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Sempra CEO: Spot LNG Cargoes to Dominate

With the substantial added global capacity and decreased demand for liquefied natural gas (LNG) supplies, spot cargoes are likely to dominate worldwide gas markets in the next two years, with very few long-term contracts being signed, according to Sempra Energy CEO Donald Felsinger.

Felsinger spoke during a conference call last Tuesday in which Sempra reported a 40% increase in first quarter earnings compared with the same period last year. Felsinger said Sempra's Cameron (LA) LNG terminal is on schedule to begin commercial operations in the third quarter.

In the near future, there are going to be some significant announcements in the industry regarding the emphasis on spot cargoes, Felsinger said.

Sempra reported first quarter earnings of $316 million, or $1.29/diluted share, compared with $242 million, or 92 cents, for first quarter 2008. Profits from the joint venture commodities trading unit, RBS Sempra Commodities, nearly doubled to $114 million (Sempra's share), compared with $59 million for the first quarter of last year before the joint venture began operations in April 2008.

In the LNG sector, Felsinger reiterated that a good portion of the spot cargoes could end up in the North American market, and that in turn will have a dampening effect on domestic U.S. natural gas prices.

While the Sempra LNG unit continued to report a loss, albeit lower, for the first quarter this year, compared to that same period in 2008 ($7 million vs. $9 million in losses, respectively), Felsinger's prepared remarks focused on the impending first test cargo at the Cameron LNG facility, which would be the company's second such facility to begin operations in the past 18 months. (Costa Azul on the North Baja California Pacific Coast in Mexico opened with a few spot cargoes late last year.)

In response to questions, however, Felsinger offered more insights into how Sempra is viewing the global LNG business these days. "We are still very optimistic that with the amount of LNG coming on-line and the need to have place to deliver it, the United States is a destination of probable choice; we're the largest market and it is going to come here, if it comes."

Sempra President/COO Neal Schmale repeated what he stressed at a Sempra meeting for financial analysts in New York City in late March, namely that the demand globally for gas is going down with the downturn in the world economy, and that more LNG will begin coming to the United States, exerting more downward pressures on U.S. gas prices.

"What's interesting from Sempra's perspective is that our business model is not designed around global gas prices," said Schmale, the company's former CFO. "We have contracted long term for the use of these facilities, and it is consistent with our approach to projects that we tend to perform pretty well in all kinds of markets."

Felsinger added that almost all of the new liquefaction facilities coming on-line are gearing up to deliver spot cargoes, at least for the near term for delivery to Europe and North America. "We have had conversations with a lot of people regarding bringing in spot cargoes; we'll see what eventually evolves, but I think there will be announcements in the industry somewhere in the next short time period."

A combination of a lot of new liquefaction capacity with the fact that there are no attractive markets from a price standpoint anywhere in the world these days will push industry players for the next one or two years to deal mostly with spot cargoes, Felsinger said in response to a follow-up question. "I think they will be thinking about spot cargoes as the market with the best price," he said. "And then as people see a firming up of gas prices in Asia, Europe and North America, there will be more long-term contracts put in place."

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