US’ Commonwealth LNG in talks to contract 2 mil mt/yr from Louisiana project
US’ Commonwealth LNG is in talks to contract 2 million mt/year of LNG supply from its project under development near Cameron, Louisiana, by year-end, its chairman Paul Varello told S&P Global Commodity Insights, while the company is also aiming to convert its existing heads on agreements with customers to sales and purchase agreements before 2024.
“It’s a race to the finish line, a project that has all the permits, has a lump sum [amount] for construction and has tonnage under long-term SPAs that will be able to help take FID [Final Investment Decision] … All the three key pieces of the puzzle will be buttoned up by the end of the year, which allows taking the FID in the first quarter of 2024,” Varello said in an interview.
Commonwealth LNG’s export terminal project located on the Calcasieu River in the Gulf of Mexico, has 9.3 million mt/year capacity, according to a company statement.
The targeted FID is expected in Q1 2024 with the first two trains to be commissioned in Q1 2027, while the remainder four are scheduled over the next six months at an interval of three months each, Varello said.
“The [project] site is secured — it’s a 400-acre site, and the footprint for our project will occupy only 150 acres of those 400 acres. The rest of it is a buffer zone,” he said, noting that the company was applying to the Federal Energy Regulatory Commission to advance the development of the project site as soon as possible.
“We’ll start in earnest with our construction in Q1 2024 as soon as FID is reached and we are funded,” Varello added.
In August, Commonwealth LNG also closed an investment of development capital from Kimmeridge Energy Management Company, in addition to agreeing in principle for a 20-year, 2 million mt/year LNG offtake commitment from the facility along with associated gas supply.
The US project developer Sept. 4 also announced a head of agreement with European energy company MET Group for the sale of 1 million mt/year for 20 years from its LNG facility.
“A couple of customers we’re talking about don’t want the intermediate step of a HOA and want to go directly to an SPA. We’d prefer that because it takes a lot less time to do that overall,” Varello said.
Meanwhile, for some potential base customers who are also looking for more clarity around commissioning volumes, “There is a simple answer — to the extent we have commissioning volumes, you will be the first to receive them,” he added.
“We’ve been talking to the Europeans for the last four-five years because they are closer to our plant, and shipping [from there] is most affordable to the Atlantic Basin, primarily Europe –both Eastern and Western Europe,” Varello said.
“We believe in the near term, we will be able to sell into the European market for a while until all that pipeline gas is replaced with LNG, and after that we will shift our focus to Asia, particularly China,” Varello said.
“China needs LNG to get rid of its coal burn and that is a gigantic upside for us if we can keep the price competitive,” Varello added.
While Europe is reluctant to enter 20-year tenure long-term contracts because they are “finicky” about green energy, the Chinese are “quite happy” with 20-year Henry Hub volumes, Varello said.
“So, in future, we may either sell 15-year contracts [to European buyers], which they seem to be willing to take or sell 20 years contracts to the amalgamators or middlemen — traders and brokers — who, in turn, will take long-term price advantage and sell shorter terms but at bigger margins,” he shared.
While the Panama Canal is expensive for shipping to Asia from the region, one could ship volumes via the Horn of South Africa or the Suez Canal, Varello said.
Varello noted that Asian countries such as India and Pakistan have been victimized by the great volatility in LNG prices, in part because of spot buying rather than contracting on a long-term basis, he noted.
“India has been more forthcoming in saying that they’d like to buy LNG and they are willing to do long term, Varello said, adding that it’s only a question of having a mixed portfolio of indexes, including Henry Hub.”
However, indexing to Brent crude pushes them toward Qatar, which seems to be “digging into 12%-13%” to Brent for deals, making it costly for such Asian buyers, he said.
While the demand curve has been mostly a smooth upward-leaning curve, supply is a “sawtooth,” he said.
“As a result, the day after a new LNG project comes on board, there is an oversupply before reverting to an under-supply … To that extent, there will always be a little bit of volatility in the pricing,” he shared.
The Russia situation was “unique but not something we are going to see very often.”
However, Varello also noted that the nature of LNG markets had changed with even perceived supply shocks exposing the fragility of the global supply-demand balance.
This was reflected in the supply risks emanating from Australia as the unions and labor threatened strikes on key LNG facilities, demanding better remuneration and work benefits, he said.
“Here in the US, we are not likely to have that kind of disruption.” However, companies must protect against other vagaries such as hurricanes and bad weather, Varello said.
“We have one source of energy coming into our plant — a buried gas pipeline from north of Lake Charles. That gas line does two things: it feeds gas to our direct gas turbines that drive our main compressors, while a second wave of flow goes to our power plant where we have auxiliary power.”
“So, chances of disruption in the gas pipeline are few and far between,” he added.