The unexpected plunge in the price of crude oil is throwing the energy markets in turmoil. It could force energy companies to defer $150 billion in future projects. However, it's not expected to cause much near-term damage to LNG projects in the U.S, despite the fact that the price of oil is an important component in LNG prices around the world. At least that's the view of analysts at energy intelligence firm, Wood Mackenzie, who see LNG's momentum in America continuing in 2015.
Construction boom continues
Wood Mackenzie sees 2015 as a pivotal year for America's budding LNG industry. The industry currently has four major LNG export projects under construction including Freeport LNG, Dominion Resources' (NYSE:D) Cove Point LNG, Sempra Energy's (NYSE:SRE) Cameron LNG, and Cheniere Energy's (NYSEMKT:LNG) Sabine Pass LNG, which is expected to begin exporting its first LNG cargos later this year. None of these projects are expected to be affected by the current turmoil in the energy market as all have signed up much of their LNG capacity under long-term contracts meaning construction should continue as scheduled.
Meanwhile, Wood Mackenzie sees two more projects beginning construction before the end of the year. One of the two is expected to be Cheniere Energy's Corpus Christi project, which is seen receiving its Final Investment Decision early this year. That project looks like a lock to begin construction as it recently signed a long-term transportation and storage agreement with Kinder Morgan (NYSE:KMI), which is going to build a new pipeline to supply gas for Cheniere's facility.
The other project that Wood Mackenzie expects to see begin construction this year is Elba Island, which is also known as Southern LNG. The project is a joint venture between Kinder Morgan and Royal Dutch Shell Plc (NYSE:RDS-A)(NYSE:RDS-B), and according to Kinder Morgan's timeline this project could begin construction in the second quarter of this year.
Once ground breaks on Southern LNG and Corpus Christi LNG Wood Mackenzie doesn't see any other projects beginning construction this year as the turmoil in the energy market is likely to cause projects farther down the pipeline to be delayed. Cheniere Energy's future expansion of the Sabine Pass, for example, could be among the projects being delayed. The company currently is building four LNG liquefaction trains at the facility, but it does have two more trains under development, which are expected to receive a Final Investment Decision later this year. That decision could be deferred until there is some more certainty in the energy market, especially given the massive amount of capital Cheniere Energy needs to raise over the next few years to complete its other LNG trains.
As the following slide notes, there are several LNG projects in various stages of the permitting process that could eventually be built in the U.S.
However, it's quite possible that the enthusiasm to move forward with some of the projects further away from construction could wane if oil prices remain muted. Demand for energy simply hasn't been as robust as forecasted, which could cause companies to rethink projects given the massive capital requirements to build an LNG export facility as those investments might not be recouped as fast as previously thought. Project sponsors could choose to defer investments until there is more clarity on future LNG demand or additional partners could be brought in to help take on some of the cost and risks associated with these projects.
The turmoil in the oil market isn't expected to cause any delays to the half dozen or so LNG export projects currently either under construction or heading in that direction this year. That said, new projects could be pushed back until there is some more clarity in the market. This is why 2015 is really a pivotal year for the industry as continued weak oil prices could push back America's hopes of becoming an LNG powerhouse.
Matt DiLallo has the following options: short January 2016 $32.5 puts on Kinder Morgan and long January 2016 $32.5 calls on Kinder Morgan. The Motley Fool recommends Dominion Resources and Kinder Morgan. The Motley Fool owns shares of Kinder Morgan. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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