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Outlook 2019: Boom or bust? Market waits for US LNG export terminal decisions

Highlights

Tellurian, NextDecade, Venture Global among those in queue

Brownfield projects may have edge over greenfield projects

Houston — Commercial success will determine how many of the second wave of US LNG export projects move forward in 2019 during a year that will be critical for decision-making because of the expected global demand during the early to middle part of next decade.

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Risks due to challenges securing financing for building terminals and feedgas pipelines mean that developers will have to move quickly to secure sufficient interest to advance to a positive final investment decision. Ongoing trade tensions between the US and China present a wildcard, as does competition from already established US LNG players such as Cheniere Energy and Dominion Energy.

Greenfield projects such as Tellurian's Driftwood LNG, NextDecade's Rio Grande LNG and Venture Global LNG's Calcasieu Pass carry the most uncertainty for market observers. Brownfield projects such as ExxonMobil-backed Golden Pass are seen as having more of an edge. Because liquefaction terminals take about four years to complete, many of the active developers will need to reach FID next year to be able to start up in the 2023-2024 time-frame during which LNG buyers are expected to be most in need of new supply.

"That's the $64,000 question among that part of the group," Wells Fargo Securities analyst Michael Webber said during a December 13 presentation to clients. "We think names like Tellurian, NextDecade, Venture Global are show-me stories. We need some degree of commercial progress to be able to ascribe any option value to the equities."

There are about one-dozen proposed second wave projects that have received permit review schedules from the US Federal Energy Regulatory Commission, with most expecting to receive certificate decisions by the end of 2019. The majority of proposed terminals would be scattered along the Gulf Coast. Proximity has caused at least some reservations among regulators as to the three terminals proposed for the port in Brownsville, Texas. That includes NextDecade's project.

Wood Mackenzie is forecasting that 2019 could be a record year globally for LNG project sanctions with over 220 million mt/year of gas targeting FID. It said in a recent research note that it expects some of the less prepared or competitive projects to slip into 2020 and beyond.

The note called out for specific attention proposed liquefaction projects in Russia, Mozambique and Australia. It said it sees only three US projects as being front-runners to get the green light in 2019 to advance to construction.

"LNG suppliers will need to ensure they can meet the changing needs of major LNG buyers as they seek a variety of contracts to meet their different needs," Wood Mackenzie said. "In addition to price, factors such as contract flexibility, index, source diversification, upstream participation and seasonality will all be considerations."

The uncertainty for developers makes it extra important for the ones in the queue to get their commercial contracts and financing together as quickly as possible to beat competitors to the punch. Tariffs imposed by China on imports of US LNG in retaliation for US tariffs on imports of Chinese goods have made those efforts more challenging.

"For some of these projects to get done, it's really going to be with Chinese (taking) gas, and they'll need to see that tariffs thing come down," Webber said.

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BUYERS' MARKET

Few of the second wave US projects have announced firm offtake deals with buyers of the LNG to be produced at their terminals.

Tellurian recently took a step toward building commercial support for the proposed Driftwood LNG project in Louisiana by inking a preliminary long-term deal with commodity trader Vitol linked to Platts JKM, the benchmark price for spot LNG in Northeast Asia, rather than the US Henry Hub that has been more commonly used for pricing long-term supply deals with US LNG facilities.

Venture Global has been the most active on the commercial front among second wave US LNG export developers by successfully securing long-term offtake agreements covering the bulk of the capacity of the proposed Calcasieu Pass terminal in Louisiana. But, market observers say even that doesn't guarantee a positive FID.

"VG is toward the top. They have actually made the most progress in terms of signing SPAs, albeit in a probably discounted level," Webber said. "We don't think that's a layup. We think there are still financing hurdles to make up there. We think a number of the projects are promising. There's strategic value in some of these. But, it's still bears watching."

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

-- Edited by Joe Fisher, newsdesk@spglobal.com