LNG export capacity keeps expanding
There were lots of big numbers last week for the U.S. liquefied natural gas industry.
The country’s fourth LNG export terminal loaded its first cargo while work is underway on four more export projects, with two scheduled to come online this year and the other two planning start-up in three to five years.
The eight plants will have a total nameplate capacity of more than 86 million tonnes of LNG per year, making the United States the world’s largest LNG producer until Qatar completes its expansion and retakes the title around 2024.
U.S. gas going through the liquefaction plants this month is cheap, at least compared to the past 20 years. The June 1 benchmark price was less than $2.45 per thousand cubic feet. It hasn’t averaged that low for an entire year since 1999.
But not everyone wants to be in the U.S. LNG business.
Toshiba, which in 2013 signed a 20-year contract to take 2.2 million tonnes of LNG per year from the Freeport project in Texas, is bailing out even before its contract kicks in next year.
The company signed the deal 2½ years after the 2011 tsunami and Fukushima nuclear plant meltdown forced Japan to shut down all its nuclear power plants, driving a steep spike in LNG demand and prices.
But global supply has more than caught up with demand and prices have fallen. Toshiba decided it could not afford the risk of paying for liquefaction capacity at Freeport and maybe not finding enough buyers every year willing to pay the price to take all that LNG.
So, the company, which has other financial problems and has decided to focus on its core businesses, last week struck a deal to turn over its Freeport LNG obligation to French oil and gas major Total. Freeport is expected to start up this year, and Toshiba’s contract is scheduled to start next year.
In a reversal of the normal practice when a company sells an asset, Toshiba essentially is selling a potential liability and is paying Total $800 million to take over the contract. Toshiba has been quoted as predicting it could have lost billions of dollars over the life of the contract, depending on LNG market conditions.
Total, the world’s second-largest LNG trader among the oil majors, is bulking up its gas portfolio, particularly in North America, adding the Freeport supply to its offtake contracts with two LNG export terminals in Louisiana.
Of the two U.S. Gulf Coast export terminals just starting construction, one developer, Virginia-based Venture Global LNG, has lined up a $1.3 billion equity investment from New York investment firm Stonepeak Infrastructure Partners to cover about 30 percent of the predicted cost of its Calcasieu Pass project in Cameron Parish, La.
Venture Global, which reported May 28 it already has spent more than $250 million on site preparation, engineering, equipment purchases and fabrication, said it plans to start production in 2022. To hold down construction costs, the company plans to use mid-scale, modular, factory-fabricated liquefaction trains for the plant’s annual LNG capacity of 10 million tonnes.
Among those projects getting close to a final investment decision, Houston-based NextDecade on May 28 awarded a pair of construction contracts worth nearly $9.6 billion to San Francisco-based Bechtel for engineering, procurement and construction services for Rio Grande LNG in Brownsville, Texas.
The start of work is contingent on NextDecade winning Federal Energy Regulatory Commission approval, anticipated in July, and then a final investment decision by the company. The contracts with Bechtel reportedly call for the LNG terminal to start up in 2023, eventually reaching 17.6 million tonnes annual capacity.
Also in Texas, Freeport LNG, which is expected to start operations later this year from the first of three liquefaction trains under construction, already is looking toward an expansion and in May lined up FERC approval and Department of Energy export authorization for an additional 5 million tonnes of LNG per year.
The fourth train, which the company said could come online by 2023, would boost the plant’s capacity to 20 million tonnes a year, the second-largest in the United States.
Another Texas project made the news in May when Saudi Aramco agreed to a 20-year LNG deal to take 5 million tonnes per year from San Diego-based Sempra Energy’s proposed development in Port Arthur. Saudi Aramco also will take a 25 percent equity stake in the development.
Sempra plans to make a final investment decision on Port Arthur in the first quarter of 2020. It would be the company’s second Gulf Coast export terminal. Its Cameron LNG project in Louisiana shipped its first cargo May 31.
While Aramco wants to develop its own gas resources for power generation, it also is looking to buy into LNG developments in the United States, Russia, Australia and Africa as it starts to get into the business, the Wall Street Journal reported.
“It’s unclear what the final destination of Saudi Aramco’s (Port Arthur) LNG will be. There continues to be a long-term expectation that, in time, Saudi Arabia will import LNG to be used for power generation,” said Giles Farrer, Wood Mackenzie’s research director.
Though it wants to reduce its reliance on oil revenues, Saudi Arabia also wants to make more oil available for export by burning natural gas — either its own or imported gas — instead of oil for power generation. In 2015, Saudi Arabia held the world’s sixth-largest gas reserves, but producing that gas is tricky, and the country has large gaps in its power needs, according to a report in The Wall Street Journal.
Multiple analysts said the Saudi deal to buy into low-cost U.S. LNG makes sense.
“The investment in gas … is a way to secure a commodity it will itself demand as well as a hedge against a murky future for its main source of income (oil),” the Journal “Heard on the Street” columnist wrote.
Larry Persily is a former Alaska journalist, state and federal official who has long tracked oil and gas markets and projects worldwide. He is the incoming Atwood Chair of Journalism at the University of Alaska Anchorage School of Journalism and Public Communication.