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Shrinking North American LNG field raises fear of 'oligopolistic' supplier future: panelists

Highlights

Mismatch between available financing, quality projects

Bankers encourage greater contract, distribution flexibility

Houston — There is a mismatch between the amount of available financing and the number of quality liquefaction projects, making it difficult to add new supplies to a tight global market, infrastructure investment experts said March 25 during S&P Global Platts' LNG Virtual Conference.

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The dearth of newly sanctioned export projects in 2020 and so far in 2021 — especially in North America, which has been responsible for the majority of new LNG supply globally over the last five years — is a worrisome sign that could lead to more price volatility in the future, the officials said.

Greater flexibility in supply-contract terms, mutual willingness to take on risk, and finding additional ways of delivering LNG to end-users in emerging markets are key to bridging the gap between buyers and sellers, they said.

"We speak to the major oil and gas companies regularly. I've had calls with five of the largest O and G companies globally in January 2021, and they've all broadly provided the same theme: their view of the market fundamentals are unchanged from a long-term perspective for the demand of gas and LNG," Michael Stirling, CEO of Stirling Infrastructure Partners, said during a panel discussion at the conference. "The outlook from their perspective is not going to change for how they are going to finance projects going forward."

In North America, there was only one new liquefaction project sanctioned last year — Sempra Energy's Energia Costa Azul project on Mexico's Pacific Coast. More than a dozen other developers in the US, Canada, and Mexico are actively pursuing projects of their own, although the field is dwindling amid ongoing contracting and financing challenges. Exelon-backed Annova LNG recently scrapped its LNG export project in Texas. Analysts expect more US greenfield projects to drop off the board.

"We don't want to have a situation where the number of suppliers in the market is oligopolistic," said Vivek Chandra, CEO of Glenfarne Group's proposed Texas LNG export project in Brownsville.

While the first wave of US liquefaction terminals was supported by large, traditional foundation customers in Europe and Asia, the second wave is facing a different group of prospective buyers, some of whom are less experienced in LNG and are not able to easily predict the amount of LNG they will need on a long-term basis, Chandra said.

"It's a lot harder the second wave ...," he said. "They're going to need a bit more hand-holding."

Texas LNG, which is proposed to be located along the Brownsville Ship Channel near where the now-canceled Annova LNG project was to be built, has not announced any firm long-term contracts tied to its supply.

To reach the emerging market customers, which would help on the project financing side, developers should consider ways to transport smaller volumes of supplies, said Alan Townsend, an LNG specialist with the World Bank Group's private-sector arm. Rather than the big tankers, they should look into rail and containers, he said.

"I think the message here is what works for the buy-side and can be accepted by the seller is where the market will go, and that will produce a lot of variety in contracts, in price terms, in tenors," Townsend said.

He said that if liquefaction developers want to reach those smaller customers, it's important to have a business model that supports distributed LNG. Otherwise, "growth will be constrained," Townsend said.