Cost inflation and increased competition to secure long-term buyers and financing could hold back some of the more than a dozen proposed LNG export projects in the United States.
Demand for LNG globally is currently high, as European countries rush to build import terminals and purchase liquefied natural gas to offset the very low, or complete lack of, Russian pipeline gas supply.
Despite the surge in LNG demand and the abundance of natural gas in the United States, America’s next LNG export boom could stall as costs have surged and financing has become more complicated with the higher interest rates.
“It’s dramatically more expensive,” Charif Souki, who founded Cheniere Energy and was the CEO of what is now the top U.S. LNG exporter until 2015, told the Financial Times.
“There are fewer and fewer construction companies that can actually handle these kinds of loads,” said Souki, who now leads Tellurian, the developer of the Driftwood project that has hit snags in its ability to raise funds and secure major long-term customers in recent years.
Apart from soaring project costs and rising interest rates, U.S. LNG export project developers face the issue with many buyers’ reluctance to commit to 20-year-long supply deals.
Developers of U.S. LNG export facilities could launch $100 billion worth of new plants over the next five years as high prices and the need for energy security create strong momentum for long-term LNG demand and contracts, energy consultancy Wood Mackenzie said in a report earlier this year.
Yet, price volatility and the cost and financing issues could mean that fewer projects could see the start of operations this decade than previously thought.
New U.S. and Canadian LNG export projects show signs of accelerating but volatile natural gas prices are making bets on future supply and demand difficult, industrial market intelligence provider Industrial Info Resources (IIR) said in research last month.
By Tsvetana Paraskova for Oilprice.com
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Any US LNG production expansion or new LNG projects will face two major hurdles. The first is that they have to compete against Qatari, Australian and Russia LNG exports all of which produce and export LNG at lower prices than US LNG.
For instance, Qatari LNG exports not only have the largest share of the LNG market in the Asia-Pacific region but also have a guaranteed market in China, the world’s largest importer of LNG. Australia also has a sizeable share of the Asian LNG market because of its proximity. The same applies to Russian LNG coming to China from the Arctic via the Northern Sea Route (NSR). Moreover, political relations between China and the United States will always impact US LNG exports to China.
The second hurdle is that LNG producers need guaranteed long-term contracts sometimes exceeding 20 years before embarking on new projects or expanding existing ones.
A case in point is Qatar which is expanding its LNG production from 77 million tons per year (mt/y) currently to 110 mt/y by 2024/25. It has first secured a market for its expanded production by signing long-term contracts with China, Germany and others and also finance by picking up major partners such as TotalEnergies, Shell, ConocoPhillips and China’s Sinopec.
Dr Mamdouh G Salameh
International Oil Economist
Global Energy Expert