Fitch: Oil Drop May Slow U.S. LNG, Weaken Economics
23 December 2014 - 04:25AM
Business Wire
The recent nearly 50% drop in oil prices may slow the momentum
behind the development of U.S. liquefied natural gas (LNG)
facilities, according to Fitch Ratings. Oil price declines have
weakened global LNG prices and could increase Henry Hub gas
pricing, weakening current U.S. LNG project economics.
Traditional LNG sponsors have been supermajors and national oil
companies with a diverse portfolio of assets and strong credit
quality affording them the opportunity to make through the cycle
investment decisions that consider their long-term production and
reserve profile. U.S. LNG sponsors have tended to be nontraditional
including smaller, less diversified international oil companies and
utilities, with more limited financial resources. This generally
requires them to secure tolling arrangements with fixed-price
availability payments ahead of financing.
The recent drop in oil prices has tempered longer term market
oil price expectations, which could challenge off-take contract
negotiations creating delays and/or changing the terms of tolling
arrangements. The oil and gas price outlook is a key component for
a sponsor to make a final investment decision and/or off-taker to
sign a long-term (e.g. 20-year) agreement. LNG project economics
rely on a generous spread between oil-linked LNG and natural gas
feedstock prices. Spread volatility, as illustrated by recent price
movements, may challenge favorable long-term assumptions driving
development of additional U.S. liquefaction capacity.
Low Henry Hub prices in a robust oil-linked LNG pricing
environment help support the U.S. LNG value proposition. However,
expectations that increasing global oil supply will exceed tepid
global demand growth in the short-term have led to sharp oil price
declines and weakened global LNG prices. A prolonged, material
reduction in U.S. shale oil-directed drilling could result in lower
associated gas volumes potentially leading to higher Henry Hub
prices.
Fitch expects natural gas prices to remain subdued over the next
several years, excluding short-term volatility from weather-related
demand, and oil prices to improve. This should keep the U.S. LNG
value proposition intact -- Fitch long-term oil/gas price ratio of
17.0x -- for projects currently under development. Nevertheless,
the oil price drop could slow the momentum behind new U.S. LNG
facilities in the Federal Energy Regulatory Commission approval
queue. The recent oil price decline as well as idled LNG
regasification facilities in the U.S. should act as a reminder of
the financial risks associated with these costly, long-dated
directional bets.
Additional information is available on www.fitchratings.com.
The above article originally appeared as a post on the Fitch
Wire credit market commentary page. The original article, which may
include hyperlinks to companies and current ratings, can be
accessed at www.fitchratings.com. All opinions expressed are those
of Fitch Ratings.
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Fitch RatingsDino KritikosDirectorCorporate Finance, Energy+1
312-368-315070 W. Madison St.Chicago, ILorGregory RemecSenior
DirectorProject Finance+1 312-606-2339orKellie Geressy-NilsenSenior
DirectorFitch Wire+1 212-908-9123Fitch Ratings Inc.One State Street
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