KBR Walks Away from Rapidly Weakening LNG Market

Researched by Industrial Info Resources (Sugar Land, Texas)--One of the leading construction firms for liquefaction plants is walking away from the once-booming business. KBR Incorporated (NYSE:KBR) (Houston, Texas) announced this week that it will exit most of its energy projects--largely liquefied natural gas (LNG) construction--in favor of its government contract and technology businesses. Industrial Info is tracking more than $146 billion worth of projects with KBR currently on board as a contractor, including nearly $73 billion in LNG projects.

Click on the image at right for a graph detailing project spending by companies currently employing KBR for their LNG projects.

KBR's decision is the latest sign that crumbling commodity prices and fallout from the COVID-19 pandemic are roiling the energy industry, with years of ripple effects ahead. Until just a few months ago, LNG exports were one of the hottest tickets in the U.S. economy. But following mild winter weather and the far-ranging uncertainties created by the COVID-19 pandemic, natural gas deliveries to export facilities across the U.S. dropped about 60% from their prior levels in just two months, according to the U.S. Energy Information Administration (EIA).

The EIA also expects LNG exports from the "Lower 48" states to hit a low of 3.2 billion cubic feet per day in July, although they are expected to increase for the remainder of the year. Capacity utilization is expected to remain below 50% through August.

Some of the largest LNG projects in the U.S. and Canada are sending clear signals that their outlooks range from murky to grim. ConocoPhillips's (NYSE:COP) (Houston, Texas) Freeport LNG complex in Quintana, Texas, has delayed the final investment decision for its $4.5 billion Train IV expansion to mid-2021 and plans to seek new bids for construction. The 5.1 million-metric-ton-per-year unit, on which KBR is the engineering, procurement, and construction (EPC) contractor, would source natural gas from the Eagle Ford Shale. For more information, see Industrial Info's project report.

A similar delay is facing Pieridae Energy Limited's (Halifax, Nova Scotia) Goldboro LNG Production Plant in Stormont, Nova Scotia, which will not see a final investment decision until June 2021. Earlier this month, a representative from Pieridae told Kallanish Energy the company remains "fully committed" to the Goldboro project, which includes a $5 billion first phase and a $5 billion second phase, and that the delay is "a function of the pandemic, nothing more." It remains unknown how KBR's recent decision will affect the project.

Each phase of Goldboro would include a production train to produce 5 million metric tons per year; the entire facility is designed to have on-site storage capacity of 690,000 cubic meters. With construction unlikely to kick off until the end of 2021 at the earliest, the project's completion will not be until at least 2025. For more information, see Industrial Info's project reports on Goldboro's first phase and second phase.

Other LNG projects involving KBR to face major setbacks include Cheniere Energy Incorporated's (NYSE:LNG) (Houston) estimated $10 billion third-stage Corpus Christi Mid-Scale LNG Liquefaction Plant in Gregory, Texas, which is designed to produce 9.5 million metric tons per year from seven trains. Buyers of LNG from Cheniere's Corpus Christi and Sabine Pass terminals in Louisiana are requesting cancellation of up to 23 cargoes scheduled to load in August, according to Bloomberg, following cancellations of at least 20 cargoes in both June and July. For more information, see Industrial Info's project report.

Although many importing countries are cancelling long-term LNG supply contracts and deferring cargo from the U.S. and Canada, some smaller LNG producers remain optimistic. The president of Woodfibre Natural Gas Limited, which is owned by Pacific Oil & Gas Limited (Singapore), recently told Canada's Financial Post that the company has experienced "no issues with existing contracts" for its $1.3 billion LNG liquefaction plant in Squamish, British Columbia, which is designed to convert a pulp mill into a facility to produce 2.1 million tons per year of LNG, for export to Asian countries.

KBR is one of the project's engineers. Woodfibre had been expected to reach a final investment decision last year, but the bankruptcy of another contractor and, later, the COVID-19 pandemic pushed the decision to May 2021. For more information, see Industrial Info's project report.

Outside the LNG market, projects involving KBR are facing similar setbacks. Methanex Corporation (NASDAQ:MEOH) (Vancouver, Canada) contracted KBR to provide front-end engineering design (FEED) services for Methanex's proposed, 1.8 million-metric-ton-per-year Geismar 3 methanol unit in Geismar, Louisiana, which would be located next to two of Methanex's existing methanol units.

Methanex's Board of Directors reached a unanimous final investment decision on the project in July 2019, but progress slowed significantly following the COVID-19 outbreak. The project is in temporary "care and maintenance," with about one-third of the estimated $1.5 billion price tag deferred for the next 18 months. For more information, see Industrial Info's project report.

Although Stuart Bradie, the chief executive officer of KBR, believes the company's energy business will be "marginally profitable" in 2020, he said the government-related contract business is now a priority: About 85% of KBR's projected earnings for 2020 are expected to come from government work, compared with only 11% in 2015.

Industrial Info Resources (IIR), with global headquarters in Sugar Land, Texas, six offices in North America and 12 international offices, is the leading provider of global market intelligence specializing in the industrial process, heavy manufacturing and energy markets. Industrial Info's quality-assurance philosophy, the Living Forward Reporting Principle™, provides up-to-the-minute intelligence on what's happening now, while constantly keeping track of future opportunities. Follow IIR on: Facebook - Twitter - LinkedIn. For more information on our coverage, send inquiries to info@industrialinfo.com or visit us online at http://www.industrialinfo.com/.