Platts is reporting that Engie has halted talks with NextDecade over a supply agreement with its Rio Grande LNG. In a written statement to Platts, Engie said “[We have] decided not to proceed with commercial discussions with NextDecade on this gas supply project. We will not be making any further comment.”
Our initial read is that the SPA’s cancellation will likely have major implications for LNG and the entire U.S. O&G complex. We expect that, going forward, EU (and probably U.S.) regulators will carefully scrutinize methane emissions when evaluating future O&G projects. But the impact could, potentially, be much greater. It’s possible that existing flows of crude, LNG, ethane, and other NGLs could face greater regulatory scrutiny and penalties. We will have to watch this trend carefully.
We suspect the sudden emphasis on methane emissions is at least partially attributable to a new satellite system dedicated to monitoring methane emissions. On October 21st, GHGSat launched a new tool that tracks methane emissions from space. It’s hard not to draw a link between the launch of the methane tool and news of the project cancellation, which both occurred on the same day. Engie and Rio Grande LNG: what the heck just happened
U.S. LNG’s off taker difficulties
U.S. LNG exporters have not contracted off taking capacity since the Plaquemines/EDF tie in. Before that, the last deal we’re aware of was the Rio Grande/Shell arrangement, reached in April 2019 for 2 MTPA. We have also heard that these SPAs were of “low value” for the respective LNG projects, as Shell and (probably) EDF were able to obtain preferential rates due to their status as “foundational shippers.” By signing onto a project in its commercial infancy, foundational shippers can often secure steeply discounted rates. We will not be surprised if Rio Grande offered similarly lucrative terms to Engie – although, to be clear, the quantity and $/MMBtu terms have not been publicly disclosed. If, on the other hand, Rio Grande was able to secure a sizable quantity commitment on competitive terms, that would be a big deal for the project – and could indicate that some of the pessimism surrounding the industry has been misplaced. We will have to wait and see until more information becomes publicly available.