June 16, 2024

Will LNG Export Freeze Put Upstream Investment on Ice?

The Biden administration’s freeze on LNG export license approvals has cast a pall of uncertainty over all facets of the US gas industry, threatening to derail existing supply contracts, postpone new ones and stymie investment in drilling, pipelines and liquefaction.

But analysts and industry officials disagree on how deep the impact goes or how long it will last, with much depending on the national political landscape a year from now.

“There is $20 billion of capital just hanging out right now at least through November and probably into 2025. And capital hates uncertainty,” Atlas Consulting CEO Dallas Salazar told Energy Intelligence, referring to money set to be deployed across the sector to support LNG exports.

Pushback has been fierce since the Department of Energy (DOE) said on Jan. 25 that it is updating its process for reviewing export approvals to assess climate impacts, during which it will pause action on applications for export to non-free trade agreement (FTA) countries.  A new report by Energy Intelligence’s Research & Advisory group says the pause will delay roughly 23 million tons per year (3 billion cubic feet per day) of Lower-48 LNG export projects that were previously expected to take final investment decisions (FID) this year. 

But without knowing the results of the agency’s review and how it might be applied to future approvals, the longer-term impact is hard to peg.

“That means an incredible level of uncertainty that has little to do with market dynamics, as the world is starving for LNG,” Salazar said. “In a worst-case scenario, this becomes a widow maker” — killing plans to boost drilling and build billions of cubic feet per day of new pipeline capacity for LNG feed gas.

That possibility becomes more acute, he said, if the DOE’s pause morphs into a cap or even a ban on new exports — and if President Joe Biden is re-elected with a mandate to rein in fossil fuels.

‘Not Crying Uncle’

But East Daley analyst Jack Weixel was more sanguine, saying the DOE pause is limited in scope and should not alarm the producers counting on that new outlet for their gas. “Our forecast still has 28 Bcf/d of export capacity online by 2030 for North America (including Saguaro and Costa Azul in Mexico which are taking US gas). So the impact takes 4 Bcf/d off the board temporarily,” Weixel told Energy Intelligence.

“If I’m a producer or pipeline developer, sure the demand market has tightened, but there is still roughly 15 Bcf/d of opportunity out there,” Weixel said. “I’m not throwing my hands up and crying uncle. I’m getting more aggressive and more purposeful in my commercial development pursuits to capture that 15 Bcf/d of demand.”

For producers that have already signed sales and purchase agreements with LNG terminals, that could take different forms. Weixel noted that heads of agreement (HOA) are non-binding “and thus easier to get out of and shift your attention over to another project. In fact, this is what we think a lot of folks are pondering and wading through right now.”

For example, EQT in September signed an HOA with Commonwealth LNG — which has not taken a final investment decision — for 1 million tons/yr, or about 0.13 Bcf/d.  “They’re not obligated to reserve that for Commonwealth, so perhaps they move that over to a facility that has non-FTA DOE approval,” Weixel said. “There are six projects that have this approval and approximately 2.2 Bcf/d of SPAs left to go on those projects. So the market is there and a shifting of the sands will likely occur.”

“The LNG FID game just became a tale of have’s and have nots,” Weixel added.

Those moving parts prompted the law firm Akin to warn investors and partners in US LNG ventures to take a second look at their potential financial risks and act accordingly.

“Those entities transacting around pending projects — including impacted exporters, terminal developers and their lenders and vendors — may want to review their commercial arrangements, particularly around force majeure and project delays to ascertain whether new or additional protections should be negotiated,” the firm said.

“Similarly, stakeholders in projects not directly impacted by the pause may experience changes in the value of their contracts if competitors are unable to bring LNG to market. A review of these contracts also may be appropriate.”

Developers’ Outlooks Vary

Currently, 16 projects sit in the DOE queue awaiting licenses, but the department only considers four to be directly affected: Sempra’s Port Arthur Phase II in Texas; the SeaOne Gulfport development in Mississippi; and the Commonwealth and Magnolia LNG facilities in Louisiana. These already have Federal Energy Regulatory Commission permits for construction and only need DOE license approvals for non-FTA exports.

The developers expressed varying degrees of concern over the impact of the DOE move. “It seems especially punitive to Commonwealth LNG, given that DOE has already had our permit application under review for an unprecedented period of four years from our initial application,” said Lyle Hanna, director of communications for the project. “We maintain our position that it’s the responsibility of DOE to weigh permit applications on their individual merits and not subject our application to further delays when they have had more than ample time to review all aspects.”

But a spokesperson for Magnolia developer Glenfarne Energy Transition said the DOE’s action “does not dampen our efforts and commitment to commercialize Magnolia LNG, nor the demand for our product. Once DOE completes its analysis, we are confident they will see the benefits Magnolia LNG brings to advance the energy transition.”

Vivek Chandra, CEO of the proposed Gulfstream LNG project, which has applied for non-FTA approval, expressed broader implications for the US market and industry.

“If you want to restrict gas usage, you can’t do that by restricting supply — you just encourage more production elsewhere,” he told Energy Intelligence. “America has benefitted a great deal from production, not just localized in Texas and Louisiana. There is economic activity in 25 states … we need to keep encouraging production” through expanded LNG exports.

Looking to Canada?

A short-term pause is not major cause for concern, said Giles Farrer, head of gas and LNG asset research at Wood Mackenzie. But a long-term freeze on new US LNG approvals “would have lasting implications on the global LNG market and could affect how buyers perceive US LNG.”

“While we expect existing LNG buyers to wait in the short term, these and other potential new buyers could start to look at competing projects outside of the US, such as those in Canada, Australia and particularly Qatar, as alternative supply sources.”

In fact, Canadian LNG developers who have enjoyed some recent tailwinds see the move as a double-edged sword. On one hand, it could make their projects slightly more competitive, with Enbridge CEO Greg Ebel even saying this week it could give Canada a “second chance” at becoming a major LNG exporter.

But others worry the left-leaning British Columbia government, which has a general election this October, is facing pressure from environmentalists to make a move similar to the DOE’s that could stall projects that have been cruising along, such as Ksi Lisims LNG.

Meanwhile, Canadian suppliers that already ship gas product to the US Gulf Coast for liquefaction, such as Tourmaline Oil and ARC Resources, may face new challenges in the potential to expand existing agreements. To that end, the Canadian Association of Petroleum Producers noted its “disappointment” in the DOE decision “given the highly integrated nature of the North American energy market.”

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