By Irina Slav
Plummeting oil prices have been the focus of attention ever since Saudi Arabia and Russia fired the first shots in what analysts see as a potentially devastating oil price war. Oil producers, however, are not the only ones suffering the consequences of this war, aggravated by the slump in demand from the coronavirus pandemic.
There were 10 liquefied natural gas projects in the United States slated for approval last year but due to an already sizable glut and the U.S.-China trade war, many final investment decisions were pushed into 2020.
Some of these projects might even be canceled if the situation doesn’t improve soon.
Tellurian’s Driftwood LNG project on the Calcasieu River in Louisiana is set to have an export capacity of 27.6 million tons of liquefied gas. The final investment decision was supposed to be made this year after Tellurian secured debt and equity funding for the $30-billion project. However, the FID date has been delayed as the company grapples with several problems raised by current market conditions.
Media recently reported that Tellurian had cut its workforce by 40 percent and embarked on an executive suite reshuffle in a bid to improve its profitability and secure funding for Driftwood LNG, especially after Indian energy company Petronet, which had committed to buy 5 million tons of LNG from Driftwood earlier this month, said it would delay its final decision on this commitment.
“The Driftwood project is Tellurian’s priority,” a spokesperson for the company told media. “In the midst of extreme global financial market conditions, Tellurian is reducing our corporate overhead costs and recently reduced our headcount to be resilient and prepared for the future.” Market conditions are indeed extreme. Buyers from Europe are turning away LNG cargoes in an oversaturated market where prices have fallen historic lows. Asian buyers are also turning away or deferring deliveries, and China’s largest gas importer PetroChina earlier this month declared force majeure on all gas imports. What’s worse, with the outbreak continuing to spread outside China, the prospect of a quick improvement seems slim.
Lake Charles LNG
The Lake Charles LNG project, a joint venture between Shell and Energy Transfer, was delayed last year. The partners in the joint venture asked for a five-year extension of the term for completing the 16.45-mtpa facility and FERC granted that extension. According to industry sources, the project could cost between $12 billion and $16 billion. The companies have yet to make the final investment decision.
It’s worth noting that the delay was not a direct result of the LNG market situation. Shell inherited the project from BG Group, which it acquired a few years ago, and had to revise the partnership agreement with Energy Partners. Under the revised terms, Shell, already the biggest trader of LNG globally, has agreed to take half of the facility’s export capacity. The delay will see the lake Charles LNG plant ready in 2025, as long as the partners make the final investment decision, which will probably happen after they pick a company for the engineering, procurement, and construction work on the facility. The latest update in this respect was a tender announced last December.
Meanwhile, many fear the Covid-19 pandemic is about to bring the global economy close to a halt, which will hardly be conducive to making final investment decisions on projects worth billions of dollars. Like other projects, Lake Charles LNG might get another delay.
Rio Grande LNG
Rio Grande LNG is the third-largest liquefied natural gas project that was scheduled for approval in the United States this year, with a nameplate capacity of 27 million tons annually. NextDecade had plans to make the final investment decision on the $15-billion Rio Grande LNG project this year and have it completed by 2023. The company has so far secured a $50-million investment from the United Arab Emirates’ state investment corporation Mubadala as well as $25 million as payment from Enbridge for the Rio Bravo pipeline that will feed natural gas into the liquefaction trains. Bechtel has also bought into the project, paying $15 million for a stake in it. However, there hasn’t been any news of buyer commitments and these are the most important factor for making an FID on an LNG project in a world that is fast getting drowned in LNG.
The Rio Grande LNG project is also facing environmentalist opposition that has taken it to court with a total of six organizations including the Sierra Club asking last month a federal judge to overturn the permits issued for Rio Grande LNG by the FERC. The grounds for the request were safety and environmental concerns.
Things are not looking up for the rest of the projects due for approval this year. Magnolia LNG, Port Arthur LNG, and Brownsville LNG are all grappling with the same problems weighing on the whole industry. If oil and gas prices remain subdued for the rest of the year, which is now increasingly likely, some of these projects will simply become unviable. And the oil price war will also play a major part.
“If coronavirus brought the near-term prospects of new LNG business to a particularly slow crawl, we believe the OPEC+ blow up will bring it to a full stop, at least until the dust settles,” Michael Webber, managing partner of Webber Research & Advisory said in a recent note to clients. “For companies in the process of restructuring, like Tellurian, it certainly won’t help the market’s appetite for refinanced, commercially-challenged LNG paper. It’s hard to imagine its lenders not feeling the collapse of commodity prices in several places throughout their loan books.”