CERAWEEK: Inflationary pressures seen boosting fixed liquefaction fees needed by US LNG exporters

Rising material and financing costs have increased the fixed liquefaction fees required to support new US LNG export infrastructure to the high-$2s/MMBtu range, up from $2/MMBtu-$2.25/MMBtu less than a year ago, Cheniere Energy CEO Jack Fusco said March 6.

Fusco's comments in an interview with a small group of news reporters at the CERAWeek by S&P Global energy conference in Houston underscored the inflationary pressures that US developers are navigating as they work to meet global demand for new LNG capacity. The need for developers to command higher fees to underpin project financing represents a stark departure from just two or three years ago, when some developers were offering long-term supplies at or below $2/MMBtu.

"Everything is higher," the Cheniere chief said. "If I was looking at a crystal ball, to meet the equity returns and the debt capacity, it would have to be in the upper $2s."

Cheniere had laid out the previous estimate of minimum needed liquefaction fees for long-term capacity in a May 2022 filing with local officials in Texas about a potential further expansion of its export terminal in the state.

The past year has seen a blitz of contracting activity tied to US LNG projects amid strong buyer interest in securing US LNG volumes, which offer destination flexibility and the relative stability of long-term contracts with fixed liquefaction fees. Long-term deals covering more than 58 million mt/year of US LNG have been announced over the past year.

But Cheniere was one of just two US LNG developers to reach a final investment decision on an LNG project in 2022 – a roughly 10 million mt/year expansion of its Corpus Christi LNG terminal in Texas. The other developer was Venture Global, which commercially sanctioned the 13 million mt/year capacity first phase of its Plaquemines LNG terminal in Louisiana.

"We were surprised that only two projects, one being the Corpus Christi expansion" got past FID last year, Cheniere Chief Commercial Officer Anatol Feygin told reporters.

Some rival developers that had hoped to reach final investment decisions on export projects in 2022 have cited cost pressures as a reason for pushing back those targets.

The head of the heavy industrial contractor that constructed the Cheniere export facilities, Bechtel CEO Brendan Bechtel, outlined some of the inflationary pressures during a panel at the conference. Bechtel cited industry costs that "are up 30% in the last quarter," one of the lowest ever unemployment rates in the sector, and a higher escalation rate for future construction.

"If you want to go do something big at scale and speed, engage early," Bechtel said.

Sabine Pass expansion

Cheniere in late February unveiled its latest infrastructure growth plans, telling US regulators that it plans to file a permit application by the end of 2023 for a 20 million mt/year expansion of its flagship Sabine Pass LNG terminal in Louisiana. Fusco said the project would be built in stages.

Cheniere has also told investors that it did not view a potentially lengthy permitting process as an impediment to marketing supplies, with commercialization efforts already underway. And executives said March 6 that the project, benefitting from Cheniere's existing infrastructure, would be competitive even with the cost escalation in the industry.

"The market continues to think that more US projects will need to move forward -- That is the underlying premise between pre-filing of the Sabine expansion," Feygin said. "We think that 2023-2024, while less of a fire drill than 2022 was, will prove to be robust years for those long-term commitments."

2023 volumes

More than 70% of the 638 LNG cargoes that Cheniere shipped in 2022 went to Europe. The company expects to slightly exceed in 2023 the total number of cargoes it shipped in 2022, though it expects the split in terms of destinations to change, with Asia picking up and Europe declining in terms of the percentage of the overall figure, executives said.

Cheniere has continued to sell spot marketing volumes since its recent earnings call, narrowing from 50 TBtu the volumes it has available to sell spot, executives said. Cheniere's spot marketing volumes were mostly being sold DES; not much was being sold on an FOB basis unless Cheniere was looking to work out something operationally with a customer like switching slots or was seeking to add flexibility to loading schedules, executives said.