By Molly Higgins
The US’s ongoing trade war with China could stymie the growth of LNG terminals in this country.
All told, the US has 14 gas export projects totaling $118.4 billion hoping to come online by the end of 2020 but securing Chinese off-takers is at a stalemate.
Of the 14 projects, eight have been approved by the Federal Energy Regulatory Commission (FERC) and four have received their final environmental impact statement. These 12 projects, along with two in the draft environmental impact statement stage, have anticipated final investment decisions targeted from the second half of 2019 to the end of 2020, according to public statements.
With overseas markets, most notably Asia and Europe, driving LNG demand, the US is hoping to get these contracts secured. LNG has proven to be an economical way to transport gas, as well as an attractive alternative fuel due to its lower carbon emissions and abundance.
The question now is if and how these projects will be financed during this trade war.
“Nobody’s signing contracts right now because of everything that’s happening on the political front… nobody can afford to sit still,” says one source familiar with the matter.
In order to approach banks and successfully receive commitments, projects and developers need a contract in place for at least 80% of offtake capacity. These same banks or investors want to see where the project’s revenue will be coming from, says the source.
Energy Transfer’s Lake Charles LNG, located on the Gulf Coast of Louisiana, has a memorandum of understanding with Korea Gas Corporation. This agreement is not legally binding, so a definitive, binding agreement must be made for financing to take place. Port Arthur Phase 1 has a signed 20-year contract with PGNIG, a Polish oil and gas company, and a 20-year heads of agreement with Saudi Aramco. If the agreement is finalized, the project will have sufficient contracted capacity to approach banks for financing. Saudi Aramco also plans to execute a 25% equity investment in Phase 1.
Given the delay in talks with the bank market, private equity firms have been filling the void and offering capital. Historically, LNG deals have been financed using a roughly 70:30 debt-to-equity ratio.
Most recently, Australian fund manager Westbourne Capital, along with its co-investors, agreed on Sept. 9 to provide an up to $1.025 billion mezzanine loan for the Freeport LNG Train 4. This, combined with a bank facility, will fund the entire capital required for the project.
Stonepeak Infrastructure Partners committed $1.3 billion through its $5 billion Stonepeak Infrastructure Fund III to Venture Global’s recently-closed Calcasieu Pass LNG project. Additionally, I Squared, through the ISQ Global Infrastructure Fund II, made an investment of $460 million to Venture Global for the further development of its projects — Calcasieu Pass, Plaquemines Parish, and Delta.
Once off-take agreements are secured and talks with the bank market begin, there will be a strong appetite for these deals, which the source says will “help [the sponsors] manage both the negotiations with the bank group and ultimately the pricing on the loan.”
Molly Higgins is a power and energy research analyst for SparkSpread and Inframation based in New York City.