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    LNG Project Finance: LNG Canada Shows the Way

Summary

As attention turns to the promised 'second wave' of North American LNG export projects, what are the implications for the other runners in a crowded field?

by: Morten Frisch

Posted in:

Complimentary

LNG Project Finance: LNG Canada Shows the Way

LNG Canada taking a positive financial investment decision (FID) October 2 for the 14mn metric tons/year Phase 1 of its export project in Western Canada, will put more pressure on developers of so-called 'second wave' LNG projects to make decisions in the near future. The next twelve months could be make-or-break for a number of these projects aiming to start LNG supply in a market window forecast to open up in the 2023 to 2027 period.

LNG market oversupply concerns caused by 'first wave' projects, the first of which started physical supply of product to the market some 3 years ago, have given LNG buyers better negotiating positions. The combination of a soft LNG market until summer 2017 and “second wave” projects competing for foundation customers have supported this development.

LNG exporters have had to offer more flexible contract terms to secure term contracts, particularly with buyers having a strong financial position. This market development has already added more risk to the LNG value chain for suppliers at the same time as more product is traded in the spot and short term market. Most of this additional market risk will ultimately be borne by LNG producers, whether the producer/seller is the equity owner of the liquefaction plant or liquefaction is based on a tolling arrangement. 

China with its rapidly growing LNG import requirements introduced a 10% import tariff on LNG supplies originating from the US effective 24 September. Depending on the current trade “spat” between the US and China, the Chinese have stated his tariff could be increased to 25% in 2019.

Currently the biggest losers from the introduction of these tariffs are likely to be US developers of 'second wave' projects aiming to secure Chinese foundation customers to invest directly in their projects and/or to obtain project finance for the construction of their liquefaction plants and export terminals based on term contacts with Chinese buyers.

The US has supplied some 5% of total Chinese LNG imports, which stood at 33mn mt at end August, representing some 11% of total US LNG exports this year.

The additional LNG value chain risks, which for US LNG export project promoters are augmented by the Chinese import tariffs, have added uncertainty in the LNG market going forward. As a consequence of this development “second wave” liquefaction sponsors likely will have to provide more equity or assume more balance sheet risks at the project promotor level to be in a position to take FID.

The possibility exists many projects needing project financing will miss out on this “second wave” of LNG developments aiming to reach markets around 2025. The signs are that the large scale LNG export industry could be split into two broad groups.

The first group would consist of project promotors having a strong balance sheet, a ready downstream market for their own equity production and/or a large traded portfolio operation, such as the LNG Canada co-venturers.

The second group of companies would typically be up-start LNG project promotors needing project finance and therefore long term LNG sale agreements in place for a large part of their production before FID can be taken.

Bankers together with Chinese LNG buyers are likely to play an important role in deciding which LNG projects will take FID in the next twelve months and therefore become part of the “second wave” liquefaction projects to be constructed.

But, as always is the case, only time will tell.

Morten Frisch is the senior partner of Morten Frisch Consulting (www.mfcgas.com). He has been working with strategic and commercial oil, pipeline gas and LNG issues for more than forty years. Throughout his career he has followed and analyzed the global LNG market giving special emphasis to Asian LNG since the early 1990. The import and consumption of LNG in China has been part of this work since Guangdong LNG (GNLNG) as the first LNG importer in this country agreed to enter into an LNG Sales Purchase Agreement (SPA) with North West Shelf Australia LNG Venture in 2002.