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Commonwealth LNG touts modular approach, second-mover advantage

Highlights

Offsite component construction mirror's Yamal LNG project in Russia

Site development, tank construction can occur simultaneously

Privately held Commonwealth LNG sees its late entrance in a crowded field of US LNG developers as an advantage, with officials saying they can apply lessons learned from the first wave of LNG export projects toward a low-cost approach that will put it ahead of its rivals.

But the LNG facility that the company's export venture in Louisiana most resembles is not among the projects concentrated on the US Gulf Coast -- it's the Yamal LNG plant in Siberia.

As PAO Novatek did in developing Yamal in Russia, Commonwealth LNG plans for offsite construction of its facility's six natural gas liquefaction trains and other major components, the company's controller, Nick Eusepi, said in an interview. The benefit of this modular approach would be a lower cost and faster turnaround time on construction, he said.

"We are basically mirroring the Yamal project," Eusepi said. "The market is tough; the customers and off-takers have fatigue from all the projects, and they are somewhat on the sideline just waiting things out. We think our low-cost, flexible approach does put us ahead of the line, though."

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It was only in August that Commonwealth LNG submitted its formal application for a federal permit to build the 8.4 million metric ton/year LNG export terminal and an affiliated feedgas pipeline interconnect in Cameron Parish, Louisiana. The project is competing against some others that already have permits and deals lined up with potential off-takers.

But Commonwealth LNG said the amount of time to build its project -- around three years as opposed to the usual four -- puts it on track to come online in early 2024, when a potential global LNG supply crunch is anticipated.

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Commonwealth LNG recently received a notice of environmental review from the Federal Energy Regulatory Commission that suggested the agency could be ready to make a decision on whether to approve the project by the end of 2020. The company is now targeting a final investment decision in early 2021 (CP19-502).

"We are coming in later, but we are not finishing much later than everyone else," Eusepi said. "We still fall right in the middle of that second wave demand cycle. A little late to the game, but not really late to the game."

The construction approach would use modular LNG facilities developed by TechnipFMC, a designer and builder of LNG projects that worked on Yamal LNG. TechnipFMC signed an engineering service contract with Commonwealth LNG in 2018. Commonwealth LNG has not finalized an engineering, procurement and construction contract. Commonwealth LNG is a subsidiary of an investment vehicle owned by businessman Paul Varello, a veteran of the engineering and construction sector.

In a significant difference from other US LNG projects, Commonwealth LNG's plans call for even the LNG storage tanks to be built away from the project site.

This will allow the developer to build the tanks and do site preparation at the same time, which would be an important innovation in handling a key timeline constraint for LNG projects, said energy analyst Katie Bays, co-founder of research and consulting firm Sandhill Strategy. This could lend predictability in cost and schedule to the project's competitiveness in the race for a final investment decision.

"There is a path for them being able to do that," Bays said. "The big issues are not their model or regulation -- it's financing and the commercial environment. It's roughly the same hurdle for them as it is for every other company that is nothing more than an idea ... Capital is just anemic. And that is a huge risk for basically every project that doesn't have a balance sheet and a huge advantage for all of the projects that do."

Adding to the uncertainty for the LNG sector is the trade war between the US and China, which is expected to be the world's biggest importer of LNG within a decade.

As it stands, Commonwealth LNG could take a final investment decision on the $4.8 billion project if it contracts about 7 million mt/y of the offtake, Eusepi said. The company in June announced the signing of a nonbinding agreement with a subsidiary of global commodity trader Gunvor Group that could lead to a 15-year sale-and-purchase agreement for 1.5 million mt/y of LNG. The deal is Commonwealth LNG's only public commercial commitment.

Bays said the shorter duration of the contracts Commonwealth LNG is marketing, compared with the typical 20-year deals, is another factor that distinguishes the project in the field of independent LNG developers.

The low cost of the project enables Commonwealth LNG to offer these shorter-term deals, Eusepi said.

Other terms of the Gunvor deal, including the price structure or links to gas indexes, were not disclosed. But as the company pursues additional deals, it is not committed to any single pricing structure or index, Eusepi said.

"We've got a little bit signed up so far, but by no means all that we need to to get the project to go," Eusepi said. "But we are confident that we are going to get there, and hopefully, by the end of the year, we have got some more announcements coming out."

-- Corey Paul, S&P Global Market Intelligence, newsdesk@spglobal.com

-- Edited by Zac Aiuppa, newsdesk@spglobal.com