How the U.S. Second Wave of LNG Is Changing the Industry

By Johnny Wood

A lot has changed since U.S. shale gas spawned a wave of LNG projects, with enough new capacity to meet and eventually exceed domestic demand, turning the country into a net exporter of liquified gas. Now, a decade later, a “second wave” is on the way, driven by surging global demand, particularly from the emerging economies of regions like Asia.

The first wave of projects exploited surplus gas infrastructure, using up any available grid capacity. With the surplus now largely exhausted, sourcing gas is becoming more difficult. Developing this new wave of supply infrastructure will be a different prospect as producers compete for a piece of the growing export market.

Additional capacity is needed to meet the future needs of overseas buyers, but with so many new supply projects in the pipeline a short-term oversupply looks inevitable, and competition for buyers is growing. And that means producers set on bringing new supply online need to get creative, coming up with new commercial structures to finance and operate LNG projects.

US LNG will represent 18% of the global market by 2022 and the second wave drives it to 25% by 2040
Source: Wood Mackenzie
Producers are finding new ways to finance and operate LNG projects
Shifting Dynamics

In a crowded supply market, opportunities to leverage idle regasification facilities or repurpose existing LNG tanks, marine vessel berths and pipelines are quickly disappearing. To access gas supplies, new projects will need longer pipelines to be built, adding to costs and introducing another level of complexity and risk to projects.

“The first wave enjoyed a fair bit of Brownfield pipeline capacity that was effectively underutilized, based on the shifting market dynamics within the U.S., and was relatively easily repurposed and used for LNG exports”, Kristy Kramer, Head of Markets, Gas & LNG Research at Wood Mackenzie, told delegates at the Gastech 2019 conference in Houston, Texas. “That low hanging fruit has effectively been picked.”

Second wave projects have morphed alongside changing market conditions. New commercial structures are emerging which alter the balance of risks versus rewards for project developers, gas suppliers and customers.

Risks and Rewards

Some developers are competing on cost. Venture Global LNG has adopted a modular approach to constructing facilities at its Calcasieu Pass LNG production and export facility.

The plant consists of nine 1.2 million ton liquefaction blocks, supported by two 200,000 cubic meter storage tanks. No lump-sum turnkey engineering, procurement and construction (EPC) contract is in place, so the project is exposed to greater risk, but the modular approach reduces the capital needed for the build, and facilitates fast-to-market LNG production as each module comes online.

The mid-scale modules are fabricated and pre-tested offsite, then delivered complete, reducing both installation time and exposure to unplanned stoppages.

A steady drift away from long-term EPC contracts has given rise to a rethink of traditional project financing structures, too.

Export facilities developer Tellurian, is partnering with major oil companies, like Total, to finance its Driftwood LNG facility without a traditional EPC agreement in place. As well as building and owning a terminal, the company intends to produce its own gas, construct pipelines, and sell gas cargoes to the global LNG market.

The Real Deal

In a supply-heavy market, project developers are competing for buyers. Developers already riding the second wave have had to be flexible and creative to find innovative ways of bringing new supply online.

But with so much supply potential, U.S. LNG is well positioned to service growing demand in markets like China, despite current trade difficulties between the two countries.

A forecast by industry analysts Wood Mackenzie predicts global LNG demand will increase from 400 mmtpa (million metric tonnes per annum) in 2020, to 550 mmtpa by 2030. An attractive proposition for would-be developers.

Even with export competition from LNG projects in Qatar, Mozambique, Russia and other smaller suppliers, the U.S. market looks set to boom in the long term. For American developers it's ultimately about piecing together the right deal.

“Some of the potential project participants are seeking different goals and different exposures in the market,” said Kramer. “So for the developers to get a project over the line, it really means potentially putting together a few different types of deals.”

“Owning the resource in the ground gives you more control over supply processes,” Kramer explained, “versus being kind of exposed entirely to the market.”

“But it also requires significant upfront investment.”

Johnny Wood has been a journalist for over 15 years working in different parts of the world – Asia, Europe and Middle East. As well as an accomplished features writer he has edited several prestigious lifestyle magazines and corporate publications.