Executive Q&A viewpoint

Shaun Davison, Senior Vice President of Development and Regulatory Affairs, NextDecade, The Woodlands, Texas

Texas-based NextDecade LLC is working to develop and manage new land-based and floating LNG projects in the US and abroad. At present, the company is focusing on a land-based LNG plant, Rio Grande LNG (Fig. 1), to be located in Brownsville, Texas.

Fig. 1. Aerial view of the proposed Rio Grande LNG facility at the Port of Brownsville in Texas.

In addition to this project, NextDecade continues to explore and develop additional opportunities, including but not limited to the creation of natural gas infrastructure, transportation and storage of LNG, and natural gas/LNG trading. The company is creating new business models for LNG that compete on a fundamentally lower cost basis, providing market players and international end-users access to Henry Hub-indexed or oil-indexed LNG.

Gas Processing spoke with Shaun Davison, senior vice president of development and regulatory affairs for NextDecade, about the Rio Grande project’s status and NextDecade’s future development plans.

GP.Can you provide a brief background on the Rio Grande LNG project’s conception and development? What is the status of Rio Grande LNG and the Rio Bravo pipeline, and what export opportunities exist for the project?

Davison. Coming off involvement in FLNG developments in Australia and downstream development of FSRUs globally, members of the NextDecade team recognized the potential for smaller and more nimble entrepreneurial companies in the LNG value chain. Experiencing firsthand how FSRU technology has changed and reshaped the traditional LNG industry, our team set its sights on opportunities to challenge the status quo on the upstream side through liquefaction development.

After initially reviewing an FLNG solution for a US-based project, we recognized the likely regulatory hurdles that were legacy issues from the original FSRU/offshore regasification projects. Working with our industry partners, we developed an alternative path optimizing a land-based solution that capitalizes on the US’ abundant gas supply, vast pipeline network and transparent regulatory process for traditionally engineered land-based projects. For NextDecade’s first US export project, our technology mantra has been “no novelty is the new novelty.”

Rio Grande LNG is our proposed LNG export facility at the Port of Brownsville in Texas. The project, planned for a 1,000-acre industrial site, includes the 140-mi Rio Bravo Pipeline. The project is now going through the rigorous Federal Energy Regulatory Commission (FERC) permitting process. On May 5, 2016, we submitted our full National Environmental Policy Act (NEPA) application (assigned docket numbers CP16-454 and CP16-455, respectively). We expect to receive the Draft Environmental Impact Statement (DEIS) before the end of 2016. A final investment decision (FID) is expected to take place sometime in mid-2017.

In November 2015, we announced that NextDecade had signed non-binding agreements for 14 MMtpy of LNG with customers from across Asia and Europe. Since then, that number has grown to 30 MMtpy, demonstrating a continued desire for US-produced LNG from customers around the world—and, specifically, a desire for LNG from the Rio Grande facility.

GP. What benefits has NextDecade experienced in working with domestic LNG solutions providers?

Davison. Our team has great experience across the full LNG value chain; however, we recognize and appreciate the tremendous value of partnering with the best energy and LNG companies out there to deliver safe, sustainable, economically sound and environmentally responsible projects. We are proud to have closely partnered and built strong relationships within all of the key support industries necessary to develop, permit, construct and operate LNG projects.

For the Rio Grande LNG and Rio Bravo Pipeline projects, these include Ecology & Environment, CH-IV, Norton Rose Fulbright, CB&I, and Moffat & Nichol, among others. The wealth of expertise and insight that these companies bring to our projects is evidenced by the quality of the products they deliver, and visible throughout our FERC and regulatory filings.

GP. What opportunities does NextDecade see for FLNG?

Davison. NextDecade’s core team has been very involved with the creation and evolution of the floating regasification industry. NextDecade’s CEO, Kathleen Eisbrenner, was the founder and CEO of the original FSRU leader, Excelerate Energy, spearheading the development of this segment of the valve chain and dramatically altering the LNG industry.

We have seen some minor growth in the upstream/liquefaction component of the FLNG industry per the development of Shell’s Prelude project offshore Australia, at least one Malaysian project from Petronas, and the construction of Exmar’s small-scale floating liquefaction module previously aimed at Colombia’s Pacific Rubiales-led project. However, at NextDecade, we are also looking for other opportunities. We do believe there will be some opportunities in the FLNG space, but these are likely to be explored by national oil companies, or international oil companies like Petronas and Shell, rather than by smaller players.

Despite the smaller scale of FLNG, there remains a high-dollar barrier to entry, and there are limited market areas that would allow for smaller developers like a NextDecade to participate. At the same time, the US is expected to remain the incremental low-cost opportunity for liquefaction plant development, which does not necessarily make it easy for FLNG to break into the existing value chain.

GP. What will be the impact of low commodity prices on the global LNG market? How will it affect US LNG export projects?

Davison. Buyers are pushing back on long-term contracts and pricing agreements that were executed when commodities were high, while suppliers are making concessions due to low commodity pricing and current oversupply. Liquefaction projects that have been proposed or are under development have, in many cases, delayed or deferred their FIDs. In some cases, they have been canceled altogether.

At the same time, on the downstream side, there is an aggressive push to develop regasification capacity to take advantage of this low pricing environment. As we move through the present phase of the market cycle, with liquefaction projects curtailing and imports expanding, the industry will inevitably need to rebalance.

For US projects that continue to advance with an eye toward the 2021–2023 market—at which point it is quite possible that there will be a global undersupply—discussions with customers are in a state of suspension. Few customers are ready to execute sales-and-purchase agreements (SPAs). However, at the same time, they are pushing hard for pricing at pre-Cheniere-Train-3 (i.e., sub-$3/MMBtu) levels, with an eye to 2017–2018 as they begin to plan for the 2020s.

GP. Do you foresee a glut of LNG supply impacting the success of Rio Grande LNG or other US LNG export terminals scheduled to come online over the next few years? Should US LNG producers be investigating other export outlets?

Davison. At present, the conventional wisdom is that, by 2021–2023, the existing LNG supply overhang will have been absorbed, and the market will be looking for the next tranche of LNG supply. In that regard, we do not see the existing supply overhang impacting the success of Rio Grande LNG; however, that does not mean that all current US export projects will be standing when the market comes back. Only well-developed, well-engineered and economically sound projects will remain.

The downstream LNG industry has been changing quite rapidly with the development of the FSRU. Floating regasification technology has opened up new markets previously shut out of the LNG space. Countries like Argentina, Indonesia, Brazil, Kuwait, Lithuania, Pakistan and Jordan have become LNG importers due to economical FSRU technology. The potential for FSRUs to provide broader LNG market penetration opens up entirely new markets, and US LNG producers must be willing to work with these customers rather than relying on the traditional players from Europe, South Korea and Japan, for example.

GP. How does NextDecade foresee LNG contracts being renegotiated in the present volatile market?

Davison. It is evident that the traditional Asian players, especially Japan, are seeking more destination flexibility with their historic long-term supply. As far as new US projects are concerned, the present oil price climate has put downward pressure on the US formula, and most customers are pushing for a sub-$3/MMBtu liquefaction fee. However, with no new SPAs executed, there is still somewhat of an unknown component to US pricing for the second wave of projects.

GP. What actions or activities might help energy prices to recover to $80/bbl for oil and $4/Mcf for gas?

Davison. I, along with many others, wish we had the silver bullet for that question! My response assumes the recognition that oil (Brent) and gas (Henry Hub) are not linked and have very different drivers. Brent is largely affected by international markets, and Henry Hub is driven by US/North American supply and demand factors.

For oil, greater alignment between OPEC and others could certainly have the greatest and quickest impact to oil prices, but it’s anyone’s guess as to the likelihood of that occurring anytime soon. For US natural gas prices, there is always the specter of US policy issues tied to new regulations for exploration, production and/or power generation that can potentially impact prices, making gas more costly. Additionally, the market demand response could, to some degree, lift US gas prices, with LNG exports being the greatest driver of this demand. GP

Shaun Davison leads commercial project development for North America, specifically the Gulf of Mexico, for NextDecade LLC. An entrepreneurial professional with more than 20 years in the energy industry, Mr. Davison is a business development and infrastructure specialist with broad-based expertise in all aspects of the natural gas and LNG industry. He has extensive knowledge of the energy/natural gas value chain: pipelines, storage, US and global markets, NGL, and LNG terminals and shipping.