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U.S. LNG Exports Seen Gulf Coast-Focused

As happened in the rush to develop U.S. liquefied natural gas (LNG) import facilities a decade ago, relatively few of the proposed export projects now before federal authorities will be built, and most of them will be brownfield projects on the Gulf of Mexico (GOM), according to a top executive with one of the competing Gulf Coast-based projects.

Illustrating the point, Cheniere Energy Inc.'s Corpus Christi Liquefaction LLC last Friday filed with the Federal Energy Regulatory Commission for a proposed export facility near Corpus Christi, TX (see related story).

The sheer scale of the multi-billion-dollar projects and the creditworthiness requirements, along with various competitive market factors, will limit the number of projects getting built, said Sempra Energy's Octavio Simoes, president of the LNG unit. He told NGI last week that he hopes the U.S. Department of Energy (DOE) will soon grant permits for exporting gas to non free trade agreement (FTA) nations and then let the market decide how many projects actually are built.

Sempra LNG has an export proposal on the table for its existing Cameron, LA, import facilities, but Simoes would not rule out the possibility of one or two greenfield projects reaching commercial reality, too. Import terminals already have storage and marine docking facilities, and that represents a huge advantage, according to Simoes.

"The greenfield sites will be much more expensive and more difficult to build because they will have to go through all the siting processes and public hearings of a new site," said Simoes. He said at a recent federal hearing held in the Cameron area "there was nothing but support" for Sempra's project.

Sempra plans to partner at Cameron with Mitsubishi Corp., Mitsui & Co. Ltd., and GDF Suez SA (see NGI, May 7), which give the facility leverage in the marketplace throughout the Far East, and plenty of heft in the financial markets for the proposed $6 billion joint venture LNG export facility at the now under-used Cameron LNG site, Simoes said.

"We're very active in the financing right now," he said. "I think there is a great appetite [among the financial community] when the conditions are all there. There are not a lot of companies that can stand behind this agreement and provide the credit support that the banks are requiring. There are only a handful of companies that can stand behind an agreement like this for 20 years when in essence over the life of that agreement they will be buying a commodity worth in excess of $20 billion."

The need for credit-rated entities and the relatively small number that qualify will in itself limit the number of export projects built. Simoes compares the current situation to the time 10 years ago when there were more than 50 import terminal proposals at FERC, and only a half-dozen or so were built.

"The fortunate thing for the export projects in the Gulf is the fact that the network of pipelines there is so huge," he said. "One of the reasons shale has developed so much in the United States and not so much in other countries is because we have all this infrastructure in terms of pipelines and service companies providing equipment, water, drilling and maintenance of equipment. It all has allowed this to take place."

Last week Standard & Poor's Ratings Services (S&P) gave Cheniere's proposed Sabine Pass LNG export facility a strong credit rating and stable outlook, citing its ties to investment-grade companies. S&P analysts noted some constraints on the project, however, due to Cheniere Energy Partners LP's marginal credit rating. Cheniere's Sabine Pass Liquefaction LLC was given a "BB+" rating on a $3.6 billion term loan due in 2019. At the same time the project dropped a term loan "B" issue, which is based on its assessment of the project's financing, counterparty dependencies and construction risk.

In the case of Sabine, it should be able to get whatever gas supplies it needs from "the robust U.S. natural gas market" and deliver it via extensive pipeline connectivity all across its Creole Trail Pipeline that is affiliated with Cheniere and which has announced plans for modifications to accommodate the liquefaction export project (see NGI, Oct. 31, 2011).

Sabine's term loan A was viewed as having good recovery if there was a default. In that case, S&P said the project lenders should recover 50-70% of their investment. S&P credit analyst Mark Habib said the rating reflects the expectation that cash flows from the 20-year sale and purchase agreements are guaranteed by investment-grade parents of BG Gulf Coast LNG LLC and Gas Natural Aprovisionamientos SDG SA, as well as performance standards that Sabine should be able to meet.

Among the strengths of the project as outlined by S&P are a strong (two times) debt service coverage ratio, use of ConocoPhillips liquefaction technology and a date-certain, fixed-price engineering, procurement and construction contract with Bechtel Oil Gas & Chemicals Inc. "Bechtel has contractual incentives to achieve scheduled completion and the construction budget has adequate contingency," said Habib. He noted that detailed construction design is now close to 20% complete. "We believe operation and maintenance risk is manageable at the rating level."

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