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Annova LNG seeks to break out of crowded export field with competitive marketing pitch

Highlights

Offering gas charge lower than 115% of Henry Hub

Three projects vying for momentum in Brownsville

Houston — Annova LNG's backers will sanction the proposed $4.5 billion South Texas export project after two-thirds of the capacity is sold and are willing to offer so far elusive buyers a gas charge with a lower premium than what has been typical for existing terminals, CEO Omar Khayum told S&P Global Platts in an interview.

Commodities 2020 | S&P Global Platts

The target and pitch reflect the realities of a crowded marketplace in which more than a dozen developers of US liquefaction facilities currently scheduled to start up during the early to middle part of next decade have persistently struggled to secure sufficient long-term offtake contracts to finance construction.

What was supposed to be a breakout year for final investment decisions has largely not been as it draws to a close. Only two new projects and an additional train at an existing facility have advanced to construction over 2019. With pressure building, several developers, including Annova LNG, have pushed off their FIDs until 2020 or later. Some have stopped talking about FID timing, altogether.

"At some point, you have to have contracts to take FID," Khayum said December 4. "We have a high degree of confidence that we're going to get there."

Annova LNG has set its threshold for advancing to FID at securing commercial contracts covering 4 million mt/year of LNG out of the 6 million mt/year capacity of the terminal. That's a lower bar than what some other developers, which are proposing larger facilities, must reach. The liquefaction fee it is pitching is in the range of $2-$2.50/MMBtu, in line or toward the lower end of peer offerings. Where it sees room to be extra competitive is on the variable gas charge. It is willing to come down from the traditional 115% of Henry Hub, though it generally wants to maintain some premium.

It was four years ago that officials from Annova LNG, NextDecade and Texas LNG gathered with community leaders in Brownsville, along the Gulf of Mexico, to talk up their three liquefaction projects, and a good location that could access cheap feedgas.

Since then, only one of the three projects has announced a firm offtake deal. NextDecade's long-term agreement with Shell for 2 million mt/year of LNG, alone, is short of what its Rio Grande LNG will need to take FID. In November, NextDecade delayed its target for FID on the first two or three trains to first quarter 2020, from fourth quarter 2019. Texas LNG has pushed FID to 2021.

COST COMPARISONS

Regulatory uncertainty, at least, is behind the Brownsville projects. The Federal Energy Regulatory Commission last month granted certificate approvals to all three. That sign-off could give commercial momentum to Annova LNG.

"We're core bread and butter what we're supposed to be doing," Khayum said. "This is the beginning of the ramp up to get to FID for us."

By comparison, LNG Limited's Magnolia LNG has had its FERC permit since 2015 and has yet to announce a firm offtake deal or take FID in Louisiana. Lake Charles LNG, backed by Energy Transfer and Shell, also has had certificate approval since 2015 and hasn't taken FID in Louisiana or announced any commercial deals.

Annova LNG has secured a county tax abatement and de-risked its project by beefing up its equity ownership group. Beyond Exelon, equity partners now include midstream operator Enbridge, engineering firm Black & Veatch and construction contractor Kiewit.

At $750/mt, the estimated all-in cost of the project is higher than what some of its second wave US peers have promised. NextDecade has promised $543-600/mt depending on a two- or three-train FID, while Tellurian's Driftwood LNG in Louisiana has promised $550/mt. Khayum questioned how realistic some of the other developers' figures are and whether they include all costs.

TRADE TENSIONS

US LNG projects face challenges including the US-China trade war, depressed global gas prices, and oversupply concerns. There are also the existing exporters to jockey with. On Friday, Freeport LNG in Texas began producing from its second liquefaction train, while in Georgia vessel-tracking data showed an LNG tanker anchored offshore as Kinder Morgan's Elba Liquefaction was preparing to export its first cargo. Also in the mix are deep-pocketed portfolio players that can advance projects without firm offtake agreements tied to their terminals - in the US, Qatar Petroleum and ExxonMobil did that with Golden Pass LNG in Texas in February.

Still, the Brownsville projects have location on their side, said Michael Webber, managing partner of investment research firm Webber Research & Advisory. He rates NextDecade as the most likely of the three to advance in some form because of its positioning and upstream focus.

"Next year we're expecting a continued transition toward supply-push dynamics, and away from demand-pull," Webber said. "That simply favors the Texas area projects located in such close proximity to the Permian."

Khayum acknowledged the market questions heading into 2020.

"What the customer's challenge is -- beyond 'Is Henry Hub competitive?' They're asking, 'Which ones of these guys are going to go?' Because, I want to bet on the right horse if I'm the customer," the CEO said.

Commodities 2020 | S&P Global Platts

-- Harry Weber and Corey Paul, newsdesk@spglobal.com

-- Edited by Richard Rubin, newsdesk@spglobal.com