US LNG projects win higher processing fees as interest rates climb
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[August 30, 2023] By
Curtis Williams
HOUSTON (Reuters) - Long-term buyers of U.S. liquefied natural gas (LNG)
are willingly agreeing to higher liquefaction fees at newer export
projects, according to analysts and developers familiar with the matter.
The U.S. emerged in 2022 as the world's second largest LNG exporter on
plentiful supplies of natural gas and relatively low processing costs
per metric ton of LNG. But rising interest rates and higher construction
costs have pushed up liquefaction fees, also known as tolling fees.
"We would naturally expect increased costs of project development, due
to higher interest rates or other factors, to have a corresponding
impact on liquefaction fees," said Lyle Hanna, a vice president at
Commonwealth LNG, one of several U.S. LNG export projects working toward
financial approvals.
Since Russia's invasion of Ukraine last year, the Dutch Title Transfer
Facility (TTF) price has been much higher and is unlikely to return to
the pre-invasion price levels, said Jason Bennett, a partner at law firm
Baker Botts who negotiates LNG contracts.
Bennett said the willingness by long-term customers to pay higher
tolling fees and ultimately higher prices for U.S. LNG was because newer
projects are still providing very good margins due to the low gas prices
at the Henry Hub, the main trading point for U.S. natural gas futures.
"U.S. LNG remains the best source of low cost LNG in the world...If the
price used to be $2.25 (per million British thermal units) and it's
$2.75 now, ok, but it's still the cheapest price of LNG anyway," said
Bennett.
The most recently approved project - NextDecade's Rio Grande LNG -
increased its liquefaction fee as project costs rose, said Jason Feer,
global head of business intelligence at LNG shipping and brokering firm
Poten & Partners.
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Snow covered transfer lines are seen at
the Dominion Cove Point Liquefied Natural Gas (LNG) terminal in
Lusby, Maryland March 18, 2014. REUTERS/Gary Cameron/File Photo
"NextDecade went back to their offtakers and sought an adjustment of
their contract levels and our understanding is most of them agreed,"
Feer told Reuters.
NextDecade did not reply to questions about its processing fees.
However, in a July 20 filing with the Department of Fossil Energy
and Carbon Management, NextDecade revealed amendments to its
contracts with all its long-term customers except France's
TotalEnergies and Japanese trading house Itochu.
"The offtakers agreed because the project was very far advanced and
was ready to go to FID (financial investment decision) and I think
some of those contracts were very low-priced by current standards,"
Feer said.
The largest U.S. LNG exporter Cheniere Energy has cut its project
financing costs by funding its newest Stage 3 expansion project from
its balance sheet.
"Increasing our own equity in our projects and thereby reducing the
level of debt required us to fund our expansions and is a
competitive advantage," the company said.
Other developers are turning to increased equity investment in new
projects to reduce the impact of higher interest rates on finance
costs, said Poten's Feer.
(Reporting by Curtis Williams in Houston; Editing by Marguerita
Choy)
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