US will become largest LNG exporter in 2023, as demand is expected to push exports to more than double by 2030 whilst supply chain challenges, competition and financing hurdles are likely to remain, research analysts at Wood Mackenzie said.
High prices and the demand for energy security is expected to drive the US to the frontline among leading exporters of LNG especially in 2023 thereby paving the way for $100 billion in new developments to support long-term growth, Wood’s new report showed.
Their analysis showed that in 2022, the US was the third-largest exporter of LNG at 76.4 million metric tonnes per annum (mmtpa). Adding that the US is also expected to surpass Qatar and Australia this year to export 89 mmtpa especially with the resumption of the Freeport facility. They have also predicted, based on the combination of projects already under construction and momentum of potential projects, that US LNG capacity could grow between 70 mmtpa and 190 mmtpa before the end of the decade, potentially more than doubling current exports. Adding however that the anticipated growth must also be tied to how quick new projects could be launched to bring about as much as $100 billion in new projects in five years’ time.
Giles Farrer, Head, Gas and LNG Asset Research at Wood said: “Record-high prices and the need for energy security drove buyers, which included portfolio players and US producers and infrastructure companies, to seek long-term US LNG deals in 2022 and created huge contracting momentum for projects.
“Last year alone, 65 mmtpa of long-term US deals were signed, dwarfing the 18.5 mmtpa we saw in 2021. This activity has pushed a host of pre-final investment decision (FID) US projects forward and we could see a wave of FIDs this year and next.”
Farrer stated that projects would be undertaken by both privately and publicly-owned developers even as most pre FID projects are at the moment seeking external financing for the investment.
“In most cases, project financing will support between 60-80% of the required capital, with the remainder either financed via equity raises and/or balance sheets.” he added.
On risks to capacity growth, he said that the potential for cost increases was to challenge developers as they advance, particularly through what he called “supply-chain-triggered inflation” and competition for resources.
“Our benchmarking analysis indicates we have already seen inflation of over 20% on the US Gulf Coast, compared to projects which were built in the last five years,” says Sean Harrison, research analyst, Gas and LNG.
“As developers continue to push more projects forward, competition for service contracts will rise, creating a squeeze on both work force and material prices. This could cause further cost inflation, along with delays to some projects.”
Harrison added that despite rising costs, competition for customers was keeping liquefaction fees low, potentially between $2-$2.5 per million British thermal units for fixed price long-term agreements, challenging profitability.
“The combination of low fees and increasing costs mean we estimate unlevered internal rates of return (IRRs) as low as 5-6% for some projects. Based on these returns, some projects are finding it challenging to secure finance, particularly via equity raises,” says Harrison.
Adding he said: “Projects are looking for ways to create additional value for developers and equity investors. Ways they might find upside include procuring feedgas efficiently, securing good prices for uncontracted LNG sales, debottlenecking and re-rating of trains and the sale of pre-commercial volumes. Charging customers for additional services to reduce project emissions could also deliver additional returns”