Cheniere Energy Inc. has a first-mover advantage that some might not have anticipated at the time it got in front of the pack of would-be U.S. liquefied natural gas (LNG) exporters: two of the company's projects are advancing while dozens of projects by others could flounder in a market weakened by cheap oil and LNG oversupply.
"Lower oil prices are causing LNG suppliers to curtail their capital budgets. This will result in the cancellation of a majority of the almost 30 proposals [to export LNG] in the U.S., 18 in western Canada and four in eastern Canada," Moody's Investors Service said in a note Tuesday titled "Lower Oil Prices Cause Suppliers of Liquefied Natural Gas to Nix Projects."
Cheniere Energy's Sabine Pass project in Louisiana is moving along and is expected to be sending out its first cargoes by the end of this year (see related story). The company's Corpus Christi, TX, project is the likeliest among the rest of the LNG pack to make it to final investment decision this year, Moody's said, adding that "...it is among the very few projects in advanced development that have secured sufficient commercial or financial backing to begin construction."
In the U.S. and elsewhere, the early movers are the winners, the ratings agency said.
"These early movers already have their liquefaction projects under construction and ready access to developed sources of natural gas, and are assured a new source of cash flow longer term." Besides Cheniere, others with U.S. projects under construction are Sempra Energy (Cameron LNG LLC) and Dominion Resources Inc. (Cove Point LP) and Freeport LNG.
Among those projects that Moody's said are "less likely" to make it to final investment decision this year are those in western and eastern Canada, Veresen Inc.'s Jordan Cove project, Sabine Pass Train 6, and the Mozambique LNG project of ENI and Anadarko Petroleum Corp.
The arbitrage play for liquefied gas exported from the United States has dried up, Moody's said, with the collapse of the spread between U.S. natural gas and global oil. "Despite the hype over the past few years about gas-linked contracts, oil-linked contracts still dominate the industry, causing LNG revenues to fall for existing suppliers."
With Henry Hub gas at below $3/MMBtu and Brent crude at about $50/bbl, U.S. LNG linked to U.S. gas prices would cost about $10/MMBtu to deliver to East Asia, slightly more than the almost $9/MMBtu estimated for LNG under traditional oil-linked contracts, Moody's said. "With spot LNG prices in East Asia currently about $10/MMBtu and about $7/MMBtu in Europe, U.S. gas-linked supplies would be near breakeven levels in Asia and unprofitable in Europe."
Moody's said gas-linked and oil-linked pricing will converge as Brent strengthens. The ratings agency's assumption for 2016 are about $3.25/MMBtu for Henry Hub and $65/bbl for Brent. "Longer term, U.S. gas-linked contracts will regain their cost advantage in East Asia if Brent prices continue to recover and assuming that shipping fees decrease with the widening of the Panama Canal [see Daily GPI,Jan. 9].
Export projects already under construction will continue as planned, which will lead to excess liquefaction capacity over the rest of this decade, Moody's said. "Notably, through 2017, Australia will see new capacity come online from roughly $180 billion in investments, which will result in a 25% increase in global liquefaction capacity. Likewise, the U.S. is poised to become a net LNG exporter after the [Cheniere] Sabine Pass Liquefaction LLC...project goes into service in the fourth quarter of 2015."
Greenfield projects on undeveloped property are much more expensive, involve more construction risk, and take longer to build than brownfield projects, which repurpose existing LNG regasification sites. Greenfield projects are also frequently challenged by local opposition and occasionally by untested laws and regulations, Moody's said. Based on the public estimates of companies building new LNG liquefaction capacity, the median cost to build a U.S. brownfield project is roughly $800 per ton of capacity, compared with the more advanced Australian greenfield projects, now estimated at around $3,400 per ton, Moody's said.
While Sabine Pass is a brownfield project, Cheniere's Corpus Christi terminal would be a greenfield project (see Daily GPI, Oct. 8, 2014). With U.S. brownfield sites long-since spoken for, and with the collapse in oil prices, LNG developers that are hoping to ride the second wave of liquefaction development in the United States have been talking about the virtues of smaller projects.
Former BG Group plc executive Martin Houston's Parallax Energy recently proposed such a project for Louisiana by its Live Oak LNG unit (see Daily GPI, Feb. 3). "It really is small [liquefaction] trains where we are taking out the things that just are not necessary in LNG plants and bringing it back to some of the basics...Customers want to buy LNG in smaller tranches at the moment," Houston told NGI last fall (see Daily GPI, Oct. 24, 2014).
Last month, veteran LNG developer Kathleen Eisbrenner (formerly of Royal Dutch Shell plc and Excelerate Energy LP) conceded that her company NextDecade LLC failed to make it into the first wave of LNG development but has high hopes for its projects on the Texas Coast. "...[T]here's an opportunity for us to actually come online more efficiently than the first wave. That's going to be one of our priorities," she told NGI (see Daily GPI, March 9).
Now with the first-mover advantage well locked up, there might be something to be said for taking one's time on new liquefaction.
Through the end of the decade, Moody's said it expects that LNG demand will grow more slowly versus supply. "China will be the biggest variable and most important driver of global LNG in that timeframe," it said. "India will see rapid growth, but not be as big of a player as China. Other more mature LNG markets in Japan, South Korea and Europe, which represent the bulk of demand, will have flat growth."
Last week in a note, analysts at Bank of America Merrill Lynch said that nuclear plants coming back online in Korea and Japan and China's economic growth weak, the destiny for LNG cargoes has tilted away from Asia and toward Europe as Asian prices have converged with those at the National Balancing Point (see Daily GPI, April 6).