The recent domestic liquefied natural gas (LNG) export deal struck by BG Group and Cheniere Energy Partners will have to overcome a number of hurdles to be economic, but it offers BG security of supply with which to serve its global LNG clientele, an analyst told NGI.

“It means having the option, the fallback position…supposing costs go out of control in Australia, what are they going to do? Supposing there are political issues in Nigeria that threaten the sustainability of their supply to Nigeria. If you look at their supply spread, part of the decision [to contract with Cheniere], I think was a political risk decision,” PanEurasian Enterprises Inc. President Zach Allen said.

“Sorting through all the political noise we have in this country, the United States is still a pretty safe political bet. I don’t mean to insult the Australians; they’re a pretty safe political bet as well, but costs have been a problem in Australia recently. The building boom has put enormous pressure on costs in Australia…and the technical risk of the coalbed methane projects [there] is still not fully understood.”

BG Group’s BG Gulf Coast LNG LLC has agreed to buy 3.5 million metric tons per year of LNG from Cheniere’s Sabine Pass Liquefaction, which is planning to develop the ability to produce 9 million metric tons per year in the first phase of its project in Cameron Parish, LA (see NGI, Oct. 31).

In a recent note to clients, Allen said BG “is in a remarkably strong position with respect to moving LNG long distances, including use of an expanded Panama Canal, to come into service in 2014.” He said it looks as if BG was thinking of Asian markets as well as markets in the Atlantic Basin when it struck its deal with Cheniere.

However, Allen said he is still skeptical that the wide spread between U.S. gas prices and global LNG prices will be sustainable. “We believe that the pressures in the market will lead to convergence, not divergence,” he said. In September Allen wrote how the potential for upward pressure on domestic gas prices is real, as is the prospect of lower gas prices in European and Asian markets (see NGI, Sept. 19).

In his more recent note, Allen said he thinks the BG-Cheniere deal is predicated on a number of assumptions by BG:

“Making these assumptions, but allowing for competitive pressures to emerge, it appears that the transportation advantage, plus first-mover advantage, put BG in a strong position,” Allen said. “First-mover advantage may be important if the U.S. government decides at some point to limit LNG exports from the U.S. to mitigate what might develop as upward pressures on domestic natural gas prices.”

The BG deal news gave Cheniere Energy Inc. stock a boost when it was announced; however, the company is still weighed down by substantial debt, as noted by Standard & Poor’s (S&P) in a recent note.

“We believe progress in its liquefaction project may increase the likelihood of future cash flows to Cheniere and improve the prospects of refinancing its 2012 debt maturities,” the firm said. “However, we expect to maintain the current [‘CCC+’] rating until there is greater certainty of the project’s development, capital structure and cash flow.” S&P has a “negative” outlook on Cheniere Energy Inc.

“…[T]he company had total adjusted debt of about $3.14 billion, which includes about $2.2 billion related to the Sabine Pass project…” S&P said. “Assuming its current liquidity does not materially improve, Cheniere will not be able to make its 2012 maturity payments. This is the basis of our liquidity concerns and our negative outlook.”

©Copyright 2011Intelligence Press Inc. All rights reserved. The preceding news reportmay not be republished or redistributed, in whole or in part, in anyform, without prior written consent of Intelligence Press, Inc.