Getting imaginative: the second-wave LNG developers
Second-wave LNG developers are embracing new kinds of financing and contract models that will support both growing spot trade and a secondary, small-volume contract market.
A growing number of second-wave LNG developers targeting startup dates in the early- to mid-2020s have been struggling to reach final investment decisions in recent years. A select few of the higher- capitalized projects have crossed the finish line.
Others are facing headwinds in securing adequate funding, calling into question the viability of projects that will be essential in meeting the anticipated growth in global LNG demand.
According to S&P Global Platts Analytics, LNG supply is expected to grow to almost 400 million mt/year by 2023, up from 320 million mt in 2018.
The market has witnessed a decisive shift in bargaining power toward buyers since the mid-2010s. The growth in flexible supply from the US and Australia has given end-users, utilities and portfolio players the leverage to exact shorter, more flexible buying arrangements.
As traditional LNG contracts, underpinned by long-term sales and purchase agreements (SPAs), become a relic of the past, second- wave developers are embracing innovative financing and contract models to reach FID. Those new models will change how LNG trades in the future.
New strategies to reach FID
For a select group of highly capitalized LNG developers, firm offtake contracts are no longer a prerequisite for FID. This development marks a sharp break with the past.
The acceleration of LNG trade in late 1990s and early 2000s was propelled by large-scale export projects built using borrowed capital tied to long- term SPAs.
These agreements required buyers to commit to long-term contracts that often included destination restrictions and even prohibited the resale or time swapping of cargoes.
With the startup of exports from Australia and the US Gulf over the past few years, more liquidity has emerged in global LNG trade. Particularly for those with portfolio trading experience, the increase in short-term and spot market transactions has helped build confidence that new export projects can be successfully launched without signi cant debt financing and firm SPAs.
Since late 2018, the equity from deep- pocketed global majors, national oil companies and portfolio players has brought LNG Canada and Golden Pass — both large-scale North American export projects of 14 million mt/year and 16 million mt/year, respectively — into their construction and redevelopment phases.
For other equity-fueled projects, like the Shell and Energy Transfer backed 16.5 million mt/year Lake Charles facility, an FID is likely forthcoming soon too, regardless of any prior contracting activity.
For developers like Tellurian, however, the road to FID for its 26 million mt/ year Driftwood LNG facility has been a bumpier one. In addition to intricate equity offerings, the project will likely be supported in part by smaller volume offtake agreements and significant debt.
In April, Tellurian announced its first successful $500 million equity investment from France’s Total. Beyond the partial ownership sale, the developer offered attractive contract terms including a destination market price linkage to Platts JKM and an option that allows Total to take or leave up to 1 million mt/year from the Driftwood LNG terminal.
Tellurian’s equity offering also gives investor-offtakers access to its gas resource in the Haynesville shale as well as midstream capacity from regional producing elds, including the Permian Basin.
Although the deal gives Tellurian a firm SPA from Total for 1.5 million mt/year, much more will be needed for the project to reach FID.
For an increasingly crowded field of low-capitalized developers, equity partnerships and offtake agreements from large portfolio traders remain elusive. For these projects, only smaller- volume and risk-averse buyers, and potentially less creditworthy buyers, are likely to sign the long-term contracts required to meet the lender’s stringent requirements for debt nancing.