Fossil fuel-conscious financing decisions add wrinkle to North American LNG market

Highlights

Some banks considering carbon footprint when lending

Long-term supply contract woes still the main challenge

• Author  Harry Weber   Editor  Valarie Jackson 09 Sep 2020 Houston  spglobal.com

Houston — Signing long-term supply agreements may not be the only challenge North American liquefaction developers face when seeking financing for construction.

Their carbon footprint also increasingly matters.

The move away from fossil fuels by some banks and non-traditional leaders raises questions about whether there will be sufficient funding sources for the growing list of planned projects in the US, Canada, and Mexico. It also adds a new wrinkle for the market to consider, as it weighs how much new capacity will be added through the middle to latter half of the decade.

"Unfortunately, oil and gas companies are not the only ones being asked to reduce greenhouse gas emissions — project financers are too," Poten & Partners finance adviser Melanie Lovatt said in a presentation Sept. 9 during a virtual version of the annual Gastech conference.

BNP Paribas and Goldman Sachs are among major banks that are placing limits on financing projects in the oil and gas sectors. Some lenders and investors are treating gas and LNG more favorably than oil and coal, but others are not. Restrictions on funding shale gas will have an impact on liquefaction developers that depend on that gas to feed their terminals.

"Given the pressure on financers to confirm a cleaner agenda, it could be very important," Lovatt said. "Going forward, I think it's going to be a good space to watch in the industry."

In the US, there are more than a dozen active LNG projects that have yet to make a final investment decision. Many have delayed decisions until next year or beyond, or stopped providing updated timelines altogether.

While market considerations such as commercial talks are the main rub, some developers already appear to be trying to appeal to a broader array of lenders in an environmentally conscious world.

In July, NextDecade abandoned the development of a sixth liquefaction train at its proposed Rio Grande LNG export facility in Texas, saying technology would allow it to achieve the same total capacity with five units.

While the move could save on construction costs, NextDecade emphasized the impact the reduced footprint would have on cutting carbon emissions. Cheniere Energy is among existing US LNG exporters that have been able to optimize their trains to be able to liquefy more gas with the units than the volumes that were originally intended.

Market fundamentals will still be critical to whether North American LNG export projects that are currently on the board move forward or get scrapped.

Demand creation, especially in Southeast Asia, where LNG-to-power provides opportunities, could be one answer.

"This is an area where GDP growth is still pretty strong," Daniel Mallo, Société Générale's Asia-Pacific head of natural resources and infrastructure, said during a presentation at the conference. "Secondly, one could argue that Asia will probably get out of COVID-19 ahead of other regions, and possibly we will see a recovery in demand that will be a bit faster and fuller than in other markets. That will be conducive to LNG-to-power infrastructure."