US LNG Projects Sail Ahead as Long-term Buyers Line Up

06/21/22 | Mauricio Samaniego

Summary

  • The strength in LNG markets has spurred a resurgence in long-term offtake agreements, which are key to advancing LNG export projects towards Final Investment Decision (FID).
  • The strong macro environment for LNG and improved outlook for projects has translated into strong equity performance for those energy infrastructure names focused on liquefaction.
  • Potential FIDs in 2022 would contribute to a more than two-fold increase in US LNG export capacity, which also creates more demand for natural gas infrastructure.

Mounting concerns over energy security are driving global LNG buyers to sign long-term supply contracts—revitalizing the outlook for US LNG projects that have been under development.

With Russia’s invasion of Ukraine exacerbating a tight market for natural gas globally and demand from Asia expected to remain strong, the world’s growing need for LNG has shifted the playing field in favor of LNG developers. The turnaround is particularly striking compared to 2020 when many buyers of US LNG were cancelling cargoes. Today’s note discusses the strengthened outlook for US LNG and positive developments in recent months that are paving the way for additional export capacity.

US LNG projects move from the sideline to the fast track.

The strength in LNG markets has spurred a resurgence in long-term offtake agreements, which are key to advancing LNG export projects towards Final Investment Decision (FID). In simple terms, FID is the point at which companies formally commit to moving forward with projects and construction begins. Motivated buyers are signing long-term purchase agreements, which is helping accelerate the advancement of major LNG projects that had stalled during the challenging market environment of 2020. As evidence of this, Venture Global announced FID for its Plaquemines LNG project in May, having secured $13.2 billion in financing for the project. Plaquemines marks the first FID for a US LNG export facility since Venture Global’s Calcasieu Pass in August 2019.

Other projects are also bounding towards FID announcements this year given the improved macro backdrop. Tellurian (TELL) is nearing FID for the first phase of its Driftwood LNG project and is currently in talks to secure financing. Cheniere (LNG) expects to reach FID on its Corpus Christi Stage 3 expansion this summer. Energy Transfer (ET) and NextDecade (NEXT) are in the process of lining up customers for their respective LNG projects at Lake Charles in Louisiana and Rio Grande in Brownsville, Texas. Since March, ET has secured long-term contracts for a combined 5.8 million tonnes per annum of LNG from Lake Charles, which is on track to reach FID by the end of 2022. In May, NEXT announced a 15-year takeoff agreement with European utility Engie and reiterated its expectations to reach FID on at least two trains of its Rio Grande LNG export project in 2H22.

The strong macro environment for LNG and improved outlook for projects has also translated into strong equity performance for those energy infrastructure names focused on liquefaction. Year to date through June 16, Cheniere Energy (LNG) and TELL have seen price returns of 22.4% and 24.0%, respectively, while NextDecade (NEXT) has seen a whopping 94.4% YTD price-return. This compares to price gains for the Alerian Midstream Energy Index (AMNA) of 9.4% over the same period.

Potential FIDs in 2022 support a more than two-fold increase in US LNG export capacity.

Including the capacity additions from LNG projects that have already reached FID—Golden Pass LNG and the first phase of Plaquemines LNG—the aforementioned LNG projects expected to reach FID in 2022 would contribute to a ~15.1 billion cubic feet per day (Bcf/d) capacity expansion relative to the 13.8 Bcf/d of LNG export capacity operating in the US today, representing a more than double increase. More LNG capacity creates more demand for natural gas infrastructure, benefiting midstream companies who own the pipeline networks that supply LNG facilities.

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Bottom line:

Long-term supply contracts are key to advancing LNG export projects towards Final Investment Decision. An uptick in long-term contracts supports the long-term outlook for US LNG and increases the likelihood that - export projects under deployment will reach the finish line, which also creates more demand for natural gas infrastructure.

 

Related Content and Research:

Midstream/MLP Contracts: Playing the Long Game Wins

Positive Fundamentals Fuel Strong 1Q22 Midstream Earnings

What Russia’s Invasion Could Mean for the US Energy Landscape

Midstream/MLPs Key to US LNG Export Growth

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