We're Not Gonna Take It - Developing New Liquefaction Capacity in an Era of LNG Oversupply

In only three years, the international liquefied natural gas (LNG) market has undergone a major transformation. The old order, founded on long-term, bilateral contracts with LNG prices linked to crude oil prices, is being replaced by a more-fluid, more-competitive paradigm. That’s good news for LNG buyers, who are benefiting from a supply glut and lower LNG prices—the twin results of slower-than-expected demand growth in 2014-15 and the addition of several new liquefaction/LNG export facilities in Australia and the U.S. But the new paradigm poses a challenge for facility developers: How do they line up commitments for new liquefaction/LNG export capacity that will be needed a few years from now in a market characterized by LNG oversupply and rock-bottom prices? Today we begin a two-part series that considers the hurdles developers face and which types of projects may have the best prospects.

When the first wave of U.S. liquefaction plants and LNG export facilities was in early stages of development a while back, LNG buyers and marketers were willing to enter into long-term, take-or-pay contracts for significant amounts of liquefaction capacity. These Sales and Purchase Agreements (SPAs) provided the financial underpinning for multibillion-dollar projects like Cheniere Energy’s Sabine Pass LNG facility in southwestern Louisiana, where three liquefaction trains already are operating, a fourth is gearing up to run, and a fifth is nearing completion (see Train Kept A-Rollin’). Banks and other lenders had confidence that these projects, backed by 20- or 25-year SPAs signed by creditworthy counterparties, would generate the revenue needed to pay off what their developers had borrowed.

In the past few years, however, many of the fundamentals governing the international LNG market have shifted, and developers of a prospective second wave of U.S. liquefaction/LNG export projects will need to be creative in lining up the commitments (and the financing) required to make their projects a go. Most important, perhaps, the old order, with its bilateral deals and oil-linked prices, continues to be undone. In fact, Cheniere’s Sabine Pass LNG contributed to this undoing by offering LNG pegged to the price of U.S. natural gas: the sum of 115% of the Henry Hub gas price plus a flat liquefaction fee.

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