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Sempra Sets West LNG Milestone; LA Storage Stalled

San Diego, CA-based Sempra Energy, which passed a milestone on the West Coast and hit some hurdles near the Gulf last week, continues to bet that new natural gas pipelines, storage and LNG terminals will be needed for years to come.

After processing two separate test cargoes, Sempra's Energia Costa Azul LNG receiving terminal along the Pacific Coast of North Baja California, Mexico, officially opened for business last Thursday as the first LNG facility along the West Coast of North America. In recent weeks, the $875 million, 1 Bcf/d facility had completed all performance testing and is officially ready for commercial operations, Sempra said.

For the initial months, and perhaps most of this year, the cargoes going through the terminal will be spot shipments from any of the world's LNG sources. Test cargoes came from Qatar and Trinidad on April 18 and May 6, respectively, Sempra said. As reported on Sempra's quarterly earnings conference call earlier in May, Costa Azul's long-term contracts won't kick in until late this year or in the second quarter next year.

Also last week, Sempra announced that it has pushed back indefinitely opening its 17 Bcf Liberty Gas Storage project in Louisiana that is tied to its LNG receiving terminal in the final months of construction at Cameron, LA, on the Gulf of Mexico. Other than oblique references to construction issues, Sempra offered no details, nor a new target date, for the redeveloped underground salt dome cavern.

In its latest 10Q filing to the federal Securities and Exchange Commission (SEC) earlier in May, Sempra said its pipelines and storage businesses are expected to require funding from the company or external sources, or both, to continue Liberty Gas Storage facility and other natural gas storage projects, along with its participation in the Rockies Express Pipeline (REX) and its planned development of pipelines serving its Cameron LNG facility.

"The [long-ago announced] sale of interest in Argentina [in two natural gas distribution companies] is expected to provide cash for company projects," the SEC filing said.

It is not clear what the storage delays will mean financially, but in regard to the Costa Azul LNG terminal, even with the expected idleness, Sempra will earn a profit based on capacity payments from a unit of Royal Dutch Shell that holds a contract for half of the 1 Bcf/d terminal's throughput at the new facility located 14 miles north of Ensenada.

When asked about the Liberty delay, a San Diego-based Sempra spokesperson said that "due to ongoing construction activities, the commencement of firm storage service will occur at a later date." He said that Liberty Gas Storage will provide updates as necessary. Earlier web-based communications had targeted April 2008 for the start of the underground storage injections at the Liberty facility.

Originally announced four years ago, Liberty was purchased by a Sempra unit as Pine Prairie Energy Center, close to the Henry Hub, the nation's largest natural gas trading center. The development plans called for three salt caverns with a total working capacity of 24 Bcf of natural gas, enabling maximum injections of 1.2 Bcf/d and maximum withdrawals of 2.4 Bcf/d.

The facility now under construction, which will be followed by an expansion, is touted as being designed for a 1 Bcf/d withdrawal and 500 MMcf/d injection capability. "By way of a bidirectional 30-inch-diameter pipeline, this project will have access to more than 5 Bcf/d of interstate pipeline capacity linked to multiple markets," a Sempra fact sheet on the project said. It noted the pipeline operations began last year -- including a link to Cameron -- and underground storage would begin in April this year.

Early in 2007 Sempra Pipelines & Storage and ProLiance Transportation and Storage LLC held a joint venture open season on Liberty Storage seeking market interest in expansion capacity at their facility in Calcasieu Parish, LA. With what the partners are calling "strong market response" to the existing 17 Bcf capacity at Liberty and unabated thirst for more gas storage along the Gulf of Mexico coast, Sempra Energy and ProLiance are offering an additional 5 Bcf at the salt dome facility.

Noting that the past month has involved a variety start-up and commissioning activities, Sempra CEO Don Felsinger said the new terminal represents the largest capital project undertaken by 10-year-old Sempra and is part of a broader plan the holding company has to build natural gas pipeline, storage and LNG infrastructure throughout North America. After a seven-year process, Sempra LNG CEO Darcel Hulse called Thursday's milestone the end of a "journey from an idea to a whole new business."

As the 100% terminal owner, Sempra reiterated that Costa Azul is fully contracted and capable of processing 1 Bcf/d with room for expansion. Sempra leases half of the terminal to Shell International Gas Ltd. under a 20-year agreement. Sempra's half of the capacity will be supplied from a new liquefaction facility nearing completion at Tangguh, Indonesia, with initial supplies scheduled to arrive in the second quarter of 2009.

"The natural gas processed at Energia Costa Azul will be used in Baja California and the U.S. Southwest," a Sempra spokesperson said. "Natural gas from the terminal will meet applicable Mexico and U.S. gas pipeline quality standards."

A second receipt terminal in Louisiana, Cameron LNG, is about 85% completed near Lake Charles, LA, and Sempra said the 1.5 Bcf/d terminal should be completed by the end of this year.

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