In the period between Russia’s invasion of Ukraine in February 2022 and the end of last year, LNG sales and purchase agreements (SPAs) totaling 47.23 million tons per annum (MMtpa; 6.3 Bcf/d) were signed between buyers and nine U.S. LNG projects under development. Of those, the projects that will ultimately secure a critical mass of reputable offtakers and achieve a final investment decision (FID) must also secure permitting and financing. Two project FIDs were taken in 2022: Cheniere’s Corpus Christi Stage III in Texas and Venture Global’s Plaquemines Phase 1 in Louisiana. Although two more FIDs have recently been announced — Plaquemines Phase 2 and Sempra’s Port Arthur Phase 1 — there can be a timing disconnect between the commitments LNG buyers are prepared to make and the ability of project sponsors to deliver on their plans. In today’s RBN blog, we focus on the increasingly important role of financing in the implementation of U.S. LNG projects and the challenges that project developers and sponsors face.
There are, of course, a number of hurdles that LNG project sponsors must clear before taking FID. Among other things, they need to have all required federal, state and local permits and other approvals in hand. They also need to have lined up their engineering, procurement and construction (EPC) contractor and be prepared to give it an unconditional notice to proceed. And in many cases — and now more than ever — a major hurdle to taking FID is securing financing. Large-scale LNG projects — those with capacity of more than 5 MMtpa (0.7 Bcf/d) — are highly capital intensive. A rough rule of thumb is that every ton of production capacity has a capital cost of $800-$1,000, depending on location and plant configuration. Therefore, a 12-MMtpa project will have a headline cost between $9.6 billion and $12 billion. Consequently, sponsors look to capital markets to provide funding.
An LNG project will typically be financed partly by sponsor equity supplemented by loans from commercial banks, and also by bonds. Debt can make up between 50% and 70% of the total capital cost. For example, Sempra’s recently announced Port Arthur Phase 1 FID includes non-recourse loans — sometimes referred to as project finance — of $6.8 billion for a project whose estimated cost is $13 billion. The use of non-recourse loans is attractive to sponsors as they do not appear on the sponsor’s balance sheet, with their repayment derived from the income generated by the project. Clearly, this requires a very robust project in terms of cost predictability, technology selection and configuration, operator capability and buyer commitment, so it is not surprising that negotiating loan terms is a time-consuming process along the critical path to FID. (Gulf Coast terminals that are under construction or have reached FID are noted by blue diamonds in Figure 1 below.)
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