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Challenging commercial environment for new US liquefaction projects seen persisting

Highlights

Liquefaction capacity growth expected to slow after next year

Developers shouldn't expect past benefits to continue: Deloitte

Houston — Advancing new US LNG export projects to ease the tightness in global supply in the early to mid-2020s will be challenging due to decades of low prices in end-user markets and greenfield developers' continued difficulty signing long-term offtake contracts, Deloitte said in a global energy outlook issued Monday.

The view is largely in line with S&P Global Platts Analytics' expectations that US liquefaction capacity growth will slow after next year, reflecting the uncertainty over when many of the projects that are to make up the second wave of American terminals will begin construction, if at all. Four US projects could hear later this week whether they will receive permit certificates, though none has announced a final investment decision.

In the meantime, the surge in capacity that began in 2016 with the first exports from Cheniere Energy's Sabine Pass terminal in Louisiana will continue, based on the schedule for bringing online additional trains tied to the first wave of projects.

"A number of projects were sanctioned in 2019, both in the United States and internationally, but most were either brownfield or sold without long-term offtake contracts," Deloitte said in its 2020 oil, gas, and chemical industry outlook. "This is not an option for greenfield developers relying on project financing."

US LNG deliveries have picked up significantly in recent weeks, averaging 7.8 Bcf/d so far in November, as many shippers likely slow-steamed or floated cargoes in October, targeting the steep October-November market contango, Platts Analytics data show.

However, the substantial increase in deliveries has also weighed heavily on LNG prices, with the Platts JKM, the benchmark price for spot-traded LNG in Northeast Asia, now trading under $6/MMBtu for January deliveries, the lowest January price since Platts began assessing the price in 2009. The ramp up in deliveries was led by Europe, which has taken 4.1 Bcf/d of US LNG so far this month, followed by Asia, which took 3.4 Bcf/d, Platts Analytics data show.

According to Deloitte, exports could hit 10 Bcf/d over the next year or two. Platts Analytics expects US LNG exports to reach 10.8 Bcf/d in December 2020. After that, exports are expected to fall to 8.5 Bcf/d in May 2021, before rebounding to 10 Bcf/d in October 2021. By December 2023, Platts Analytics forecasts that US LNG exports will reach 14 Bcf/d, representing a 40% increase since 2021 versus growth of 100% during the last two years.

"While European and Asian prices are at decade lows, Henry Hub prices remain even lower, supporting the competitiveness of US LNG exports into a soft global gas market," Deloitte said. "This has cut into profits for existing exporters, but it poses a bigger challenge for project developers looking to sanction in 2020 -- and it is not the only headwind on the horizon."

COMMERCIAL ACTIVITY

While there has been an overall uptick in 2019 in commercial activity -- with NextDecade, Venture Global, Tellurian and Cheniere announcing long-term agreements tied to new supply -- only two final investment decisions have been reached among more than a dozen active US projects. A third FID was made on a new train at an existing facility. This year was expected to be critical because of the length of construction and efforts to meet global demand next decade.

Going forward, Deloitte said it will be harder for new US projects to benefit from some of the factors that allowed existing projects to advance to construction, such as uniquely flexible contracts and less-volatile delivered costs than many competing oil-indexed projects.

"While the US gas market remains a key strength for domestic developers, the contract terms are no longer as differentiated as they once were, with competitors willing to provide flexibility in a buyers' market," Deloitte said. "Add in tariffs and low oil prices, US cargo pricing is not as attractive as it once was."

-- Harry Weber, Harry.Weber@spglobal.com

-- Ross Wyeno, rwyeno@spglobal.com

-- Edited by Keiron Greenhalgh, newsdesk@spglobal.com