Developer LNG Limited faces export marketing challenges

The prospects for the US Magnolia LNG export project in Louisiana and its sister project, Canada’s Bear Head LNG, may be dimming as the struggle to secure long-term customers continues.

The proposed 8mtpa Magnolia LNG has postponed the closing date for a tolling agreement with the UK’s Meridian LNG amid uncertain market conditions, according to a statement by Magnolia LNG owner, Australia’s LNG limited, on Monday 1 February.

The closing date for the tolling agreement between Magnolia and Meridian has been extended from 30 June this year to 31 December, according to LNG Limited.

The 20-year agreement was signed in July 2015 for 2mtpa into Meridian’s proposed floating storage regasification unit (FSRU) in the UK.

The volumes were intended to supply a contract with German utility E.ON. Meridian LNG and E.ON executed a 20-year gas sales agreement in July 2015 for 2mtpa.

A final investment decision for sometime in 2016 is still slated for Magnolia. The proposed plant cleared the regulatory hurdle from the US Federal Energy Regulatory Commission (FERC) after receiving a final environmental impact statement (EIS) in November 2015.

CEO Maurice Brand said in the statement that the closing date for FID is dependent on other binding offtake agreements: “the timing of which is uncertain due to current market conditions.”

While a number of Heads of Agreements (HoAs) have been signed by Magnolia LNG, none have transpired into firm sales and purchase agreements. These have included initial offtake agreements with Spain’s Gas Natural Fenosa, a subsidiary with Swiss trading company Gunvor and with the Latin American arm of US-based power generator AES.

The slump in crude oil prices has not only suppressed appetite from prospective LNG buyers, but the perception of future oversupply and competition from Australia and east Africa has made Henry Hub-linked US LNG difficult to compete.

Asian offtakers from US LNG projects such as Japanese trading companies Mitsui and Mitsubishi, South Korea’s KOGAS and Indian gas transmission operator GAIL are now struggling to resell their committed US LNG, pitting buyers against sellers as the sanctioned US LNG projects such as Freeport LNG and Cameron LNG also look to expand.

As a greenfield project, Magnolia LNG has touted LNG Limited’s new patented OSMR technology and competitive feedgas position, with some market sources citing tolling figures offered by Magnolia LNG at under $3.00/MMBtu. However, even with these discounted liquefaction fees, the economics of US LNG do not appear to be as attractive as they were when the oil-to-LNG spread was wider.

LNG Limited also is developing the 3.5mtpa Queensland-based Fisherman’s Landing LNG along with its subsidiary Gladstone LNG, although the sourcing of gas supplies for that venture has stalled.

In its quarterly report also released on 1 February, LNG Limited stated its current cash position of Australian dollar 114m ($80.4m), as of 1 January.

“In applying our cost management strategy our existing cash position can sustain us through the end of 2018,” the company stated.

Hedge funds Valinor Management in New York and Boston-based Baupost Group have shares in LNG Limited, which likely places stronger expectations on LNG Limited to complete their deals and make a return. ruth.liao@icis.com