 15% from those levels would have a significant impact on global balances.

"These near-term impacts are unlikely to affect projects slated to come online in the next few years, but they could put some projects expected further out at risk," he added.

HURDLES AHEAD

Longer-term challenges also are coming into clear focus as infrastructure projects are being scaled back and commercial support for new projects under development dry up.

Houston-based Cheniere is now no longer publicly targeting first-half 2020 FID on Texas mid-scale expansion, while its Magnolia LNG project in Louisiana is seeking a lifeline through a takeover of the parent company.

In 2019, Australia laid out plans for brownfield expansions and projects to replenish existing plants called backfills.

The country will however, bear the brunt of pre-FID project deferrals with key LNG-backfill projects at risk of being pushed back, such as the Scarborough and Barossa developments that were expected to be the biggest FIDs in 2020.

"I don't think the current global demand climate will necessarily impact supplies over the next few years - those projects being built will continue to be built through to 2025-26 and beyond," said Mike Fulwood, senior research fellow at Oxford Institute for Energy Studies.

"A key question may be for projects which were looking at FID this year - Rovuma in Mozambique and the Qatari trains, plus possible US ones."

According to Fulwood, although the FIDs for these projects are dependent on demand profiles five years out and beyond, they might be delayed for a while because of uncertainty over how long the current situation might last.