When LNG glut ends, exporter wants to be ready
Company is the latest to win federal approval for a project
The latest company cleared to proceed with a major liquefied natural gas export project is jointly based in Houston and Perth, Australia, and run by a longtime Chevron executive who came out of retirement to take the job this year.
Liquefied Natural Gas Ltd., better known as LNG Ltd., last week received final U.S. regulatory approval to export LNG and begin building a plant south of Lake Charles, La.
Despite facing a global LNG glut and not having enough contracts in place to secure construction financing, the company is bullish on the proposed $4.3 billion Magnolia LNG project. It hopes to break ground in a year or so and begin operations in 2021 or 2022, just as global LNG demand begins to pick up.
“If you want it then, you really need to work with us now,” CEO Greg Vesey said of potential buyers. “We’re getting much richer discussions.”
LNG Ltd. was founded 14 years ago in Perth, but its focus shifted over time to North America, largely because of the cheap and ample natural gas supplies from the shale revolution. The company aims to build modular natural gas liquefaction facilities, called trains, smaller and more cheaply than its competitors.
LNG Ltd. opened a Houston office and eventually made it a co-headquarters. Only six employees remain in Australia, though the company is still publicly traded in Sydney. About 20 people, including Vesey, are in Houston, and the company in November appointed a Houston-based chairman, Paul Cavicchi, a veteran of GDF Suez Energy, now called Engie.
The problem, according to Vesey, is this: “No one
realizes we’re here.”
Analysts, however, see a world of other problems. Gautam Sudhakar, director of global LNG for IHS Markit, said too many LNG export projects are coming online in the U.S. and Australia, with global demand not growing as strongly as previously expected.
“We’re absolutely heading into a period of oversupply in the LNG market,” Sudhakar said. “A glut isn’t a good time to be reaching final investment decisions.”
Japan is seemingly shifting back to nuclear power, while China is struggling more economically and European demand is stagnant. Global demand may not pick back up until 2024, Sudhakar said, so few buyers will be eager to enter into industry standard 20-year contracts.
Plus, a handful of LNG export projects along the Gulf Coast already are under construction in Louisiana, Freeport and Corpus Christi, and LNG Ltd. is competing with a so-called second wave of proposed projects in Texas and Louisiana.
Early this year, Houston-based Cheniere Energy became the first U.S. LNG exporter, shipping liquefied natural gas from its Sabine Pass terminal near the Texas-Louisiana border. The project is several miles southwest of the proposed Magnolia LNG export project.
Five other LNG export projects, including two in Texas, are under construction in the U.S. Houston-based Kinder Morgan’s Elba Island project in Georgia commenced in early November.
Of the second-wave projects, only LNG Ltd. thus far has full regulatory approval and is thus “shovel ready.”
Still, said Pavel Molchanov, an analyst at Raymond James Financial, “Magnolia LNG is one of the too many North American players that are competing to grab a slice of what is likely to end up being a relatively modestsized pie.”
“It is hard to assign odds to any given project, but there is no doubt in my mind that most of the pending projects will never get built,” he said.
Molchanov warned there are too many “LNG wannabe” projects proposed along the Gulf Coast and not enough demand for years to come.
Vesey said he is banking on emerging markets such as Brazil and Chile in South America, as well as some African nations, India and others. Europe also will want to diversify so it doesn’t rely too much on Russian gas, he said.
Industry analyst Rob Norfleet of New York-based Alembic Global Advisors added that the Magnolia LNG project currently appears best positioned of all the Gulf Coast LNG projects that are yet to begin construction. Regulatory approval should give potential buyers more confidence, he said.
The project has the land, technology, pipelines and contractors all in place, Norfleet said. Houston-based KBR is leading the engineering and construction. Magnolia also has additional financial backing from New York-based Stonepeak Infrastructure Partners private equity firm.
The Magnolia LNG project would consist of four trains combining to export 8 million metric tons of LNG annually.
Thus far, the company has contracts in place for just a quarter of that. The buyer is London-based startup Meridian LNG, which wants to ship the LNG to floating storage and regasification vessels in the United Kingdom’s Morecambe Bay.
Because Meridian is another startup, Vesey wants to get other contracts from more established companies before moving forward.
The 35-year Chevron veteran, a former president of natural gas, retired in December 2015 and was looking to take on corporate board seats this year. Instead, Vesey, 58, had discussions with the LNG Ltd. board leadership that shifted to the CEO role.