Climate, security and feasibility concerns stopping investors from financing LNG terminal projects

The dynamic atmosphere that characterised the LNG sector just two years ago now seems like the distant past

Globally only one Liquified Natural Gas (LNG) export project has reached a final investment decision (FID) in the past year, according to a report by Global Energy Monitor–a  network of researchers developing informational resources on fossil fuels and energy alternatives. An FID is a stage during the life cycle of a project where a company decides to move forward or withhold the project.

The report titled, “Nervous Money: Global LNG Terminals Update 2021” comprises the results of a worldwide survey of LNG terminal projects. It reveals that despite Covid recovery, at least 26 LNG export terminals totalling 265 million tonnes per annum (mtpa) of capacity continue to report FID delays or other serious disruptions.

Climate concerns and pandemic flattered LNG projects

According to the report, in 2019, the international gas sector was in the midst of a rapid expansion of LNG infrastructure supported by various factors–forecasts of long-term increased demand in Asia, surging gas output in the United States and the widespread portrayal of gas as a positive tool for transitioning economies away from coal. Around 71 btpa LNG capacity reached the FID in the same year, the report says.

However, climate concerns and pandemic delays flattened the prospects of nearly half of the world’s projects to build infrastructure for exporting LNG. Most striking is the shift in LNG’s public image from climate solution to climate problem, the report states.

LNG was seen as a transition fuel for coal as burning gas produces only half the carbon dioxide emissions, it says. However, CO2 is not the only gas emitted by LNG.  Methane, a highly potent greenhouse gas, is also released in the gas supply chain. This has shifted LNG from the “solution” side of the climate ledger to the “problem” side, the report notes.

The International Energy Agency’s (IEA) stance on LNG has also changed. While in 2017, the IEA projected a near tripling of long-distance LNG trade by 2040, in its 2050 net-zero scenario, it states that inter-regional LNG trade would grow from 310 million tonnes in 2020 over the next five years, but then would fall to around 118 million tonnes in 2050.

“LNG was sold to policymakers and to investors as a safe, clean, secure bet,” said Lydia Plante, lead author of the report. “Now all those attributes have turned into liabilities. The sheer size of the projects has exposed investors to catastrophic losses. And the recent IEA 2050 scenarios show that LNG has no place in a climate-safe energy future. The industry has lost its climate halo, and the only question is whether the Biden administration will waste precious political capital propping up potential white elephant projects.”

With the European Union passing a new methane policy in October 2020 aimed at reducing emissions from imported gas, multiple projects have already lost developer support. 

In November 2020, the French energy company Engie cancelled its$7 billion deal to buy gas from NextDecade’s Rio Grande LNG Terminal, reportedly over French government policy to avoid gas sources with high methane emissions.

Other factors that plagued the LNG sector

The report reveals that the cost overruns, scheduling delays, and high outage rate have been affecting the LNG sector and they were further exacerbated in the past year by Covid-related workforce disruption. 

One of the industry journals mentioned in the report describes the sector as “infamous” for both project delays and cost “blowouts,” citing a survey by Wood Mackenzie showing that just 10% of LNG projects have been built under budget, and 60% have experienced delays.

A 2019 study by researchers from the Queensland University of Technology cited in the report, states that “significant schedule overruns have become increasingly commonplace within LNG projects, contributing to severe cost blowouts.”

Storms, compressor fire, heat exchanger cracking and other safety issues plague the operating LNG terminals. According to the IEA 2021 report, in September 2020, 59 mtpa of liquefaction capacity was offline, representing 14% of global capacity.

The report states that with more problems plaguing the LNG sector, it is likely that electricity system planners in countries like Vietnam, Bangladesh and South Korea will increasingly see renewable energy as an alternative to LNG.

North America is the home to most troubled projects

North America accounts for 64% of the global export capacity in construction or pre-construction. It also has the most troubled projects, with 11 of the 26 LNG export terminals reporting FID delays or other serious disruption, the report notes.

In March 2020, Shell ended its participation in the Lake Charles LNG terminal in Louisiana, citing low prices. As of May 2021, Jordan Cove LNG Terminal in Oregon was also seeing no progress, and company officials said that they “sadly” could no longer predict FID. The project was officially placed on hold.

With low production costs in the Persian Gulf and the Russian Arctic, there are possibilities that LNG projects in the US, Mexico and Canada are vulnerable to being crowded out, it says.

“Those who are accustomed to thinking of infrastructure as a ‘safe’ investment may be in for a rocky ride with LNG terminals,” said Ted Nace, executive director of Global Energy Monitor. “The opportunity has narrowed for more export capacity to be built, and North American projects have fallen behind for several reasons. They’re rightly seen, especially by European buyers, as particularly dirty, due to their reliance on fracked gas. In addition, Qatar and Russia both have access to cheaper gas, and they’re not about to relinquish market share.”

LNG export-import status

As of May 2021, there was 448.3 mtpa of liquefaction capacity operating globally and another 699.7 mtpa was in development, the report says. The majority of operating liquefaction capacity is in the Middle East and North Africa (30.5%), Australia (19.5%), and North America (16%).

Moreover, LNG import capacity continues on a rapid expansion path, with enough projects in construction or pre-construction to increase global capacity by 70%, it says. Of the capacity in construction or pre-construction, 32% is in China, 11% is in India, and 7% is in Thailand. 

Furthermore, Asia is home to seven of the top 10 countries with the most regasification capacity in construction or pre-construction.

Outside Asia, Brazil is a hotspot with 13 LNG import terminals in construction or pre-construction, it states.

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