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With Freeport LNG Delayed, Some Natural Gas Demand Seen Missing in 2019

Freeport LNG’s delayed start-up of its liquefied natural gas (LNG) export facility now under construction on the Texas coast could have varying impacts on the broader market next year, according to analysts.

It remains unclear why project completion has been delayed. However, Freeport LNG’s website indicated engineering, procurement and construction (EPC) contractors led by the Chicago Bridge & Iron Co. (CB&I) envisage “that the three production units will commence commercial operations sequentially between 3Q2019 and 2Q2020.”

The three liquefaction trains were previously scheduled to begin operations between 4Q2018 and 3Q2019. The updated timeline would imply a nine-month delay, as the first train was expected to come online by December, according to a construction update Freeport issued at the end of last year. When it reported year-end earnings in February, CB&I said the project would be completed by 3Q2019.

One source, who has followed the project closely, said a shorter delay was likely. But the person said it was difficult to believe that a contractor yard that was flooded last year during Hurricane Harvey would cause nearly a one-year delay, as has been reported. The yard housed equipment for the project, which is being built on Quintana Island, about 70 miles south of Houston.

CB&I has had execution problems with similar projects. Sempra Energy said last year it was delaying the start-up of the Cameron LNG export project in Louisiana to 2019 because of CB&I’s handling of EPC issues. CB&I said in a preliminary first quarter earnings report earlier this month that Freeport LNG is 82% complete.

Freeport’s three trains are designed with the capacity to liquefy roughly 700 MMcf/d. About 13.4 million metric tons/year of capacity has been contracted under use-or-pay liquefaction tolling agreements with a coterie of mostly Asian customers, including Osaka Gas Co. Ltd., Jera Energy America LLC, BP Energy Co., Toshiba Corp. and SK E&S LNG LLC.

Genscape Inc. senior natural gas analyst Eric Fell told NGI that if most of the project is ultimately delayed until 2020, it could have an impact on the U.S. gas market. Only five LNG trains are operating in the country between Cheniere Energy Inc.’s Sabine Pass LNG export terminal in Louisiana and Dominion Energy Inc.’s Cove Point facility in Maryland. Nine trains, including the three at Freeport, and others at Cheniere Energy Inc.’s Corpus Christi terminal and Sempra’s Cameron facility, are expected to come online next year, Fell said.

A significant supply ramp is expected in 2019, and without two of Freeport’s trains to meet those volumes, that’s a missing chunk of demand that could have implications, Fell said. Bespoke Weather Services appeared to second that view on Thursday as the Energy Information Administration released a bullish storage report showing a larger than expected withdrawal.

Fell in a note to clients Friday said the Freeport delay could reduce LNG exports by an average of 600 MMcf/d next winter and by 1.3 Bcf/d in the summer of 2019. However,as the other U.S. LNG trains come online next year, and as Australian exports ramp up, pundits expect that capacity utilization could decline.

“So, while I’m sure those Asian customers would like access to gas sooner rather than later, in order to provide more diversification in their supply, Freeport being delayed by a year or so probably won’t make too much of a dent in the overall worldwide supply/demand balance,” said NGI’s Patrick Rau, director of strategy and research.

Freeport was authorized by FERC in 2014 to modify existing import terminal facilities for LNG exports, and by the Department of Energy to export U.S.-produced LNG worldwide. The company applied with the Federal Energy Regulatory Commission last year to construct a fourth train that is scheduled to begin operations in 2022. The project has also experienced regulatory snags and been delayed in the past. 

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