NextDecade Corp. CEO Matthew Schatzman said this week that FERC’s order reaffirming its approval for Rio Grande LNG was a crucial milestone that’s likely to vault sanctioning of the project across the finish line.
“This was a strong order,” Schatzman told NGI in an interview this week days after the Federal Energy Regulatory Commission made its decision. “It removes any regulatory uncertainty from the project. It allows us to move swiftly in bringing the project to a positive final investment decision (FID).”
In a 3-1 vote, FERC found its 2019 approvals for the Rio Grande project, along with the Rio Bravo Pipeline and the Texas liquefied natural gas export project, are in the public’s interest and can move ahead. The decision came 18 months after a federal appeals court ordered the Commission to review its authorizations for the South Texas projects.
The 27 million metric tons/year (mmty) Rio Grande facility is among a coterie of U.S. export projects under development that are considered closest to being sanctioned. It has signed contracts with LNG buyers to supply more than 60% of the first 17.6 mmty stage.
Schatzman acknowledged there is still much work to do to make the project a reality, but he believes Rio Grande will be one of the final U.S. greenfield projects to reach FID and move ahead in the coming years as the energy landscape grows more complex and the global natural gas market has become increasingly competitive.
NGI: There’s been chatter in the market that potential offtake agreements, equity backers and financing for the project have been dependent on FERC’s decision. Do you expect to make any big announcements soon given the positive outcome last week?
Schatzman: The big announcement that everyone is waiting for is FID. We haven’t changed our current guidance that we expect to make FID before the end of the second quarter.
NGI: The order does stipulate that Rio Grande ensures any overlapping construction and operation doesn’t exceed federal air quality standards. Is that onerous? Does it change the project timeline at all?
Schatzman: No. We don’t anticipate that being an issue. In fact, we welcome the Commission’s idea to monitor that. Prior to commissioning, we’ll need to put a plan in place with FERC, and we’ll be monitoring the air quality in certain areas. We’re completely aligned with the idea that if we were to create any emissions exceedances, we need to mitigate those. I don’t anticipate any exceedances occurring during an overlap between construction, commissioning and operations.
NGI: You have agreed to supply customers with 11 mmty of LNG from the Rio Grande so far. What do you need to commercialize the project, and how close are you to doing that?
Schatzman: Our plan is to FID three trains. The market can anticipate additional announcements with respect to long-term LNG contracting. We need to finalize all the debt and equity to finance the project too. When we do those things, we’ll be at FID. We’re not going to get into details of how much we’ll end up selling to get to FID. Suffice it to say, when we make our FID announcement, we will fully disclose how much LNG we’ve sold under long-term contracts and who those have been signed with.
NGI: Has navigating the financing environment for the first phase of the project been a challenge given the state of the global economy and all the other U.S. LNG projects working toward FID?
Schatzman: I think that any time you’re trying to finance a large infrastructure project you’re faced with a lot of challenges, not the least of which is the volatility we’ve experienced in the debt markets over the last couple of months.
Despite that, this project is incredibly strong. It is going to be financed by the end of the second quarter.
NGI: If you do reach FID, what are some of the next big hurdles facing the project? The labor market is tight, project costs are rising under inflationary pressures and other projects are being built. There doesn’t seem to be a shortage of challenges right now.
Schatzman: It’s important to note that we have a long-term, lump-sum turnkey contract with Bechtel. A lot of the risks you’re talking about are not borne by us or our equity partners. They’ll be managed by Bechtel under that contract.
I think we’re in good shape in terms of other challenges. We’ve built a certain amount of contingency into the project to manage things that are unknown. That is embedded into the costs of our project. With the customers that we have, and those that we’ll announce in the future, along with Bechtel, I feel like we have an incredibly strong partnership that basically ensures the project is going to move forward to FID. I know we can manage the inherent risks that exist for any large infrastructure project over the course of the next four or five years.
NGI: Shifting to the broader state of the market, can you talk about how dramatically the global natural gas trade has changed over the last year or so, and why that makes new U.S. LNG projects like yours so important?
Schatzman: The market has changed dramatically from the standpoint of the Russian invasion of Ukraine, which has disrupted the European gas market. Prior to that, we had been saying for many years that global demand for LNG was rising at a faster pace than many thought.
The market had been moving at a good clip before the war. The pandemic slowed things down. We saw before the Ukraine invasion a rapidly tightening LNG market, one that even took us by surprise. Demand was outpacing available LNG.
What’s changed in the past year has been Europeans focusing on alternative supplies from Russia, putting additional pressure on long-term contracting. They had been very reluctant in the past to sign up for long-term volumes. What you’ve now seen in several projects, including ours, is more European contracts. I think you’ll see more of that in the future.
Another challenge facing the market going forward is building LNG supply capacity at the same rate we have in the past. I think it will take longer in the future. It will be more costly, and that means LNG prices are likely to continue rising. I expect the value of trains four and five at our facility will be higher than trains one to three. The cost to build greenfield projects, and further expansion of the LNG business globally, is going to be more expensive.
NGI: You expect more European buyers to enter long-term contracts? Has it been challenging to sign European offtakers given efforts on the continent to phase out fossil fuels and reach future climate targets?
Schatzman: I think they’ve already been signing more contracts. We have flows directed to European consumers. Other projects have signed with customers that are direct consumers. There are traders, large gas producers and portfolio players that are going to be helping move cargoes into the continent and helping European customers that don’t want to sign long-term contracts.
I think it’s important to note what the European Union (EU) is doing. They’re trying to create opportunities for direct consumers of natural gas to buy LNG through a creditworthy intermediary so they can contract long-term and mitigate their risk of having adequate supply over the course of the next 10-15 years. I think the EU has also expressed to us, and publicly, that they expect natural gas to be part of the energy mix through 2050. Natural gas is the right start to help reduce greenhouse gas (GHG) emissions, especially relative to coal.
The fact that the EU itself is pushing for policies, processes and structures to make it easier for commercial and industrial customers to contract for long-term LNG is a message that says Europe is going to be a buyer of long-term LNG. The narrative in Europe has evolved drastically over the last year. They can no longer rely on Russia for half of their gas supplies and that means more LNG.
Additional LNG infrastructure is also being constructed, which will likely result in more long-term contracting to fill some of that import capacity.
NGI: There are a lot of U.S. LNG projects under development. Rio Grande LNG is closer to FID than some. How has the project come this far? What makes it different from others?
Schatzman: The carbon capture element of our project is important, but it’s not the most important. This is something that we’re actively working on, and it’s supported by most of our customers.
There are other things we’ve been saying for years. We have a great site, not only because of the abundant access to natural gas in the Eagle Ford Shale and Permian Basin, but the pipelines that need to be built to move that gas to our facility are intrastate.
We don’t have to rely on the federal regulatory environment to ensure that available gas can be transported to us. For other projects there is a limitation on building infrastructure from places like the Marcellus Shale, or those in Louisiana seeking to tap back into Texas supplies would be subject to federal regulations.
The soil conditions at our site are also far different from anything you would see on the upper Texas, or Louisiana Gulf Coast. This results in a lower construction cost. We’re also blessed with a community in the Rio Grande Valley and a phenomenal workforce that lives there. We have committed to having 35% of our workforce come from the local community. I hope we’re able to do more than that. These are all competitive advantages for our project.
NGI: To be clear, will the carbon capture project be developed simultaneously with Rio Grande LNG?
Schatzman: The export plant is moving forward with or without the carbon capture project. It is a separate FID. We have to permit the carbon capture project. It has to be permitted at the state and federal levels. We have a lot of things that still need to take place, and they’re going to take several years.
It’s also important to note that this is not an effort at greenwashing as some people have claimed. This is part of the ethos of our company. Our mission is to deliver sustainable energy solutions by decarbonizing natural gas and accelerating a path to a net-zero future. We think natural gas is the best fuel for the transition to displace other hydrocarbons. It’s a good bridge fuel. But we think we can do better. You can decarbonize the process of liquefying natural gas. We can help companies decarbonize when they consume natural gas for power generation through our carbon solutions business.
When we talk about the carbon capture project for Rio Grande LNG, it is not something we’re doing to sell LNG. We’re doing it because we believe this is the right thing to do, and if we can do this throughout the entire natural gas value chain, there is no reason to believe natural gas can’t be part of the long-term solution for a lower carbon future.
NGI: What does the future hold for U.S. LNG exports?
Schatzman: First, I don’t think as much LNG capacity gets built as people think. I think we’ve overestimated how much will get built, not because of demand, but just the physical limitations of how quickly we can build it.
But the world needs more LNG, and the projects currently being developed like ours will help meet baseload demand. It won’t be swing capacity. In the future, it’s going to be a lot harder to get projects off the ground unless you already have scale. It’s not easy developing a large project, and as you start competing with brownfield projects that some of us will have, it becomes even more challenging. Long and short of it is we need all the LNG that has or is planning to FID this year.
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.
