Oil & Gas News

U.S. LNG Boom In Jeopardy Due To Costs and Rivalry

LNG, Gas, Projects

Intense competition among developers and rising costs are creating challenges for new liquefied natural gas (LNG) projects in the United States, even as the fallout from Russia’s invasion of Ukraine drives strong demand for American fuel exports. Over the past year, a new wave of multibillion-dollar LNG projects along the US Gulf of Mexico coast has accelerated as the war-induced energy crisis triggers a global race to secure fossil fuels from extensive Texas shale fields.

Since Russia’s full-blown invasion of Ukraine began 14 months ago, four projects totaling $40 billion have reached the critical final investment decision (FID) milestone. However, other projects have faced continuous delays as they compete to secure long-term purchase agreements needed to underpin their projects and grapple with sharply rising construction and financing costs.

Charif Souki, who pioneered the US LNG export industry over a decade ago, noted that costs have increased dramatically, and fewer construction companies can handle such projects. Souki, now CEO of developer Tellurian, has seen his $25 billion Driftwood development struggle after a fundraising failure last year led crucial buyers to abandon the project. The company recently announced plans for the sale and leaseback of land to raise funds.

Two other projects – Energy Transfer’s Lake Charles conversion and Next Decade’s Rio Grande terminal – hoped to reach FID by the end of March but have been delayed to later this year.

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The Biden administration and the European Commission have made expanding US LNG exports a cornerstone of securing energy supplies in Europe as the continent seeks to eliminate Russian gas from its national economies. Projects under construction or entering service will increase US capacity by roughly 70% by 2027, making the country the world’s preeminent LNG superpower. The US is expected to surpass Australia and Qatar this year to boast the world’s largest export capacity.

Wood Mackenzie estimates that if all potential projects in the pipeline were to come online, they would triple US capacity by 2030. However, analysts predict that many will fail as the race to build them intensifies and funding for long-term fossil fuel projects becomes harder to secure in a decarbonizing world.

As construction costs rise and interest rates increase financing costs, many projects will likely need to renegotiate offtake deals, which could delay them further and allow others to muscle in. Some more established players, such as Sempra Energy, Venture Global, and Cheniere Energy, have successfully capitalized on the demand for US molecules and secured contracts, enabling them to proceed with major new projects.

Securing necessary commitments from offtakers has become increasingly challenging as financiers weigh the need for long-term fossil fuel infrastructure in a rapidly decarbonizing world. Many European buyers, eager to secure short-term LNG supplies, are hesitant to commit to multi-decade contracts that developers require to finance their projects.

While the US government emphasizes that a lack of permits is not causing delays, securing offtake agreements to underwrite financing has become a much more significant challenge than obtaining permits. Projects that experience setbacks may find themselves replaced by others that are better positioned to seize the opportunity.

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