Fred Jones, CEO & Matthew Weil, CFO, Delfin LNG
Delfin LNG is poised to become the first
floating liquefaction project in the United
States. Located fifty miles off the coast of
Louisiana in the Gulf of Mexico, Delfin will
liquefy pipeline-quality gas using a series of
floating liquefaction vessels. Delfin is a
brownfield project that will utilize an existing,
wholly-owned pipeline to transport gas to its
offshore vessels. As such, the project is a
relatively straightforward, lower-risk project
that offers an environmentally friendly, cost competitive and efficient solution for at least 8
mtpa of gas supply.
We spoke with Delfin LNG CEO, Fred Jones, and CFO, Matthew Weil, to learn more
about this exciting project.
Mr. Jones, could you walk us through your background?
Fred Jones: “I’ve been in this industry in some capacity for 40 years. I began my career on
the shipping side of the commodities business, working for a company called Phibro in the
1970s. Initially I worked on the Baltic shipping exchange in London handling dry bulk
cargoes. My focus shifted however, as the lack of a spot crude market in the 1970s created
an attractive opportunity to transport refined oil products. Over time, of course, this grew into
a major business. I highlight this because I believe there exists a similar opportunity in the
natural gas market today.
My passion for shipping actually began even before I started at Phibro. When I was younger
I remember reading an interview with the famous Chinese ship owner, Yue-Kong Pao, who
had assembled a massive shipping fleet in the 1960s and 70s. The interviewer asked Mr.
Pao why he liked ships and he said something to the effect of, “You have to understand that
my family fled Shanghai when the Communists took over and came to Hong Kong with
nothing but what we could carry. I like ships because they are moveable assets.” That
thought stuck with me and has influenced a number of projects I’ve pursued over the years,
including Delfin.
After Phibro I became a founder-shareholder of Marc Rich + Co AG, which has since
morphed into the $60bn commodities business called Glencore plc. From this experience I
developed a good sense for numerous commodities markets around the world and for where
the best opportunities might lie ahead. Since leaving Marc Rich + Co AG, I have leveraged
this knowledge in pursuit of various energy and infrastructure projects throughout the world. I
have been involved in oil and gas, infrastructure and real estate projects in India, AsiaPacific, Africa and the United States, all of which have led me to this exciting opportunity
we’re here to talk about today.”
Let’s talk about Delfin then – why are you developing a floating facility rather than an
onshore facility like your U.S. peers?
Fred Jones: “True to the spirit of Mr. Pao, one of the things I like about our floating facility is
that it has movable assets. When I started looking at the U.S. LNG business in 2010, I was
cognizant of the fact that the world changes over 20 years. So if one is looking to export gas,
I don’t think it’s a great idea to invest a billion and a half dollars into a stationary, onshore
facility. If markets change over time, the onshore facility will be at risk of becoming obsolete,
while the floating facility can simply be relocated to a more advantageous location. This is
truly unique among our U.S peers and is a dynamic that resonates well with shareholders,
off-takers and lenders.
The second benefit of developing a floating facility in the U.S. is the regulatory regime. While
onshore projects have to be approved by the Federal Energy Regulatory Commission
(FERC), offshore projects are governed by the United States Maritime Administration
(MARAD) and the United States Coast Guard (USCG). This is an advantage because, while
the FERC process has no time limit and can sometimes take up to four years to complete,
the MARAD process is bound by a time limit of one year.
While these important benefits have not been well understood to-date, I believe that slowly
there is a growing recognition of the competitive advantages inherent in floating liquefaction
projects.”
So why develop Delfin in the United States? Can’t you build a floating project
anywhere in the world?
Fred Jones: “It’s true that other floating facilities are being developed in various parts of the
world, but I believe there are significant advantages to operating in the United States.
My first experience investing directly in the U.S. was in the mid-1990s when I began making
real estate investments in and around Texas. While unconventional drilling techniques were
not as advanced as they are today, my partners and I saw our neighbors successfully drilling
in the area and decided to get involved in the upstream business. By the late 1990s, the
area’s vast resources had become more apparent and I began to contemplate the idea of
the U.S. eventually becoming a major energy exporter. If you fast forward to today,
unconventional drilling techniques have uncovered vast quantities of natural gas and have
positioned the U.S. as a logical exporter.
With many decades of experience in the oil and gas business, the U.S. has a number of
competitive advantages as an exporting nation. First, the U.S. is governed by the rule of law
and promotes the idea of private ownership of assets. I spent a lot of my early years working
in places like Africa, and I have developed a strong appreciation for the risk in developing
assets that might be subject to the risk of nationalization. Second, the U.S. has an advanced
infrastructure system already in-place. This allows projects like Delfin to seamlessly access
the entire nation’s supply of gas through a sophisticated network of pipelines and gathering
facilities. Third, decades of experience have created enormous intellectual property in the
U.S., especially in places like Texas and Louisiana. The oil and gas business is a major
driver of the economy and there is a deep pool of skilled workers to engage in projects like
ours. Delfin and its U.S. peers will create jobs and help to improve the nation’s balance of
trade. Projects like this are truly part of the American DNA.
Finally, the U.S. is a logical gas exporter because of its geopolitical advantages. A number of
nations in Europe have become overly reliant on hostile energy suppliers and are eager to
diversify their imports. Delfin recently announced a Memorandum of Understanding with the
Lithuanian energy company, LITGAS, which is a good example of the potential for mutually
beneficial partnerships.”
Where will the demand for Delfin come from?
Fred Jones: “A long career in the global energy markets has given me a good understanding
of worldwide demand. One of the major parts of my business involves downstream projects
in Asia-Pacific, particularly India. India is acutely short of gas and has a population of 1.3bn
people who have aspirations to increase their standard of living. They might have a bicycle
today, but they will want a family car tomorrow. They will also want televisions, cellphones
and climate control. This means they will consume more energy in five years than they do
today, and more energy in ten years than they will in five years. This will be a multi-decade
phenomenon and is true in many other growing Asian countries as well.
Europe is another major source of demand. As I mentioned earlier, many European nations
are eager to diversify their gas supplies and the U.S. represents a friendly and reliable
provider. I believe Central and South America will also experience growing demand. As in
Asia, many of these countries have growing middle classes that will require more energy to
satisfy their increasing standards of living. Delfin recently announced a Memorandum of
Understanding with BTG Pactual Commodities, part of a large Brazilian investment bank,
which exemplifies the long-term demand growth trajectory in Central and South America.
Finally, demand for our project will result not only from growing energy demand generally,
but also from natural gas becoming a larger percentage of overall energy demand. Natural
gas is the cleanest fossil fuel, producing far less greenhouse gases than either coal or oil.
And while renewable sources of energy are growing, they will be far too small to satisfy
growing worldwide demand for the foreseeable future. There are also new applications for
LNG that will grow over time. The global marine bunkering market, for example, is a 600
mtpa opportunity that LNG hasn’t reached at all yet. Some predict LNG will eventually
comprise more than 10% of the bunkering market, implying 60 mtpa of incremental demand,
which is approximately equal to the entire demand of Korea.”
Are there any other Delfin highlights we should be aware of?
Fred Jones: “Delfin is very much a brownfield project. We purchased a pipeline in the Gulf of
Mexico that had previously been used to import gas but was subsequently mothballed when
the project’s economics ceased to be attractive. We thought we could repurpose the pipeline
to instead supply an export project. We’ve added some onshore facilities and compression
stations and the pipeline will soon be poised to do just that. At 30 miles long and 42 inches in
diameter, this is the largest pipeline in the Gulf of Mexico and will be capable of supplying
quite a large project. Having this infrastructure already in-place gives Delfin a nice
competitive advantage.”
What is your biggest project-specific challenge?
Fred Jones: “I am not sure there is one single factor but rather a number of them. The first
challenge was the acquisition of the existing pipeline. Having infrastructure in-place was
critical because it changed our project from a risky, greenfield project to a more
straightforward, brownfield project. Thankfully this challenge has now been overcome. The
second challenge is educating the market about our project and stimulating interest from the
investment community. We want to have a strong U.S. investor base and, until recently,
there was not a lot of public information available on our project. We are now taking more
active steps to explain the benefits of floating liquefaction generally and Delfin specifically.
Finally, all pre-FID liquefaction projects have the challenge of attracting customers. We have
been working hard and have been getting very positive feedback, but this is always a
gradual process. Thankfully, we recently entered into Memorandums of Understanding with
BTG Pactual Commodities and LITGAS to be our first two customers.”
Mr. Weil, are there specific challenges to structuring projects with non-traditional
buyers as your off-takers?
Matthew Weil: “That is actually one of the best aspects of our project. Our view of future
LNG demand is that it will increasingly come from emerging market sources, such as
Thailand, the Philippines, Brazil and countries in Central America rather than traditional LNG
buyers. Traditional buyer demand will still grow steadily but it will grow more slowly than
these non-traditional buyers.
The challenge with these non-traditional buyers is that they require more flexible contract
terms. Onshore plants generally require 20-year tolling agreements with investment grade
companies from investment grade countries to achieve the financing necessary to construct
their massive, stationary facilities. But non-traditional buyers often prefer shorter-duration
contracts and do not necessarily have the investment grade requirements. Floating
liquefaction projects like Delfin are well positioned to provide this flexibility and still achieve
financing because they are movable assets. This is because a lender will have more comfort
that if markets change in 10-15 years, the floating project will be able to relocate to a more
favorable geography while the onshore project will simply become obsolete. As long as there
is natural gas consumption and confidence that LNG trade will continue, floating liquefaction
facilities will have significant value. The future of LNG trade is going to be floating facilities
that are moveable and can be flexible with customers.”
What are you most looking forward to at the World LNG Series: Americas Summit?
Matthew Weil: “We are really looking forward to the conference in May as a good opportunity
to meet various industry participants and continue to educate the market about the
significant competitive advantages of floating liquefaction and our project, Delfin LNG.”
Fred will be speaking at the 13th World LNG Series: Americas Summit on the Panel
Discussion: US Liquefaction Projects - A Key Driver in Changing Global Market
Fundamentals?
For speaking, sponsoring or networking opportunities contact Tyler Forbes on +44 20 7978
0061 or email LNGAmericas@thecwcgroup.com