Financial hurdles are rising for U.S. liquefied natural gas (LNG) project developers aiming to get their proposed export terminals off the ground as investors become more demanding.
The banking crisis added a new snag to rising interest rates and supply chain shortages for these multi-billion-dollar projects, which months ago were seen as sure bets. Two of four new projects aiming for a financial okay this quarter have been pushed back, and others will face that higher bar, said analysts.
The pair that have gone ahead – Venture Global LNG‘s project in Louisiana and Sempra Energy‘s (SRE.N) in Texas – embody what analysts say have met the new requirements: less reliance on developer’s equity and more on fully contracted capacity.
Both projects won approvals with strong corporate financing – $7.8 billion for Venture Global and $6.8 billion for Sempra – noted Jefferies Group Managing Director of Equities Research Lloyd Byrne.
And the pair address volatile gas-price risk by having about 90% of production capacity under long-term deals, Byrne wrote in a report this week. Rivals who are unable to recruit a full contingent of buyers face “a project stalling or outright cancellation,” he added.
NEW DELAYS
Eleni Papadopoulou, lead natural gas analyst at commodity data and analytics firm Kpler, said the banking crisis that emerged earlier this month raised “concerns that banking lending activity might be pulled back,” she said, and “delay further FIDs,” using the acronym for financial investment decision approvals.
The proposed NextDecade and Energy Transfer LP export terminals – the two other projects previously aiming for FID in the first quarter – have been repeatedly delayed due to rising construction, labor and borrowing costs, and by the recently narrowing spread between U.S. and global natural gas prices.
Energy Transfer pointed to February comments by its co-CEO Thomas Long that it was optimistic its LNG project would go ahead.
On Tuesday, French bank Societe Generale SA confirmed it last year had withdrawn as lead bank for NextDecade’s Rio Grande LNG project.
NextDecade said it had taken on MUFG Bank as a financial advisor last year and retained Macquarie Capital as a second advisor.
‘HARDER SELL’
This month, NextDecade said it aimed for a financial go-ahead for the first phase of Rio Grande before the end of next quarter. Two months earlier it said it expected the decision by March 30.
Soaring inflation means “LNG exporters need to recover their costs via higher liquefaction fees, which is a harder sell now with gas prices collapsing,” said Stephen Ellis, an energy strategist at Morningstar Research Services LLC.
Demand for U.S. LNG increased after several countries slowed purchases of Russian energy and imposed sanctions on Moscow after Russia’s invasion of Ukraine in February 2022.
After hitting record highs of around $90 per million British thermal units (mmBtu) in Europe and $70 in Asia last summer, gas prices this year plunged to around $13 in Europe and Asia. U.S. gas prices dropped from a high near $10 last summer to $2 today.
“Developers have re-evaluated their cost structure and profitability and that, I think, is what is delaying some of these final investment decisions,” said Ade Allen, an analyst at energy consulting firm Rystad Energy.
