A gap is emerging in the U.S. LNG industry as big players such as Exxon Mobil Corp. and Cheniere Energy Inc. race ahead to build export terminals without new long-term contracts, while smaller developers struggle to find financing for their first plants.
LNG trade has traditionally been underpinned by long-term purchasing deals which finance multibillion-dollar terminals that liquefy natural gas by chilling it to -260 degrees Fahrenheit (-160 Celsius), load it onto ships, and regasify it when delivered.
This is changing. As the market grows and pricing mechanisms diversify, some buyers do not want to commit to 20-year contracts. The growing prowess of oil majors such as Exxon Mobil and recent entrants such as Cheniere and trading houses means there are aggregators that can supply buyers more flexibly, making it harder for smaller players.
"The industry is moving away from long-term agreements to justify construction of a new facility to a true commodity business," said Charif Souki, co-founder and chairman of Tellurian Inc.
Dozens of LNG export terminals are being planned in the United States with a total capacity exceeding 300 million tonnes per annum (mtpa). That is equal to the world's entire consumption of LNG last year. Globally, LNG demand is expected to rise 26% by 2024, far short of such an increase in export capacity, analysts said.
"I'm not going to pick a winner or loser here, but I don't think there is enough support for all of these projects by any means," said Rich Redash, head of global gas planning, at S&P Global Platts Analytics.
Tellurian has been seeking investors for its 27-mtpa Driftwood export terminal in Louisiana. Instead of trying to line up long-term purchase agreements, it offers customers the opportunity to invest in the company's gas production, pipelines and liquefaction.
The company has delayed the start of construction to early next year from a previous target of the first half of this year, according to company presentations. It also reduced how much its partners need to invest in the project to receive LNG to $500 per tonne from a previous target of $1,500 per tonne.
By contrast, Exxon Mobil and Qatar Petroleum decided this year to move ahead with their 15-mtpa Golden Pass project in Texas without substantial long-term agreements, while Cheniere said it would add a sixth liquefaction train at its Sabine Pass terminal in Louisiana with fewer long-term contracts than in the past.
Buyers have been wary of committing to long-term deals due to the influx of flexible supply and the recent decline in prices, removing the urgency they felt last year to sign deals.
"It's hard to sign long-term deals when prices are so low," Vivek Chandra, CEO of Texas LNG, told Reuters. "I think to sign deals on long term basis is counterproductive now."
Texas LNG already delayed its Final Investment Decision (FID) from 2019 to 2020, but Chandra said that decision may slip further.
"We think our FID will be the end of next year, but we’ll see, we’re not under pressure, which is good," he told Reuters.
U.S. developers had been banking on signing deals with buyers in China, which will account for more than 40% of global gas consumption growth between 2018-2024, becoming the top LNG buyer by 2024.
The 15-month U.S.-China trade war has choked off overall demand from that country, once the third-biggest buyer of U.S. LNG. For the first eight months of 2019, the U.S. exported just 14% of the volumes it sent to China for the same period in 2018, according to U.S. Department of Energy data.
"It is still a very difficult market. The trade war with China has put a damper on deals in China," said Greg Vesey, CEO of soon-to-be U.S.-listed LNG Ltd., which is planning the 8.8-mtpa Magnolia project in Louisiana.
Magnolia had hoped to reach a FID last year but delayed that citing the trade war. It has about 25% of its capacity under long-term contract. Vesey said there is potential LNG Ltd could make a FID this year but next year would be more likely.
Other delays include two Louisiana projects: Delfin LNG's floating plant and Energy Transfer LP's Lake Charles LNG, both asked federal regulators for more time to complete.
Large projects from other countries are also vying for market share, including Russia's Arctic LNG 2 and two projects in Mozambique being shepherded, respectively, by Total SA and Exxon.