Several U.S. LNG producers are trying to renegotiate higher prices with buyers as a result of rising construction, labor and borrowing costs, according to sources and company statements reviewed by Reuters.

Higher prices would eat into the competitive advantage of U.S. liquefied natural gas on the global market, at a time U.S. President Donald Trump is seeking to expand the industry – already the world’s largest.

“The competitiveness of U.S. LNG could face a double whammy,” said Alex Munton, director of global gas and LNG research at consulting firm Rapidan Energy Group.

Rising liquefaction costs, a tighter domestic gas market, and falling prices for rival supplies indexed to oil could all impact U.S. LNG competitiveness, said Munton.

Four sources said Mexico Pacific and Venture Global VVG are seeking to renegotiate their supply purchase agreements with buyers, while Energy Transfer’s ET co-CEO told an earnings call that negotiations were underway.

Mexico Pacific, which is developing a 15 million metric tonnes per annum (MTPA) facility in Western Mexico to market U.S. natural gas, has been trying to renegotiate higher liquefaction fees with Chinese buyers Zhejiang Energy and Guangzhou Gas, according to two Chinese industry officials with knowledge of the matter.

Mexico Pacific wants to renegotiate the prices because U.S. engineering firm Bechtel, the company building the plant, wants a construction price that has made the project too expensive, the sources said.

Mexico Pacific and Bechtel declined comment.

Zhejiang and Guangzhou have so far rejected Mexico Pacific’s proposal, the sources said. They did not provide details of Mexico Pacific’s liquefaction costs or how much the company wanted to lift them.

Guangzhou, meanwhile, has asked to cut its take from the project from 1 MTPA to 700,000 tons per annum, one of the two sources, who has direct knowledge of the matter, told Reuters.

Zhejiang Energy didn’t respond to emailed requests for comment. Guangzhou Development Group, parent of Guangzhou Gas, did not immediately comment.

Venture Global, the second-largest U.S. LNG exporter, has also been trying to renegotiate higher prices for supply and purchase agreements for its CP2 project in Louisiana, even though the plant is yet to start construction and has not gotten the financial go-ahead, according to two separate sources.

Venture Global did not reply to a request for comment. In January the firm told investors that liquefaction fees could rise above $4 per million British thermal unit (mmBtu) from around $2.25 today.

Energy Transfer ET, which is developing a 16.5 MTPA LNG export facility in Louisiana, said on an earnings call in February that it has also been renegotiating liquefaction fees with customers as it tries to align higher construction costs with offtake agreements.

“Everybody understands how costs have risen. And we are in continued negotiations with those to renegotiate their fees,” said Marshall McCrea, Energy Transfer’s Co-Chief Executive Officer.

McCrea said customers had stuck with the project despite the demand for higher fees.

The largest U.S. LNG exporter, Cheniere Energy LNG, meanwhile, said in February it was not increasing fees, in part because its prices are already linked to inflation and its projects are built on brownfield sites that have cost advantages.

Baker Hughes BKR, one of the largest equipment providers to the U.S. LNG sector, has been able to contain its cost inflation but there have been increases for LNG developers, said Lorenzo Simonelli, the company’s CEO.

“It’s the EPCs that we see that more, it’s the labor content that we see that more,” Simonelli said, referring to engineers, procurement, and construction firms. “If we look at the external environment we would say there is some inflation taking place.”

Overall, liquefaction fees for U.S. LNG projects are on a path to rise above $2.50/mmBtu due to a tight labor market, rising construction costs and stubbornly elevated interest rates, brokerage Poten and Partners said in a recent report to clients.

Higher liquefaction fees could hurt the cost-competitiveness of U.S. LNG projects, especially if coupled with an increase in U.S. natural gas prices and or a drop in Brent crude oil prices, Poten warned.

“On top of a labor shortage, inflation is driving up the price of equipment and materials,” Poten said.

Source: Reuters