Freeport LNG Development LP expects to build enough commercial support to green-light a 5 million tonne/year expansion at its Texas natural gas export facility by early 2023 as the energy crisis in Europe put a new focus on security of supply, Chairman and CEO Michael Smith said March 9.

Challenges in securing sufficient long-term contracts forced Freeport in recent years to delay a final investment decision on gas liquefaction train 4, but a huge run-up in European LNG prices following Russia's invasion of Ukraine on Feb. 24 has fueled a rapid shift in buyer sentiment.

"We are in very, very active discussions on train 4 with a large number of potential buyers," Smith said during the CERAWeek by S&P Global energy conference in Houston. "The tone of the conversations and the pricing has changed in the last week to a level that I now believe we can hopefully build the facility, and reach [a final investment decision] by the first quarter of next year."

Freeport expects the train to come online about four years after it is commercially sanctioned.

LNG sellers hold power in volatile market

Smith predicted that the crisis in Europe would reverse the trend of U.S. LNG developers "racing to the bottom pricing-wise," even as sponsors of rival projects also described an uptick in commercial talks.

Cheniere Energy Inc., the biggest U.S. LNG exporter and leader of the first wave of major U.S. liquefaction terminals, took final investment decisions on its two existing projects with fixed liquefaction fees in the range of $2.75/MMBtu to $3.50/MMBtu. In more recent years, second-wave developers agreed to lower fees that were in some cases below $2/MMBtu. Smith said he believes that, because of current market conditions, developers can command higher fees than what was offered by the first wave of projects. He did not disclose his specific view of fair value.

At the same time, inflationary pressures on global supply chains threaten to become a headwind for the development of new LNG facilities, which involve large amounts of pipeline infrastructure, Smith said. Steel prices are high, and Russia is a major world supplier of nickel, an important component of pipeline materials.

"Who knows what they are going to cost now," Smith said.

But the Freeport chief said he expects buyers would be willing to pay more for LNG to support competitive projects that have stalled, as urgent demand in Europe presses buyers in Asia to compete to secure sale and purchase agreements supporting the buildout of new capacity.

High prices hit market

LNG spot prices have surged past LNG supplies that are indexed to oil, a pricing mechanism that has historically dominated the world's LNG trade. These market dynamics underscore the reliability of traditional U.S. LNG sale and purchase agreements during times of geopolitical instability, Smith said.

S&P Global Commodity Insights assessed the Platts DES Northwest Europe Marker for April at $44.870/MMBtu on March 9, down $16.055/MMBtu from its latest all-time high set the day before. Across the Atlantic, the U.S. FOB Gulf Coast Marker for cargoes loading 30 to 60 days forward was assessed at $40.750/MMBtu on March 9.

U.S. LNG exporters have been running their facilities at full tilt for months, and project developers are limited in their ability to offer near-term relief to the European gas crisis. But the U.S. could launch a major expansion of export capacity if buyers are willing to sign sufficient long-term supply deals to underpin financing for new export projects, Smith said.

"The one thing that this whole chaos has proven is that the U.S. LNG model was designed for just what happened," Smith said.

Harry Weber is a reporter with S&P Global Platts, an offering of S&P Global Commodity Insights. S&P Global Commodity Insights is owned by S&P Global Inc.

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