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North American LNG developers face buyer pressure to ditch traditional take-or-pay funding model

Conventional wisdom says the success or failure of the next wave of North American LNG export projects depends largely on the ability of developers to secure long-term offtake contracts with buyers.

That contention has been challenged by two recent decisions to go forward without new contracts.

The different approaches highlighted a debate Wednesday at a Houston energy conference about how to align the needs of consumers of the chilled fuel that want flexible terms and transparent pricing mechanisms with those of producers that want to satisfy banks and investors with the promise of stable returns.

“In some markets, the traditional model is seen as too risky under certain circumstances. That’s why we have decided to stay in between,” Alessandro Della Zoppa, executive vice president, LNG, for Italy’s Eni, said during the CERAWeek by IHS Markit conference.

Over the last 12 months, contracting activity for US export projects has picked up significantly after a lengthy lull. However, most of the developers of liquefaction terminals that are expected to start up in the early to mid-2020s have not announced any firm deals, causing some to delay final investment decisions.

Meanwhile, last month ExxonMobil and Qatar Petroleum decided they will build their Golden Pass export terminal in Texas without the announcement of a long-term offtake contract. That followed Shell-backed LNG Canada’s similar decision in October 2018 for its British Columbia facility.

These moves signaled the willingness of major energy companies with existing LNG volumes in their portfolios to accept a level of risk that was unheard of in the North American market until recently. Analysts have wondered whether that would catch on with more developers. That spurred talk of a potential trend on the horizon.

“We still consider ourselves that old-fashioned model,” Venture Global LNG co-CEO Michael Sabel said during a panel discussion with Della Zoppa. “It has to be take or pay. If it isn’t, the cost to capital to build is too high.”

He said LNG export projects still take a long time to develop and require investors to take huge risks. A chunk of the second wave LNG export projects that have been proposed in the US, Canada and Mexico don’t have the backing of deep-pocketed equity investors.

DRIVING CERTAINTY
Even some that do have that backing prefer the certainty that comes with 20-year contracts. After all, that’s the model Cheniere Energy used to build its LNG export facilities in Louisiana and Texas, and Dominion Energy used to build its terminal in Maryland. Cheniere has said repeatedly that future expansion will be determined by the ability to secure sufficient long-term contracts.

“Our focus to customers is to deliver absolutely the best price possible for that 20-year strip of LNG,” Sabel said. “We’re not looking to do anything creative with those contracts that might increase cost or price.”

But Della Zoppa said the industry has to “acknowledge that there are a growing number of buyers that are more and more uncomfortable with that, because with the old model they face more and more uncertainties.” Some buyers, he said, would even like to abandon the sale-and-purchase agreement model.
Source: Platts

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