What’s the issue?
2020 was supposed to be the biggest year ever for final investment decisions (FID) being made for LNG projects all around the country. Instead, we reached the end of the year and not one project had reached FID.
Why does it matter?
With all of the projects essentially chasing the same long-term contract parties and the competition being worldwide, there is a substantial likelihood that not all of the projects will be built.
What’s our view?
FERC typically imposes a time limit by which an approved project must be placed into service. While that time limit can be extended, some of the pending projects have already received one extension. Also, with the change in control at FERC that is coming this summer, future extensions may not be so easy to get. The time it typically takes for a project to move from the start of site preparation to in-service means many of the approved projects are already at risk of needing a further extension.
Former FERC Chairman Chatterjee has spoken in the past about his pride in being able to broker a working relationship with Commissioner LaFleur that allowed him to clear a backlog of LNG export terminals that were waiting for FERC approval. Of the projects that have been approved but have not yet started construction, projects authorized to produce over 140 million tons per annum (MTPA) were approved between April and November of 2019 during Chairman Chatterjee’s tenure. But it is not only the recently approved projects, but also the projects approved between December 2015 and September 2017, totaling almost another 50 MTPA, that are seeking to sign sufficient contracts to allow the project to reach a final investment decision (FID) and begin final design and construction.
Most of these projects had indicated that they expected to make an FID in 2020, but none actually did. Most have since announced that they were moving the date to 2021, and many have said that the volatility in pricing toward the end of 2020 has helped them in their discussions with potential counterparties. However, as we discuss today, the FERC certificate order has a date by which the project is required to be in-service. Many of the projects approved before Chairman Chatterjee’s tenure have already had to seek an extension of their dates. But the ones approved during Chairman Chatterjee’s tenure may find a less receptive FERC if they are not able to complete the project by the required date. As we discuss below, the time from FERC approval of site clearance to in-service would indicate that many of these projects need to start making progress soon, or they run the risk of going beyond the time limit set in their certificate orders.
Timing of FID
Almost all of the projects that have been approved but have not yet reached FID have indicated that they intend to reach that milestone this year. Only one of the projects has indicated that FID will not be reached by the end of this year. Texas LNG has indicated it doesn’t expect to reach FID until 2022. The delays in reaching FID may also delay each project’s ability to begin even the basic site preparation work. In looking at past projects, we find that the time it takes for a project to move from initial site preparation approval to in-service is typically three to five years.
As seen above, the median time is four years, and as we discuss below, many of these projects have time limits in their current orders that would require them to be in-service no later than the end of 2025. This means that many of those projects could be at risk of not being in-service by the date specified in their certificate order.
Certificate Order Dates Can Be Extended
In all certificate orders, FERC will include a date by which the approved project is required to be placed into service. In the past, these dates have generally been extended through letter orders issued by FERC staff if there are no objections filed. However, Chairman Glick has indicated that such orders should be issued by the Commission rather than staff and has expressed reluctance about granting them if the circumstances have changed since the original certificate was granted. This may become even more of an issue for these LNG projects, which already have much longer time periods in their orders than the typical pipeline project. These projects already were given four to seven years to complete construction, which is much longer than the typical two-year period granted to pipeline projects. Clearly, a lot can change in four to seven years, including the composition of the FERC commissioners, and projects should not expect that they will readily receive extensions of the current dates going forward.
As seen above, many of these projects have required in-service dates that expire before the end of 2025. The earliest one, Delfin LNG, is a unique case and should not be considered along with the rest, because FERC’s authority, in that case, was limited to certain onshore facilities for this proposed floating LNG project.
Projects At Risk
Given the delays in reaching FID and the required in-service dates, we can begin to rank the projects, excluding Delfin, by those that are most at risk of needing an extension of the required in-service date.
In the chart above, if the projected date for FID is just a year, we have assumed it will not be achieved until the end of that year. In addition, if the project has not already received authority to begin site preparation activities, we assume it will not begin those activities until it reaches FID. By then overlaying the range of time periods that prior projects have taken to move from site preparation to in-service, we can see which projects are most at risk of missing the required in-service dates.
Based on the above analysis, the projects that appear most at risk of not being able to complete construction by the time period in their certificate orders are Texas LNG, Eagle LNG, Cameron LNG (Trains 4-5), Annova LNG and Gulf LNG. The projects that do not currently appear to be at risk of meeting their required in-service dates are Freeport LNG (Train 4), Plaquemines LNG and Driftwood LNG.
One Final Risk
There is one final risk for some of these projects that are not applicable to all. FERC’s authority over the LNG terminals is more limited than its authority over pipeline projects because LNG terminals are considered by law to be in the public interest, whereas FERC needs to find that to be true for pipeline projects. Some of these projects have related pipeline projects that are designed to provide feed gas for the LNG facility.
FERC is undertaking a review of its certificate policy statement and the perceived “need” for a project may be changing. There are two changes that could put these related pipeline projects in jeopardy. First, FERC is considering whether it should be doing an independent needs analysis rather than relying solely on precedent agreements. Second, FERC is considering whether to restrict the use of eminent domain and a pipeline used primarily for export may be one target of such restrictions. Seven of these projects have a related pipeline that is required to be in-service on the same date as the LNG facility, and those pipeline projects should probably avoid the need to seek an extension of their in-service dates because FERC may want to reassess these related issues if any extension is sought.