We're Not Gonna Take It - Developing New Liquefaction Capacity in an Era of LNG Oversupply, Part 2

The international spot price for liquefied natural gas (LNG) has been steady-as-she-goes the past few months, within a few dimes of $5.50/MMBtu, but that stability belies the upheavals the LNG industry continues to experience. The old paradigm of long-term contracts and milk-run deliveries from supplier to buyer is breaking down. New Australian and U.S. liquefaction capacity is coming online fast and furious, exacerbating the global LNG supply glut, and Qatar — the world’s largest LNG supplier, just announced plans to increase its output by 30%. With LNG readily available and priced to sell, new LNG buyers are entering the fray, developing natural gas-fired power plants that will be fueled by imported LNG. What does all this mean for the next wave of U.S. liquefaction projects and for natural gas producers in the Marcellus/Utica and the Permian? Today we continue our look at the topsy-turvy LNG sector.

As we said in Part 1, when the first wave of U.S. liquefaction plants and LNG export facilities was in 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’). In Maryland, Dominion Energy is only months from starting up its Cove Point liquefaction and LNG export terminal (see Down by the Seaside), and in 2018 the first liquefaction trains at Elba Island (near Savannah, GA), Cameron LNG (in southwestern Louisiana) and Freeport LNG (along Texas’s Gulf Coast) will be coming online too. Plus, units 1 and 2 at Cheniere’s Corpus Christi LNG will follow in 2019. 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.

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In the past few years, however, the prevailing winds in the international LNG market have shifted, and developers of a prospective second wave of U.S. liquefaction/LNG export projects are taking different tacks in their efforts to line up the commitments (and the financing) required to make their projects a go. There is a lot going on, but let’s zero in on five key factors likely to affect global LNG contracts, supply and demand.  Each of these will influence (pro or con) the prospects for rising LNG exports from the U.S. over the next five to 10 years:

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