Only the Strong Survive, Part 3 - How COVID-19 Reshaped the Future of North American LNG Projects

Appetite for new North American LNG export capacity had been waning already when COVID-19 brought it to a screeching halt. The global gas market was expected to be well-oversupplied through the mid-2020s as U.S. liquefaction capacity additions, combined with supply growth from Australian LNG projects, were far outpacing any increase in demand. However, the past year or so has proven how quickly things can swing from oversupplied to undersupplied. The extended run of high global gas prices is bringing renewed interest in expanding North American LNG export capacity. Although COVID dashed the prospects of many LNG projects, a handful have emerged from the morass of the past year stronger and with a clearer path to FID than ever before. Those that remain will be better positioned if they can navigate four emerging trends that are key for offtaker agreements in the post-COVID era: shorter contract terms, increased pricing or deal-structure diversity, reduced environmental impact, and a prioritization of brownfield expansions or phased greenfield projects. Today, we conclude the series on the status of the second wave of LNG projects.

So far in this series, we have focused on the eight LNG projects under development that we believe have the most likely shot at reaching an eventual final investment decision (FID). In Part 1, we focused on the two projects that we categorize as “probable” (i.e., likely to reach FID this year): Woodfibre LNG and Cameron LNG Phase 2. Woodfibre has more than 70% of its capacity secured in firm long-term sales and purchase agreements (SPAs) with BP, while Cameron has credible, non-binding agreements equivalent to the full capacity of the expansion with the terminal’s existing offtakers: TotalEnergies, Mitsui, and Mitsubishi. Due to their strong commercial position, both of these projects could realistically take FID in the next six months. In Part 2, we rounded up the other six projects that have demonstrated momentum toward an FID — perhaps not in the next six months but in the mid-term. We categorize these facilities as “Tier 1” and “Tier 2” based on how far they are into their development, particularly on commercial agreements. These have the needed regulatory approvals in hand, along with reasonable access to feedgas supply, which are the two other metrics we use to grade prospective LNG projects in our LNG Voyager Quarterly supplement. Specifically, there are four projects we place as Tier 1: Cheniere Energy’s Corpus Christi Stage III expansion, Sempra Energy’s Port Arthur LNG, Freeport LNG’s Train 4 buildout, and Tellurian’s Driftwood LNG. And then, there are two projects we consider Tier 2: Venture Global’s Plaquemines LNG and NextDecade’s Rio Grande LNG.

All eight projects, along with Sempra’s recently green-lighted Energía Costa Azul (ECA) LNG, have something in common: just about all of them have had to adapt their strategy to better compete for commercial commitments or SPAs with ever-pickier offtakers. Their forward momentum highlights the four main project features we named earlier that developers are offering as they strive toward FID: shorter contract terms, increased pricing or deal-structure diversity, reduced environmental impact, and a prioritization of brownfield expansions or phased greenfield projects that are scaling down the capacity for initial start-up. The projects we’re discussing today have homed in on at least one of these facets as part of their overall strategy to achieve FID, but most capitalize on multiple angles in order to make themselves look as attractive as possible to offtakers. The table in Figure 1 summarizes the ways in which they have incorporated the four metrics. A filled-in green circle indicates that the developers are very committed to that particular strategy, while an unfilled circle indicates that there has been at least some progress in that aspect. An empty cell means either that there has been no development or that no information has been provided publicly regarding that strategy. It is likely that most projects are exploring all four strategies but have not announced anything firm yet. While some developers share the structure of their offtake agreements others do not, so we simply don’t know what we don’t know here. Additionally, many of these projects had offtake agreements in place before the pandemic, and it’s likely that any new offtake agreements will look different than the original deals already made. That has certainly been the case for Driftwood LNG, which was selling equity stakes in the project before the pandemic and is now selling 10-year SPAs indexed to global gas prices. Below, we’ll dive into each of the strategies, specifically highlighting examples of how they’re being utilized by project developers.