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Cheniere’s Upstream Optionality Gives It Key Advantage, Company Says

Just over a year since Cheniere Energy Inc. became the first to export liquefied natural gas (LNG) from the Lower 48, the company can tap gas from any North American basin it would care to. Meanwhile, Cheniere Gulf Coast exports and export capacity continue to grow.

“We have the ability to access all of the major basins east of the Rocky Mountains,” Cheniere’s Corey Grindal, senior vice president for gas supply, told NGI. “The Uinta, the Bakken, the San Juan, the cost of doing something in those basins to where we would take the gas, it's just not economically feasible....[W]e have the ability to access all the basins that we would want to...”

Unlike most U.S. LNG export terminals in the development or planning stage, Cheniere’s Sabine Pass terminal in Louisiana (now with two trains operational and a third on the way) and its Corpus Christi, TX, terminal (now under construction) are integrated with upstream natural gas supply.

“The North American continent is available for us to source gas from,” Cheniere Chief Commercial Officer Anatol Feygin said at CERAWeek by IHS Markit. “We are the largest physical gas buyer in the country.”

Other U.S. LNG projects plan to use a tolling model, whereby they sell liquefaction capacity and their customers procure the gas to be liquefied.

“We deal bilaterally with the producer,” Grindal told NGI at CERAWeek. “We deal with the marketers to help us balance on the day, but when you look at who really our target audience is, our target audience are the producers. And we're doing everything that we can...to kind of meetup and partner with the producers. As they produce and they get longer and we continue to build and we get shorter, it's just kind of a natural fit.”

And a not insignificant one.

“We're in the wholesale market,” Grindal said. “Some of these tollers are going to be in the retail market -- the difference between buying 150 to 300 MMcf/d versus having to buy 5.5 Bcf/d. It's a sunk cost. I've already go the capacity; I've already got the people; I've already got the processes; and we've already got the relationships.”

Not to mention the pipeline capacity.

At Sabine Pass six liquefaction trains are permitted, with two in operation and the third coming online soon. Cheniere has contracted for pipeline capacity for five of the trains, and Grindal said securing capacity for the sixth train on Kinder Morgan Louisiana Pipeline won’t be a problem.

Pipeline capacity for the first two of three trains at the Corpus Christi terminal has also been contracted. The third Corpus train likely will be commercialized before Train 6 at Sabine, Grindal said, but capacity has yet to be secured because a start date is not yet known.

“...[W]e have enough capacity to satisfy not only our firm obligations to our customers, but almost everything that we would need for a peak load scenario,” Grindal said.

During the winter Sabine Pass is able to produce more LNG than during the warmer months, thanks to cooler ambient air, which gives the facility a peaking opportunity. Because the facility has 20-30% redundant pipeline capacity, it has the additional gas supply to liquefy during the winter.

“[W]e saw it this winter with cooler temperatures with the two trains that we had running and the demand that we saw from our customers as well as the worldwide pull, we utilized a lot of our [pipeline] capacity, including the redundant capacity,” Grindal said.

Redundant capacity serving Sabine also is a backstop: in case of problems on one pipeline pipeline, another can pick up the slack. “We haven't cut a single person in the last year throughout all the commissioning process,” Grindal said.

The Corpus terminal will have air chillers, so its liquefaction capacity will be fairly constant throughout the year, regardless of ambient temperature. Corpus needs less redundant pipeline capacity because peaking gas supply is close at hand, thanks to connections with Texas intrastate pipelines.

“We can deal with every interstate pipeline that passes through Louisiana and Mississippi and East Texas for both of our facilities,” Grindal said. “In Texas...we're connected to all the major intrastate systems, including some of the smaller systems.”

Grindal said he expects that over the next 12 to 24 months the evolution of an LNG spot market will become clearer.

“I do think that the spot market has already started,” he said. “People reference TTF [Title Transfer Facility in the Netherlands] or NBP [National Balancing Point in the UK], some slope of oil [prices], JKM [Japan/Korea Marker]. We're working pretty heavily with some of the indexation companies and exchanges on developing a Gulf Coast index to where you can trade off of it and you can take physical receipt and delivery. So we have a guy that travels back and forth between here and London that's working very heavily on that.

“What does it take to have a successful spot market? It takes liquidity. It takes indexation. It takes multiple players playing. Well, I would say, that's what I see happening in the LNG market.”

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