- After a dearth in liquefaction FIDs over the last 18 months, investment decisions should pick up pace over H221 to 2022. However, fierce competition for buyers and a competitive capital allocation process will see the bulk of projects struggle to progress.
- North America will likely lead project sanctions, due to its healthy pipeline and the more advanced stage of several of its ventures.
- Elsewhere a number of projects in markets including Russia, Mozambique, Mauritania-Senegal and Papua New Guinea are vying for investment. However, strong capacity growth in Qatar will squeeze the availability of demand. Smaller and scalable projects may fare better in this environment.
- Access to financing is becoming more challenging, reflecting the migration of demand growth from developed market to emerging market buyers , rising demand-side uncertainties, evolving pricing and contracting structures and the ongoing greening of capital.
- Increasingly, climate considerations will factor alongside cost competitiveness as a key determinant of project success.
After a dearth in liquefaction FIDs over the last 18 months, investment decisions should slowly pick up pace over H221 to 2022. In the past 18 months, only two projects have reached a positive FID – Sempra’s 3.25 mtpa Costa Azul facility in Mexico and the 33mtpa North Field Expansion in Qatar. This represents a significant drop from the six projects - Calcasieu Pass (10mtpa), Golden Pass (15.6mtpa) and Sabine Pass Train 6 (4.5mtpa) in the US; Arctic LNG 2 (19.5mtpa) in Russia; Area 1 (12.9mtpa) in Mozambique and LNG Train 7 (8.0mtpa) in Nigeria - that reached FID in 2019 alone. The pandemic had a hand in the slump and, with the recovery ongoing, interest among buyers has been heating up, in part stimulated by the recent and severe spikes in spot LNG prices. Nevertheless, the number of projects chasing investment far outweighs our expectations for future demand growth, which implies that many projects will struggle to progress. Moreover, capital spending remains heavily constrained and projects will have to compete for capital allocation within the project developers’ own portfolios. We expect to see the pace of new FIDs accelerate over the coming 18 months.
North America will likely lead project sanctions, due to its healthy pipeline and the more advanced stage of several of its ventures. According to the Canadian government, 18 liquefaction projects have been proposed, 13 on the west coast and five on the east, with total capacity of 216mtpa. In the US, the Energy Information Administration, reports that 210mtpa of capacity across 17 projects has been approved but is yet to start construction. As point of reference, global LNG trade amounted to 356.1mtpa in 2020. While relatively few of these projects have made progress over recent years, there are more than 10 targeting FID over 2021-2022, with combined capacity in excess of 145mtpa.
In Canada, Goldboro (10mtpa) and Woodfibre (2.1mtpa) are among the most advanced. The former has sold the full offtake from the first train to Uniper, while Woodfibre reports that around 70.0% of its capacity has been secured under long-term sales and purchase agreements (SPAs). Both projects are well-positioned to reach a positive FID over 2021-2022, in line with the project developers’ own expectations. The prospects for other projects in the country are more clouded. Only one major project is currently under development – the 13.0mtpa LNG Canada facility. However, the Coastal GasLink Pipeline, which would feed the terminal, is facing continued opposition from First Nation and environmental lobbies. The pipeline developer TC Energy has indicated that construction delays and cost overruns are likely, which could result in higher tariffs for the LNG project partners. Strong local opposition, regulatory delays, tightening environmental mandates and relatively high unit costs are dampening the outlook for the Canadian LNG sector more broadly. Symptomatic of this, Woodside recently followed its project partner Royal Dutch Shell in announcing its intent to divest a 50.0% stake in the proposed Kitimat LNG project. Shell announced it would exit the project back in December 2019, but has yet to find a buyer. That said, this could work in favour of Cedar LNG, which would also be located in Kitimat and has the advantage of being owned by the Haisla, a First Nation group in British Colombia.
At least nine major projects in the US are targeting FID over 2021-2022, although these projects will generally need to sign more binding SPAs before financing can be secured. During the last investment cycle, the US market enjoyed a number of advantages, which saw it dominate project sanctions globally. These included access to unused import infrastructure, which could be repurposed for export, wide availability of cheap domestic gas feeds and favourable price spreads between the US, Europe and Asia. Project developers also tended to favour phased developments and the use of standardised concept designs and equipment, which further lowered capital costs. Some of these advantages, including the access to brownfield infrastructure and favourable price dynamics have ebbed. The US is still among the most attractive markets globally, reflecting factors such as a large and cost-advantage resource base, developed infrastructure, a mature services sector, a diverse competitive landscape and a favourable investment climate. However, LNG developments may face greater challenges going forward, as the regulatory landscape shifts under Biden. Higher emissions standards, tighter environmental approval processes and potential curbs on oil and gas permitting and leasing will all likely weigh on future developments. FIDs on several projects have now been delayed, some indefinitely, while at least one major project – Annova LNG – has been cancelled outright.
Elsewhere a number of projects in markets including Russia, Mozambique, Mauritania-Senegal and Papua New Guinea (PNG) are vying for investment. Russia is targeting ambitious growth in its LNG exports, with a number of projects in the pipeline. However, political risks loom large. The government is offering tax breaks on LNG projects, to advance its ambitions to grow its share in the global LNG market. Traditionally, Russia has been heavily dependent on the European gas market, where prospects for growth are dwindling in line with deeper decarbonisation strategies. Russian gas is highly competitive in Europe and can also reach other, higher-growth markets – notably Asia. In general, Russia enjoys favourable climatic conditions for LNG and a low-cost base, but is disadvantaged by the sanctions currently in place. We do not expect any other projects to reach FID over 2021-2022.
LNG developments in PNG have also been hamstrung by political risk. Two major projects previously sat in the pre-FID pipeline: the PNG LNG expansion (2.6mtpa) and Papua LNG (5.3mtpa). FIDs on these projects have faced repeated delays, due to contract disputes between the developers and the government. Planning on the Papua LNG project has recently recommenced, with the 2019 gas agreement reaffirmed, a fiscal stability agreement signed and a license extension granted. However, the PNG LNG expansion project has now been cancelled. An FID on the Papua LNG project is not expected before 2023.
Mozambique’s LNG developments have also faced major headwinds. Two projects are currently under development – Area 1 (12.88mtpa) and Coral FLNG (3.4mtpa). Area 4 (15.2mtpa) had been targeting FID in 2020, but has since been delayed. A substantial rise in militant attacks around the Rovuma basin has delayed works on the Area 1 project and the FID on Area 4 has been put in jeopardy. Given the scale of the discovered resource base, the quality of the project sponsors and the volume of SPAs in place, we expect that the project will ultimately progress. However, the timeframe is now highly uncertain. The militant group al-Shabaab is pushing to establish control over the country’s gas resources and form a caliphate in the Cabo Delgado province. The Mozambican military has struggled to contain the insurgency and, with the government reluctant to accept foreign military assistance, prospects for a near-term resolution of the conflict appear poor.