Multibillion dollar gas export projects that are central to the Trump administration’s push for “energy dominance” are locked in a battle for survival as prices fall and the market faces a supply glut.
Liquefied natural gas is a critical outlet for the US’s surfeit of cheap natural gas and the country is on track to pull ahead of Australia and become the world’s biggest exporter by 2024, the International Energy Agency has said.
Companies ranging from Royal Dutch Shell and Total to utilities and smaller independent groups are racing into the LNG export market, but planned capacity exceeds what is likely to be needed.
The consultancy McKinsey predicts that only one in 10 proposed export terminals will ever be built.
Last year, global importers received 346m tonnes of LNG — gas condensed to a liquid so it can be loaded on to tankers — according to S&P Global Platts. The volume will rise by 100m tonnes to 446m by 2025, it estimates.
Yet in the US alone, 14 unbuilt export terminals with government approval would add 160m tonnes a year of capacity, according to the Federal Energy Regulatory Commission. Another 90m tonnes’ worth of projects are still awaiting approval.
Last year, three US projects totalling 30m tonnes in annual capacity received final investment approval from their sponsors.
Plunging natural gas prices are also complicating the outlook for companies developing LNG export terminals, as the US benchmark price fell to its lowest level in four years on Monday. Cheaper US gas helps in the intensifying battle for market share, but also makes developers’ projects look less financially viable. Companies are already cutting processing fees, burning cash and letting construction deadlines slip.
The global LNG glut has also pushed down prices outside the US as customers use their negotiating power with exporters. The Japan-Korea Marker, a regional benchmark, has been trading at about $5 per million British thermal units, well below the level when most US export projects were conceived.
“There’s no question that the marketplace has become increasingly competitive,” said Jeff Martin, chief executive of Sempra Energy, a US company developing LNG terminals.
US projects face growing foreign competition from countries including Qatar, the largest and cheapest exporter, which recently confirmed plans to increase output from 77m tonnes to 126m by 2027. Mozambique is entering the market with a 13m tonnes per annum project and Nigeria said in late December that it would raise output from 22.5m tonnes to more than 30m by 2024.
China is set to overtake Japan as the world’s largest importer in 2024, the International Energy Agency predicts. But when the US trade war with China worsened last year, Beijing cut off purchases and added a 25 per cent tariff on US gas.
The trade deal announced last week included a commitment by China to increase purchases of US energy — including LNG — by $52.4bn over the next two years, but the tariff remains. If nothing else, the agreement will increase China’s negotiating power with other exporters, said Ira Joseph, head of gas and power analytics at S&P Global Platts.
To attract financing, independent developers require contracts of 15 or 20 years. This includes a price for the gas and a fee for liquefaction — cooling the gas into a liquid. Liquefaction fees are also falling, another challenge to the economics of some projects.
Six years ago, another independent group Cheniere Energy was charging a fee of $3.50 per million Btu when it was lining up customers for its export terminals in Louisiana and Texas. It has since stopped disclosing fee terms. Other companies say they will liquefy gas for prices in the low $2 range.
One source of pricing pressure has come from Venture Global’s 10.8m-tonne project in Louisiana, which was among the three to receive the go-ahead last year. Still, a rival notes that Venture has only disclosed 1.5m tonnes of sales for a second, 20m-tonne export facility. Venture did not respond to requests for comment.
Several other projects are still trying to add customers. Tellurian wants to build a 27.6m-tonne terminal in Louisiana, while LNG Limited has been promoting the 8m-tonne Magnolia LNG project in the same state.
At the mouth of the Rio Grande river in Texas, three companies in November won federal permission to collectively export more than 37m tonnes a year.
As developers chase customers and financing, one of the largest construction contractors in the industry is under severe stress: McDermott International is in talks with lenders to avoid default.
LNG developers are working hard to attract and hold on to clients. At the Gastech trade fair in Houston, potential customers entering Tellurian’s two-storey booth were serenaded by a harpist and a string quartet beneath crystal chandeliers.
Tellurian said its $30bn Louisiana project would produce some of the lowest-cost LNG in the world, at a cost per tonne of $796. “There’s no such thing as economies of small. There’s only economies of scale,” said Tellurian chairman Charif Souki in an interview.
However, Tellurian’s target for a final investment decision has slipped from 2019 to 2020. As of last September, it had $91m in cash on its balance sheet and outflows from operations and investing totalling $200m in the previous 12 months. Meg Gentle, chief executive, said: “We are not going to run out of cash, this is not a concern.”
Mr Joseph predicts that only three US projects totalling 12.7m tonnes in capacity will receive a final investment decision this year. Two would expand terminals at Freeport, Texas and at Cheniere’s Corpus Christi site in the same state. A third is Sempra’s Mexico project, known as Energía Costa Azul.
Greg Vesey, chief executive of LNG Limited, said he travelled more than 200,000 miles last year drumming up business. So far the company has signed one nonbinding agreement to export 2m tonnes to Vietnam, a country he visited in November with US commerce secretary Wilbur Ross.
“I wouldn’t kid you, it’s a very tough market,” Mr Vesey said.
Additional reporting by Anjli Raval and David Sheppard in London