As the team behind the Commonwealth LNG project proposed for Cameron, LA, pushes toward a final investment decision this year, Executive Chairman Paul Varello said the global natural gas market is on the precipice of change despite the relative calm over the past year.
When Varello and the Commonwealth team proposed the more than 9 million metric ton/year (mmty) facility over a decade ago, the goal was to use the next generation of modular liquefied natural gas technology to create a plant with lower upfront costs and lower associated emissions.
Now, with half of Commonwealth’s capacity under final or tentative agreements, Varello said the firm is looking toward the future of a gas market with new emerging players and new ways of making contracts.
In September, Commonwealth became the latest project developer to sign a tentative tolling agreement with a U.S. producer. Its 15-year, 1 mmty heads of agreement with EQT Corp. built on a rash of contracting announcements from earlier in 2023.
Commonwealth also signed on Kimmeridge Energy Management Co. LLC as an equity partner and potential offtaker. Varello said there could be room for more equity partnerships as the company moves closer to finalizing financing.
NGI: What sets Commonwealth LNG apart from other operating or proposed exports terminals on the Gulf Coast?
Varello: In addition to very competitive pricing and flexible terms from 15 to 20 years, our engineering-focused approach will include the largest LNG modules ever built for a U.S. project.
NGI: Is Commonwealth still targeting early 2024 for a final investment decision (FID)?
Varello: We’re planning for FID in the first half of 2024, enabling us to begin producing LNG in 2027.
NGI: Does final non-free trade agreement (FTA) approval from the Department of Energy impact that timeline?
Varello: Non-FTA approvals are important in our industry, as offtake customers can be hesitant to enter into contracts for a facility without one. However, we remain confident that we will receive our non-FTA approval very soon.
NGI: After the equity deal with Kimmeridge, is there room to consider further equity partnerships?
Varello: Yes, we would consider additional equity partnerships with the right synergistic partners.
NGI: Do foreign investors still seem as interested in equity stakes in U.S. projects as they did during the height of 2022 price spikes and are there new players entering the market?
Varello: While there may be reduced interest in equity participation by some foreign investors compared to a year ago, there are some new players entering the market, particularly offtakers from Eastern Europe, Southeast Asia and China.
NGI: The rise of more feed gas demand on the Gulf Coast starting in early 2024 is forecast to push Henry Hub and Houston Ship Channel prices upward into 2025 before production catches up. How is Commonwealth navigating that potential supply crunch?
Varello: Since our feed gas won’t be needed until we start producing LNG in 2027, we believe that supply from upstream sources will be more than adequate at that time.
NGI: In the long-term, how is Commonwealth expecting producers to react to the surge in demand post-2025?
Varello: Gas producers are eager to see greater demand for their product. They can turn on additional drilling operations at the earliest signs of demand increases. While domestic demand for gas fluctuates depending on weather conditions, demand from LNG facilities is more constant, offering stability to the market at the new higher levels.
NGI: What were the primary goals behind forming a direct tolling and supply agreement with a producer like EQT?
Varello: For producers, these agreements serve to broaden their base by allowing them to increase annual production volumes, create long-term revenue flows and participate in the stronger pricing in international markets such as Europe and Asia.
For Commonwealth LNG, tolling provides a simplified business model. We never own the gas; we just convert it to LNG for the customer and then load it onto ships provided by the customer. Another benefit can be the opportunity for a long-term offtake contract with a credit-worthy customer as a consideration in financing the project.
NGI: As other producers explore similar agreements, are direct partnerships between terminal operators and exploration and production (E&P) firms becoming a more essential part of launching a project?
Varello: Yes, to a certain degree. For most LNG projects to be financeable, lenders will still want to ensure that the E&P partners involved have a strong credit rating.
NGI: What does the global demand landscape look like in 2027 when Commonwealth could become commercially operational?
Varello: We believe demand will be greater than supply from 2027 onward beyond 2050. The growth is less likely to be driven by any meaningful increase in demand from Europe, but rather from emerging markets including India, Pakistan, Bangladesh, China and the countries of Southeast Asia.
NGI: While low Henry Hub prices may not be favored by the producers, is the ability for U.S. gas to stay relatively affordable critical for making sure developing countries become long-term buyers of U.S. LNG?
Varello: Yes. I’m encouraged by the fact that U.S. gas reserves are so abundant and, thanks to our current technologies for extracting gas, producers can access those reserves easily and affordably. This modulates price volatility as producers can adjust drilling activity to efficiently respond to demand trends, lending stability to Henry Hub pricing.
Editor’s Note: This segment is one in a regular series by NGI’s LNG Insight. Conversations with experts explore news and issues throughout the global LNG market that matter most to the industry in North America and beyond. Excerpts have been edited for brevity and clarity.
