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Tariffs Pack a Bigger Punch Than Tax Incentives

LNG Ltd.’s Magnolia project has received a tax exemption from the State of Louisiana, which was announced on 17 May. The $4.4-billion undertaking is eligible for the state’s Industrial Tax Exemption Program (ITEP) for the property tax for a portion of the building and materials, machinery and equipment, and labor costs.

“Louisiana leads the US as an exporter of liquefied natural gas, and the Magnolia LNG project will extend our state’s production and technology leadership in this vitally important energy market.,” Gov. John Bel Edwards said. “By the end of 2019, Louisiana producers will generate enough LNG to fuel 24 million homes on a daily basis. Our next wave of LNG projects, which will include Magnolia, can raise that total to the equivalent of 63 million homes. With a projected 38 billion cubic feet of natural gas to be produced daily along the Gulf Coast, Louisiana is well-positioned to continue our LNG leadership.”

Magnolia LNG proposes to construct and operate up to four liquefaction production trains, each with a capacity of 2.2 mtpa or greater. Construction and operation includes two 160,000-m3 full-containment storage tanks, ship, barge, and truck-loading facilities, and supporting infrastructure. The project is fully permitted, having received its US Federal Energy Regulatory Commission Order and both free trade agreement (FTA) and non-FTA approval from the US Department of Energy.

The Global Effects of Uncertainty

The governor’s projection and Magnolia LNG’s movement toward FID may be damped by tariffs on US LNG imported into China and their effect on the wider global market.

During the company’s 22 May investor update, Greg Vesey, managing director and CEO of LNG Ltd., said the company is aiming for offtake commitments of 6 million tonnes before FID. Vesey said, “Below that, it really doesn't make financial sense. But more importantly, I think if we can get that first customer signed, I think there's enough interest in us that we would get some momentum.”

He said, … “the LNG market really went south probably in the middle of 2014, and while there have been a few times of good news throughout that 5 years, it's really been a down market for about 5 years now. Forecasters show that by 2022, 2023, demand should, in fact, start to outstrip supply … and so all the more reason for us to stay at its heart.

“There is a very soft spot market. So, a lot of times, decisions are getting deferred which doesn't make a lot of sense if you're thinking long term, but it does happen with that. China still offers a tremendous growth opportunity and they will need a lot of LNG, and so we do look forward to things getting straightened out and continuing to work with them in China,” he said.

Vesey believes future LNG demand growth will come from Europe (one-third) and Asia (two-thirds). The long-term view for Europe is still very favorable for US LNG, he said, referring to a lunch with the Vice President of Energy for the European Union last week. Vesey said, “He was very bullish on US LNG for the long term for Europe. I think that's an important relationship that they want to make. Right now, the numbers don't quite work, but long term, that will be a big market for US LNG.”

In response to a question during the investor call about how the Chinese tariff affects the rest of the LNG market, Vesey said, “It puts a bit of uncertainty in the market, and so probably the most important part of that is they're a little hesitant because of the soft market … if [the trade war] goes on for a long period of time and China goes to a different direction, to Russia or other places, does that mean the prices are going to go down in the rest of the world, and that's why they want to wait and see what happens there because they don't want to overpay, especially on a 20-year deal.”

While Japan and Korea are also potential markets for US LNG, Vesey noted that Japan is currently focused on nuclear power, and not making many LNG deals. Korea may be a brighter prospect, but only after the government moves further with the switchover from coal and oil to natural gas for power generation.

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