In the period between the Russian invasion of Ukraine in February 2022 and the end of last year, LNG purchase and sale agreements (SPAs) were signed for a total of 47.23 million tonnes per annum (MMtpa; 6 .3 Bcf/d) between buyers and nine US LNG projects under development. Of these, projects that will eventually achieve a critical mass of reputable buyers and achieve a Final Investment Decision (FID) must also secure permits and financing. Two FIDs were made for the project in 2022: Cheniere’s Corpus Christi Phase III in Texas and Venture Global’s Plaquemines Phase 1 in Louisiana. Although two more FIDs have recently been announced: Plaquemines Phase 2 and Sempra’s Port Arthur Phase 1, there may be a temporary disconnect between the commitments that LNG buyers are willing to make and the ability of project sponsors to fulfill your plans. In today’s RBN blog, we focus on the increasingly important role of financing in the implementation of US LNG projects and the challenges facing project developers and sponsors.
There are, of course, a number of hurdles that LNG project sponsors must clear before taking FID. Among other things, they must have all necessary federal, state and local permits and other approvals in hand. They must also have lined up their engineering, procurement and construction (EPC) contractor and be prepared to give them unconditional notice to proceed. And in many cases, and now more than ever, a major obstacle to taking FID is getting financing. Large-scale LNG projects—those with a capacity of more than 5 MMtpa (0.7 Bcf/d)—are very capital intensive. A rough rule of thumb is that each ton of production capacity has a capital cost of $800 to $1,000, depending on plant location and configuration. Therefore, a 12 MMtpa project will have a total cost of between $9.6 billion and $12 billion. Consequently, sponsors look to the capital markets to provide financing.
An LNG project will typically be financed in part by the sponsors’ own funds supplemented by loans from commercial banks and also by bonds. Debt can represent between 50% and 70% of the total cost of capital. For example, Sempra’s recently announced Port Arthur Phase 1 FID includes non-recourse loans, sometimes called project finance, of $6.8 billion for a project with an estimated cost of $13 billion. The use of non-recourse loans is attractive to sponsors as they do not appear on the sponsor’s balance sheet, with their repayment derived from the income generated by the project. Clearly, this requires a very strong project in terms of cost predictability, technology selection and configuration, operator capability and buyer commitment, so it is not surprising that the negotiation of loan terms is a time-consuming process along the critical path to FID. (Gulf Coast terminals that are under construction or have reached FID are shown in blue diamonds in Figure 1 below).
