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Low Global Oil Prices Not Affecting U.S. LNG, Sempra Execs Say

Today's depressed global oil prices are not a deterrent for prospective buyers of future U.S. liquefied natural gas (LNG) exports because there is a developing diversity in worldwide pricing that looks to Henry Hub gas prices -- not to oil -- to price long-term LNG contracts, Sempra Energy senior executives said Thursday.

While the majority of the world's LNG contracts are mostly tied to global crude oil prices -- so-called "crude cocktail" prices -- that is not what future deals, including those from Sempra's three existing and potential LNG export projects, are going to look like, Sempra President Mark Snell said during an earnings conference call.

In response to an analyst's question about a "decoupling" of LNG and oil prices, Snell said the prices aren't decoupled, per se, but there is a definite diversification developing in terms of setting LNG prices for potential U.S. exports.

"There are numerous LNG contracts linked to oil, but the change coming is really a diversification that is injecting another element into the mix, and that is Henry Hub-based LNG prices," Snell said. "All of the LNG sold out of the United States so far has had some sort of indexed price back to Henry Hub."

From the prospective buyer's viewpoint, it provides an added pricing mix in their portfolios, particularly in the Far East, where buyers are seeking more diversity of sources of LNG, he said. "It was very popular, obviously, when crude oil prices were very high, but the popularity hasn't diminished because crude has gone down in price.

"There is a big desire, especially by the Japanese and Koreans, to diversify their pricing mix and to have different pricing points," said Snell. Henry Hub-based prices are still a "very small" portion of customers' overall LNG portfolios, he said.

"We're not anywhere close to be full up with Henry Hub-based prices; there is still a lot of room to go."

With preliminary federal filings for an anticipated expansion of fourth and fifth LNG production trains at its Cameron, LA, export facilities and a new agreement to look at exporting from its existing West Coast import terminal in Baja California, Mexico (see Daily GPI,Feb. 25), Sempra is talking to prospective customers, according to CEO Debra Reed.

Once the conceptional design is in place, that is when "you can begin commercial activity," Reed said. "So the active marketing [of additional LNG export volumes] begins right around now, and we have had numerous contacts with customers regarding all three of our projects." She said Sempra intends to outline more detailed groups of customers and their different interests at Sempra's annual analyst conference March 26 in New York City.

Snell said the talks with potential customers are preliminary and there is still a need to complete preliminary engineering work so they can have a "better ballpark on pricing."

"We are highly confident with [Cameron] trains four and five we will be a low-cost provider and that will position us well for additional volumes," he said. At the Energia Costa Azul facility in Mexico, he feels Sempra can be a "relatively low-cost provider, given both the existing facility and transportation advantages of being on the West Coast.

"We're coming into the market with at least two projects that should be at the low end of the price scale compared to other things people are looking at. We should be in a good position to sign up people later in the process."

Reed and Snell stressed that lower oil prices are not affecting the viability of any of Sempra's multi-LNG projects, and customers are not expressing any doubts during preliminary discussions.

"The buyers are looking to 20- to 25-year contracts, so spot oil prices are not a determining factor for them in looking at a long-term investment at a given facility," Reed said. "Our [potential] customers look at this as having a portfolio of assets to meet some of their needs, and the world demand for LNG is expected to increase considerably over the next 10 years. Customers are looking at having LNG that can give them some optionality, and the U.S. projects have the advantage of allowing freedom of destination for the exports.

"More importantly, in the United States customers have a liquid hub [Henry Hub] with upstream development and a robust pipeline network that is already paid for by someone else. From the customers’ standpoint, they want LNG that has that type of flexibility." Under the old oil-linked LNG pricing, many of the facilities that have been built in other areas of the world could not be built today, so U.S. LNG sources are actually now more competitive, Reed said.

Sempra reported increased profits overall and for each of its business units; 4Q2014 earnings were $297 million ($1.18/share), compared to $282 million ($1.13) for the same period a year earlier; full 2014 profits were $$1.16 billion ($4.63), compared to $1 billion ($4.01) for all of 2013.

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