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Analyst Sees LNG Export Contracting Challenge

Two projects that would add natural gas liquefaction and export capacity to existing Gulf of Mexico liquefied natural gas (LNG) import and regasification terminals at Cameron Parish, LA, and Brazoria County, TX, need to ink contracts quickly in order to beat shrinkage in LNG export margins, according to Societe Generale (SG).

In a recent note SG analyst Laurent Key focused on plans by Cheniere Energy Partners LP unit Sabine Pass Liquefaction LLC to export LNG from its terminal in Louisiana. Sabine's recent receipt of an additional approval from the U.S. Department of Energy (DOE) for exports (see Daily GPI, May 23) piqued gas market interest (see Daily GPI, May 25). Federal Energy Regulatory Commission (FERC) review is still pending.

While Cheniere said its project will be online in 2015, SG said it does not expect a start date before the end of 2016. Besides FERC approval, Sabine will need to secure financing before 2012, Key said. "For Sabine Pass, financing means commissioning both supply (out of Texas and Louisiana) and demand, preferably from a high-price, long-term buyer like Japan or South Korea, than from a somewhat spot-inclined UK NBP [National Balancing Point] market," he said.

Over recent months Cheniere has announced that it's been in talks with a number of parties for LNG supply from Sabine, including Spain's Endesa SA and Gas Natural Fenosa, Italy's Enel Trade SpA, China's ENN Energy Trading Co. Ltd., France's EDF Trading and Japan's Sumitomo Corp. (see Daily GPI, Feb. 22).

"The goal for Cheniere will be to lock in a Henry Hub-Japanese crude cocktail price spread of future cash flows in order to get the right [financial] backing," Key said.

He noted that Cheniere claims it has memorandums of understanding for nearly 61% of the project's capacity. "The company emphasizes that this is more than the required commitments for building the two first liquefaction trains, but securing supplies at a low enough price will be key in carrying the project forward," Key said.

Plenty of U.S. gas is expected to be available for export, thanks to shale gas plays, but "new demand centers and production cost inflation are likely to drive prices upward and limit spot LNG export margins in the future; this is why likely LNG exporters will have to act fast to lock in upstream costs and downstream revenues after receiving final approvals," Key said.

Securing gas at prices below $6/MMBtu for 2015 is a "major concern," he said. "Only cash-limited independent producers could be willing to risk selling five-year forward gas below $6/MMBtu at a time when drilling cost inflation is becoming the major concern on the supply side."

Key also said "future Chinese shale drilling is a possibility," which makes acting fast a necessity to secure markets.

Turning to export plans for the Freeport LNG terminal in Texas, in February DOE approved a request to export 511 Bcf of LNG annually to natural gas free trade agreement countries (see Daily GPI, Feb. 17). Key said Freeport's economics are better than those for Sabine thanks to Freeport's partnership with Macquarie Energy on the marketing/contracting side. Also, South Texas gas is expected to sell at a discount to Henry Hub due to supplies coming out of the Eagle Ford Shale in South Texas, Key said.

While export of domestic gas as LNG from Dominion's Cove Point LNG terminal has also been discussed, this seems less likely to advance as export gas would be sourced "from the controversial Marcellus Shale" (see Daily GPI, April 25), Key said.

Not addressed by Key in his note are plans to export LNG from Western Canada (see Daily GPI, May 2).

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