Inflation pressures may boost fixed liquefaction fees that US LNG exporters seek

Rising material and financing costs have increased the fixed liquefaction fees required to support new U.S. LNG export infrastructure, Cheniere Energy Inc. CEO Jack Fusco said March 6.

Specifically, Fusco sees these fees rising to the high-$2s/MMBtu range, up from $2/MMBtu-$2.25/MMBtu less than a year ago.

Fusco's comments, made 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 U.S. developers are navigating as they work to meet global demand for new liquefied natural gas capacity.

The need for developers to pursue 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."

Market ahead

Cheniere had laid out the previous estimate of the 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 U.S. LNG projects amid strong buyer interest in securing U.S. 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 tonnes per year of U.S. LNG have been announced over the past year.

But Cheniere was one of just two U.S. LNG developers to reach a final investment decision, or FID, on an LNG project in 2022 a roughly 10 Mt/y expansion of its Corpus Christi LNG terminal in Texas. The other developer was Venture Global LNG, which commercially sanctioned the 13 Mt/y 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 FID 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 Group Inc. 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," along with 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 U.S. regulators that it plans to file a permit application by the end of 2023 for a 20-Mt/y expansion of its flagship Sabine Pass LNG terminal in Louisiana. Fusco said the project would be built in stages.

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

"The market continues to think that more U.S. projects will need to move forward. That is the underlying premise between prefiling of the Sabine expansion," Cheniere's 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. In 2023, the company expects to slightly exceed 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 trillion Btu the volumes it has available to sell spot, executives said. Cheniere's spot marketing volumes were mostly being sold delivery ex ship, or DES; not much was being sold on a 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.

FOB cargoes put shipment risks on the buyer once the ship is loaded, while DES cargoes delay that risk transfer until the shipment arrives at its destination.

S&P Global Commodity Insights reporters Corey Paul and Harry Weber produce content for distribution on Platts Dimensions Pro.