LNG Tailwind For U.S. Natural Gas Intact As Projects Progress

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The US became the world’s largest exporter of LNG in 2023, and export capacity is set to expand from 14 billion cubic feet per day (Bcf/d) to 25 Bcf/d by 2028 based on nameplate capacity of projects ...

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Two projects are anticipated to start up this year.While the space has seen some challenges in 2024, LNG projects continue to advance, and companies are signing long-term supply agreements with prospective customers for future LNG.Investors can add exposure to LNG by allocating to producers, shippers, and regasification players or through midstream companies with natural gas infrastructure.   CHUNYIP WONG Growing exports of US liquefied natural gas (LNG) has been a tailwind for the US energy sector in recent years. Six US LNG export projects are under construction and set to add capacity by the end of 2028. More projects are under development and signing agreements with customers in hopes of advancing to construction. Today’s note provides an update on projects currently under construction and under development and looks at ways investors can gain exposure to the space. LNG Capacity Growth to Boost US Natural Gas Demand. The US is the world’s largest exporter of LNG, and exports represent a significant outlet for the ~105 Bcf/d of natural gas produced in the US. Growing demand for natural gas from LNG facilities is the greatest tailwind for natural gas demand anticipated over the next five years. Specifically, LNG capacity in the US is expected to rise 80% from 14 Billion cubic feet per day (Bcf/d) in 2023 to 25 Bcf/d by 2028 based on peak nameplate capacity (read more). Other drivers of US natural gas demand include power generation, including for data centers (read more), pipeline exports to Mexico (read more), and industrial reshoring. There are six projects currently under construction, with two facilities expected to start up in 2024. Venture Global’s Plaquemines LNG in Louisiana is anticipating LNG production this year and will have a capacity of 1.6 Bcf/d. Cheniere Energy’s (LNG) 1.5 Bcf/d Corpus Christi Stage 3 facility is targeting first LNG by the end of 2024. Projects will take time to ramp. QatarEnergy and Exxon Mobil’s (XOM) Golden Pass LNG has faced delays following the bankruptcy of its main contractor. On its August earnings call, XOM indicated that the current expectation was to achieve first LNG in the back end of 2025. At the end of August, the project filed for a 3-year extension to complete construction, which was originally set to expire in November 2026. NextDecade’s (NEXT) Rio Grande LNG Phase 1 is also under construction, but in early August, the U.S. Court of Appeals for the D.C. Circuit issued an order vacating the Federal Energy Regulatory Commissions’s (FERC) authorization for the facility stating that FERC should have issued a supplemental Environmental Impact Statement. As of mid-August, construction on Phase 1 was continuing, and the company was assessing all of its options. NEXT was also evaluating the impact on Train 4, which has not begun construction. The Next Wave of US LNG Capacity Continues to Garner Customer Interest. There are a handful of projects currently working towards a final investment decision (FID), or the point at which a company sanctions a project upon receiving sufficient customer commitments and securing financing. Five pre-FID projects have signed agreements with offtakers representing 13 million tons per annum (MTPA) so far this year. Contracts have largely been non-binding Heads of Agreement (HOAs), subject to conditions including the project reaching FID, that will be formalized into binding sale and purchase agreements (SPAs). In June, Sempra Energy’s (SRE) Port Arthur Phase 2 signed an HOA with Saudi Arabia-based Aramco (ARMCO) for a 20-year SPA for 5 MTPA, which also contemplated Aramco taking a 25% equity interest in the project. The contract represents 38% of the proposed capacity of Phase 2. Port Arthur Phase 1 is already under construction with two trains expected to be in service in 2027 and 2028 with 13 MTPA (1.8 Bcf/d) of total capacity. Also in June, Venture Global announced an HOA with D.Trading to supply LNG from Plaquemines starting in 2024 through the end of 2026 and to sell up to 2 MTPA from CP2 LNG for 20 years. CP2 is Venture Global’s third LNG facility and is currently awaiting authorizations from regulators. Separately, Venture Global signed an agreement with Grain LNG to access 3 MTPA of LNG storage and regasification at the Isle of Grain import terminal, which serves as a gateway to the UK and broader European markets. The agreement allows Venture Global to regasify and sell LNG from all its facilities starting in 2029 for sixteen years. NEXT’s Rio Grande LNG Train 4 signed three agreements covering 3.6 MTPA, including a 20-year 1.9 MTPA with UAE-based ADNOC, but the timeline for FID may be impacted by the court decision mentioned above. Glenfarne Energy’s 4 MTPA Texas LNG project has contracted 3 MTPA or 75% of its proposed capacity this year, including a 2 MTPA liquefaction agreement HOA with natural gas producer EQT (EQT). However, the same court decision discussed above also overturned Texas LNG’s regulatory approval. While customers have been willing to sign agreements for capacity beyond 2028, the regulatory environment has created some headaches for LNG projects. In addition to the court decision impacting Rio Grande and Texas LNG, the Biden Administration paused new export licenses to non-Free Trade Agreement countries in January, while the Department of Energy conducts economic and environmental impact studies. In July, a federal judge blocked the pause, and last week, New Fortress Energy (NFE) received the first export permit since the pause was announced. Energy Transfer’s (ET) proposed 2.33 Bcf/d Lake Charles LNG is awaiting an LNG export authorization. How Can Investors Gain Exposure? Given the long-term anticipated growth of US LNG exports, investors may look for different ways to gain exposure to the space. The Alerian Liquefied Natural Gas Index (ALNGX) is an index of companies materially engaged in LNG globally, including pure-play LNG producers, shippers, and regasification players, as well as diversified LNG companies (read more). Investors can also gain exposure to the long-term growth in natural gas production and demand from LNG facilities by investing in midstream companies that could benefit as gathering, processing, and transportation volumes rise. The Alerian Midstream Energy Select Index (AMEI) offers broad exposure to North American midstream MLPs and C-Corps, including LNG players. As of August 30, AMEI was 40.8% weighted toward natural gas pipeline companies, 27.1% toward gathering and processing companies, and 6.4% weighted toward liquefaction (LNG) companies. Bottom Line: Despite some challenges and regulatory headaches, US LNG projects continue to make construction progress, and developing projects continue to see strong customer interest. Investors can gain exposure to the companies engaged in LNG directly or the midstream companies that are set to benefit from the higher overall production and demand for natural gas. ALNGX is the underlying index for the Roundhill Alerian LNG ETF (LNGG). AMEI is the underlying index for the Alerian Energy Infrastructure ETF (ENFR). Disclosure: © VettaFi LLC 2024. All rights reserved. This material has been prepared and/or issued by VettaFi LLC (\"VettaFi\") and/or one of its consultants or affiliates. It is provided as general information only and should not be taken as investment advice. Employees of VettaFi are prohibited from owning individual MLPs. For more information on VettaFi, visit VettaFi.  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