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Freeport LNG optimistic it could get support for Train 4 by end of year: CEO

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Platts Market Data – Natural Gas

Freeport LNG optimistic it could get support for Train 4 by end of year: CEO

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At least 75% of capacity to be sold before sanctioning

'ESG bonkers' European buyers tough to crack for new deals

Freeport LNG could sign sufficient long-term contracts by the end of the year to sanction a proposed fourth liquefaction train at its Texas export facility, based on the advanced stage of talks with potential buyers, CEO Michael Smith said during a June 29 interview.

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While the company has not announced any firm commercial deals tied to Train 4 since a p reliminary agreement signed in 2018 by Japan's Sumitomo for the purchase of 2.2 million mt/year of LNG expired last year without being finalized, talks with potential buyers have picked up in recent months amid tightness in global supplies, Smith said on an installment of the S&P Global Platts Capitol Crude podcast that will air July 6.

If it gets at least 75% of the train's about 5 million mt/year capacity sold to the commodity traders, utilities, and other end-users that Freeport LNG has been talking to, that would allow the company to make a final investment decision by the summer of 2022, he said.

"I think it is only a matter of time before customers will be willing to sign 20-year deals to facilitate new FIDs," Smith said. "I think we have seen this movie before."

The optimism about being able to sanction Train 4 within the next 12 months was noteworthy in that Smith made his comments the same day that another major US LNG exporter, Sempra, said that a key deal with Saudi Aramco to support its proposed Port Arthur LNG facility in Texas had fallen through.

For existing exporters, global gas and LNG forward prices are trending strong and relatively stable, pointing to a long runway for exporters to enjoy healthy netbacks on deliveries to Europe and Asia, buffeted by cheap feedgas costs because of low US Henry Hub prices. Feedgas deliveries to US LNG export terminals have recently been averaging over 11 Bcf/d, implying utilization of over 90%.

But w hile those trends are positive, challenges remain, largely owed to the high cost of construction, the risk to lenders in terms of providing financing, and uncertainty in the markets amid the global energy transition to increased use of cleaner-burning fuels.

"There are a lot of wanna-be LNG facilities that have been approved by the FERC that just aren't in the right place, in the right developer's hands, well-conceived, and would only be able to reach FID in the greatest of markets," Smith said. "And for many of those, they have been trying to get off the ground for so many years that the well is going dry on their investors willing to put capital into something when the chances of succeeding are probably slim and none."

He added, "Obviously, that's not the case with Sempra, that's for a different reason, but there's only going to be a handful of facilities that I believe are going to get built."

Freeport LNG's tolling model, location, and the leverage of its existing footprint, as well as its stick-to-it frame of mind when it comes to traditional pricing mechanisms for US liquefaction projects, make Train 4 a good bet, Smith said.

Carbon emissions

He also noted Freeport LNG was ahead of the curve in terms of limiting carbon emissions by building the only liquefaction terminal in the US that uses exclusively electric motors instead of natural gas turbines to drive its liquefaction compressors. While that presents unique power needs that can be challenging during hurricanes and other disruptions, it has helped the company in recent commercial talks with climate-conscious buyers.

While he wouldn't name the buyers, Freeport LNG is talking to about being foundation customers for Train 4, he did suggest that as far as regions Europe, which helped support the first wave of US liquefaction capacity, was largely off the board for the second wave.

"That is a tough market to crack because they are so ESG bonkers and there's a lot of governments that don't want US shale gas, I think, even if you do carbon sequestration for some of them," Smith said.