Asian buyers exploring the value of contracting for LNG from US Gulf Coast projects need to ensure that they fully comprehend the unique risks and challenges that buying from the region entails, a panel of speakers at a conference in Singapore said Thursday.
Some LNG buyers -- particularly Japanese, and Indian buyers -- have been increasingly focused on the upcoming US Gulf Coast projects.
Attracted by the prospect of diversifying their LNG portfolio in an effort to buy cheaper supplies, many are keen to index LNG contract prices to the US Henry Hub price.
US projects also offer flexible free-on-board term cargoes, with no destination restrictions on the LNG.
These new deal arrangements represent a significant shift away from traditional LNG term contracts, where buyers would receive volumes directly from producers on a non-diversion delivered ex-ship basis, with prices indexed to crude oil.
However, the US tolling model exposes buyers to more risk, that had traditionally been the responsibility of the supplier.
US companies looking to convert their existing brownfield projects into LNG export facilities are adopting a utility model, and signing contracts with buyers on this tolling basis, according to Steve Hoyle, VP of LNG Marketing and Shipping at Anadarko.
Recent contracts signed on the utility -- or tolling -- model have been around 115% Henry Hub gas prices, plus a liquefaction charge of around $3.00/MMBtu.
This new model means that the liquefaction project developers are only responsible for providing the liquefaction services and take only the liquefaction fee as such.
Gas will be drawn down from the US pipeline system and sold on a 115% basis to Henry Hub futures, meaning project developers are largely unable to make much upside when selling LNG in a strengthening market.
By structuring the projects this way, developers effectively move the risks upstream of the liquefaction facility -- as well as downstream of the liquefaction process -- to the buyers.
In some cases, the risks associated with the actual liquefaction facilities would also be shared by the liquefaction project with the buyers, Hoyle said.
Because the liquefaction plants in the US Gulf would rely on pipeline gas processed from other areas, if the composition of the feed-gas changed over time and the treatment facilities would need to be modified, those costs could also be passed on to buyers.
"What generally happens in most of the contracts is that it gets rolled into the toll, and there would be some sharing of the pain, but in general, that is the sort of risk that the offtaker needs to understand and measure," Hoyle said.
"You will see risks like municipal taxes, if they go up, quite often they will be passed to the buyer; spread risks on pipelines...Henry Hub is not next to the LNG plant, you still have to move the gas to the plant, and there is a pipeline and a spread risk that you can't control," Hoyle added.
Other risks the buyer would be exposed to include ensuring adequate upstream sourcing and transportation of pipeline gas to the liquefaction terminal, the relative inexperience and financial security of the new US LNG developers, and the possibility of labor competition driving up costs, similar to the scenario that has emerged in Australia.
"It has almost become mandatory for many of these capacity holders [buyers] to start taking firm transportation capacity in some of the [US] pipelines," according to Ashish Mohanty, senior director at consultancy Galway Group.
However, all of the 5-6 Bcf/d of capacity on the existing gas pipeline infrastructure has already been committed either to these LNG projects or to other industries in the south, he added.
The effect will be that future expansions of liquefaction plats would involve more pipeline developments, which would result in increased cost, as well as a longer approval and construction process.
Furthermore, the current sellers, looking to develop projects and export LNG from the gulf largely lacked the long history and reliability of past suppliers in the market.
"In the past, there was a very experienced project developer with a very strong financial standing who was running the project," Mohanty said, adding that there is a significant amount of counterparty credit risk as such.
As buyers are taking LNG on a FOB basis, buyers are responsible for putting the whole LNG operations value chain together, in order to receive the volumes.
"As a capacity holder who is entering into the US market, you have to take on a lot more responsibility, and have to have a lot more participation, as there are a lot more things to think about than merely signing the SPA itself," Mohanty said.
Mohanty also pointed to the increased pace of development of the US gas market, with ammonia plants, petrochemicals users, and other gas-based industries now popping up on the US Gulf Coast looking to take advantage of the cheaper gas.
"Now what is going happen is as all of these enter into construction along with these LNG projects, there is a possibility of greater competition for the same labor...which could create some timing and cost uncertainty especially as you go later in the time horizon," he said.
