U.S. LNG RISK
PLATTS - Cheap, abundant US supplies of natural gas combined with forecasts of growing global LNG demand early next decade are not enough to ease the uncertainty facing the next wave of LNG export projects, S&P Global Ratings said Tuesday, citing high construction costs and the challenges in securing long-term supply contracts.
The ratings agency is part of the same company that owns S&P Global Platts.
The main fear is that as developers along the US Gulf of Mexico and the Atlantic and Pacific coasts seek creative ways to finance liquefaction units, they will be open to shorter agreements with smaller quantities and more flexible terms, raising concerns about their ability to repay debt as contracts come up for renewal more often, S&P Global Ratings noted in a report.
There are more than a dozen LNG export projects currently being proposed to US regulators, though across the industry almost no final investment decisions have been announced over the last 18 months and some developers have delayed their decisions into 2018 or beyond. Few firm supply purchase agreements have been announced for the projects that have yet to commit to moving forward.
"The repayment of project finance debt is from cash flow generated by long-term LNG offtake agreements with investment-grade companies; however, for a variety of reasons, these contracts are increasingly difficult to procure," it said.
"The credit quality of new facilities could suffer if project finance structures are used but backed by shorter-term agreements (which introduce re-contracting risk) and/or merchant sales (and associated market risk) or include revenue counterparties that we rate below investment grade."
Cheniere Energy's Sabine Pass terminal in Louisiana is the only US facility currently exporting LNG produced from shale gas. The four liquefaction units that it is currently operating there were financed with 20-year take-or-pay contracts with credit-worthy buyers, setting a standard for the industry.
Dominion Energy's Cove Point export terminal in Maryland, which is expected to start shipping LNG later this year, has similar deals in place, as do the several other projects that are currently being built, including facilities in Freeport, Texas, and Corpus Christi, Texas.
But for projects still going through the regulatory approval process, the tap has been running dry of late. Bank decisions also are in the mix, S&P Global Ratings said. Earlier this month, French bank BNP Paribas decided to stop doing business with companies that are primarily involved in oil and gas production from shale, a potential impediment to other projects' ability to pay for construction if more banks follow suit.
"This isn't to say that liquefaction facilities will no longer be built in the US," S&P Global Ratings said. "However, the nature of these facilities could change. For example, we expect to see a greater number of smaller, more modular units, and potentially shorter-term contracts up to five years in length, with gas procurement arrangements changing as well."
"We think these changes will likely introduce a host of new credit issues such as market and recontracting risk, while possibly eliminating others such as counterparty risk," it added.
Cheniere recently told regulators it has decided to change the design of a later stage of its LNG export facility in Corpus Christi to incorporate mid-scale LNG trains, instead of large-scale units. The Houston-based company has been considering new mid-scale liquefaction opportunities as a way of reducing per-train construction costs and making it easier to find offtakers to buy the capacity.
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