Shorter Contracts Impacting New LNG FID
For the past five years, new contracts to buy LNG on the global market have been growing shorter, and the result, Akos Losz, senior research associate at Columbia University’s Center on Global Energy Policy in New York said March 21, is an impasse in new project development.
Speaking to the 16th Americas Summit of the CWC World LNG & Gas Series in Houston, Losz said average contract lengths have shrunk from 15 years in 2013 and 2014 to between five and seven years in 2017.
“The LNG industry now is in something of a Catch-22 situation,” he said. “Buyers are reluctant to sign long-term contracts in the face of long-term demand uncertainty and competition in liberalising markets, while sellers are unable to sanction new projects because they can’t secure project financing without long-term contracts.”
This impasse led to a sharp drop in new FIDs in 2016 and 2017, Losz said, from about 20mn mt/yr in 2015 to slightly more than 5mn mt/yr in 2016 and to less than 4mn mt/yr in 2017.
“It will be very interesting over the next two years to watch how this impasse will resolve itself,” he said. “There are really only a couple of ways it can resolve itself – the question is, who will blink first?”
If buyers blink first, long-term contracts will return to the global market, and major US projects with offtake agreements already in place – Cheniere Energy’s Train 3 at Corpus Christi, Texas or Venture Global’s Calcasieu Pass project in Louisiana – will be the beneficiaries.
If the buyers don’t blink, then the financiers can take advantage of that by taking on the higher risk of shorter contracts from less credit-worthy borrowers. In return, however, they will want higher-priced loans and shorter tenors to compensate for the higher risk.
If the market unfolds in this fashion, Losz noted, mid-scale floating LNG (FLNG) projects like Ophir Energy’s Fortuna FLNG project offshore Equitorial Guinea or low-cost resource play projects like Mozambique LNG or Novatek’s Arctic LNG 2 might benefit the most.
Finally, if suppliers blink first and accept shorter contracts, they will also have to accept reduced returns and increased balance sheet financing. This would likely lead to new business models and creative or unconventional financing arrangements.
In this environment, Losz said, projects backed by major international oil and gas producers – Shell’s LNG Canada and Lake Charles projects or the Qatar Petroleum/ExxonMobil-led Golden Pass project in Texas – would stand to benefit, as would innovative business models like Tellurian’s Driftwood LNG project in Louisiana or virtually any state-supported project.