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Freeport LNG Eyes 2022 to Sanction Fourth Train as Market Undergoes ‘Total Transformation’
The developers of the Freeport liquefied natural gas (LNG) export facility in Texas are targeting a mid-2022 final investment decision (FID) and a 2026 startup for the plant’s fourth train as customers indicate interest for long-term contracts.
However, CEO Michael Smith told NGI last week that Freeport LNG will maintain a patient approach when it comes to the project. He is hopeful that Train 4 will be the first project sanctioned among a lineup of facilities scheduled for FID next year, but added, “I think the demand is such that I can be second, third or fourth and we’ll get it done. And if it’s not ‘22, it’ll be ‘23.”
Smith, who owns 63.45% of the privately held project, said the company has seen a “total transformation” of the global natural gas market since last year, when weak demand spurred by the Covid-19 pandemic caused the facility to shut in all three trains. But it was a matter of months before output ramped back up, he said.
“In October, we went to 100%, chock-a-block full of demand from every one of our customers,” he said.
Now, with spot prices spiking, potential customers are looking for long-term agreements again, he said.
“There’s been renewed interest by buyers to discuss getting term contracts, because they see a rising market,” he said. “And now it’s time to lock in.”
20-Year Contracts ‘Around The Corner’
To sanction the fourth train, Freeport needs to sell 75-80% of its 5 million metric tons/year (mmty) capacity under 20-year offtake contracts, Smith said. The company is in talks with several potential customers. Smith described them as “traditional” LNG buyers, with “a little more concentration of new entrants from Asia” and fewer from Europe.
He declined to say whether the talks included any of Freeport’s existing customers. The company has offtake contracts for the first three trains with customers that include BP plc, TotalEnergies SE and Osaka Gas Co. Ltd., which also is a partner.
“I think there are going to be companies that are going to say, ‘Look, I want to be the first mover and get 20-year contracts at what could be a very low price compared to where I’m going to have to pay in two or three years if the market really is coming back’,” he said. “And so I think it’s just around the corner, that people are going to break from 10 years to 20 years to finance a new facility.”
With the facility running at full blast in the winter, Freeport LNG realized about 2.5 mmty of excess supply above its 13.2 mmty nameplate capacity. That allowed Freeport to sell the excess on the spot market, something that wasn’t even in the business plan for the first year, Smith said.
While Smith is not looking to sign agreements with terms under 20 years for Train 4’s nameplate capacity, the company “could be willing” to sell a portion of that excess supply on 10-year contracts. “We’re not anxious about running out to do it,” he said. The company instead wants to wait on debottlenecking results to see how much excess supply it can count on.
“I think that the 10-year contract will be less than what we’re going to be getting on a spot basis for the next few years,” he said. “This is a tight market. I think we’re going to be seeing very hefty numbers.”
He expects the market tightness to stick around as demand in Asia is forecast to balloon in the coming years and new LNG capacity lags until the middle of the decade.
“This is going to be a very tight market,” he said. Smith added that he was not worried about forecasts predicting U.S. LNG suppliers could lose market share in the coming years to Qatar, which is developing the North Field East project.
“Hell, we need it, we need it badly,” he said. “And heck, we need a lot more. So we need FIDs, badly.”
Freeport is also looking into serving the LNG bunkering and Caribbean markets with its excess capacity. It is in the process of permitting a barge dock that would allow it to fill smaller ships. The company is in pre-FERC stakeholder outreach and has “actively engaged” the Army Corps of Engineers and the U.S. Coast Guard. The Federal Energy Regulatory Commission would be the lead government agency.
Smith expects bunkering to grow as more fleets convert from diesel to LNG fuel to comply with environmental rules. “It’s not easy for them to source the volume of LNG that they need because the big facilities really can’t take them,” he said.
The barge dock would also allow the Freeport facility to serve the vessels that supply LNG to the Caribbean.
“Their ships aren’t compatible with our docks,” Smith said. “You can actually use barges to get to the Caribbean market. It’s not going to be a booming business like building another train. But it’s incremental.”
Smith also said the tolling facility has begun branching out to offer different contract models. The facility is now offering free-on-board (FOB) contracts where it would source gas supply and provide sale-and-purchase agreements (SPA). Freeport may also consider a delivered ex-ship (DES) contract to manage shipping a cargo.
“That has to be a very special one-off type deal for only certain customers,” he said of the DES structure. “It’s not our model, but for the right customer, we want to get the capacity sold. And if that’s what they need, we’ll do it.”
A Freeport spokesperson said the SPA and the DES structures could be used for long-term agreements or spot deals, “though we haven’t explored many long-term DES transactions.” Most U.S. LNG is sold on an FOB basis, with LNG ownership transferred to the buyers when it is loaded onto a ship at the terminal. Offtakers then incur transportation expenses. Under DES deals, title isn’t transferred until the fuel is delivered to the buyer at an import terminal.
While Smith counts the contract offerings among the “new things” Freeport is now providing to customers, he draws a line at contracts not indexed to Henry Hub or Houston Ship Channel prices.
“I think the United States is going to continue to have the lowest cost gas in the world for the next 50-plus years,” he said. “But this is the oil business and the gas business. Crazy things happen.”
Smith said deals indexed to Japan-Korea Marker (JKM) and Dutch Title Transfer Facility (TTF) prices could be risky if U.S. natural gas prices were to spike above the JKM and TTF benchmarks. That situation could force suppliers to pay more for feed gas than would be paid for the cargo, he said.
“It’s not a financeable solution,” Smith said. “I could take that risk on my excess capacity, but I’m not taking that risk. That’s a crazy risk to take. The only way I would take that risk is if there was a formula where I had some floor, and I shared in the upside.”
Low Emissions ‘A Selling Point’
Several U.S. LNG suppliers have unveiled plans to “green up” facilities to lower the emissions profile of their cargoes. Those plans include carbon capture and sequestration (CCS)M, along with emissions verification and certification.
Still, Freeport already relies on electric drive motors, which have lowered emissions by 90% over a conventional, natural gas-powered plant, Smith said. Freeport claims to have the lowest emissions of any liquefaction plant in the world because of the electric drives.
“That is a selling point” when marketing Train 4 to potential customers, he added.
The company is exploring how it can further shrink the carbon footprint. Like its peers, it is looking into third-party emissions verification and is in “very early stages” of exploring the potential for CCS, he said.
“I don’t take this lightly,” he said. “And if carbon capture can be done, and it’s reasonable at a reasonable cost, we will be doing it.”
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