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As LNG Exports Increase, Cheniere Becomes A Leading NatGas Buyer, Pipeline Capacity Holder

Last year was a transitional one for U.S. liquefied natural gas (LNG) export pioneer Cheniere Energy Inc. as exports from its Sabine Pass terminal in Louisiana ramped up. The company has become a leading buyer of U.S. natural gas and recently a buyer of gas from Western Canada, too.

"The fourth quarter of 2016 was another milestone quarter for Cheniere, as today we report financial results driven by nearly a full quarter of LNG production from the first two trains at Sabine Pass," said CEO Jack Fusco. "Transition and execution will remain central themes for Cheniere in 2017, as we expect Trains 3 and 4 at Sabine Pass to begin commercial operations, with Train 3 having produced its first commissioning cargo in January.

A demand increase in LNG seen last year was to be expected because of new supply coming online from projects in Australia as well as Cheniere’s Sabine Pass, said Chief Commercial Officer Anatol Feygin, during a conference call Tuesday. What was not expected, though, was the size and speed of the demand response, he said.

“Global demand last year was up 6% year-on-year, a 15 million tonne net increase, but more than 28 million tonnes of demand growth outweigh the 13 million tonne decline, which came mostly from a slowdown in Latin America and Japan.”

China and India led the demand charge. China increased LNG imports by more than 7 million tonnes compared with 2015, Feygin said, adding that the amount is equivalent to the production coming from nearly two conventional-size liquefaction trains. Demand from India increased by 4 million tonnes year over year, he said, with the bulk of the increase coming during the third quarter.

Also supporting the demand for LNG were Egypt and Pakistan, which are new entrants into the global LNG marketplace, Feygin said. Spain and France increased their imports as well.

“LNG supply grew more in 2016 than it has on an annual basis since 2011,” Feygin said. “In addition to our own plant starting up, four projects in Australia were either beginning operations are ramping up during the year, adding the majority of the 17.5 million tonnes of incremental supply.

“Declines at legacy producers helped to keep the year-over-year increase from being even bigger, despite the increase in Pacific Basin supply, the region still had to draw on LNG produced in the Atlantic Basin, especially during the second half of the year when the demand response from Asia was strengthened considerably.”

The fourth quarter saw a particular uptick in demand, Feygin said, while prices increased. Asian spot prices during the quarter reached two-year highs, nearing $10/MMBtu, he said. “The demand pull from Asia was headlined by China, which increased imports by more than 60%, about 3.5 million tonnes, in Q4.

“South Korea and Spain both imported 16% more LNG in Q4, while Taiwan was up by double digits at 13%,” Feygin said. “A cold snap in Asia helped to underpin the increased demand, and LNG was able to quickly fill in for nuclear outages, domestic gas shortages, and compete effectively with coal and liquid fuels. The first two trains were operating at Sabine Pass for most of Q4, and the profile of delivery destinations from the plant showed the ability of U.S. LNG to be reactive to market conditions.”

Asia grew as a destination for LNG volumes from Sabine Pass during the fourth quarter as the spread between Henry Hub and Asian prices drew U.S. supply into the Pacific Basin, he said.

Cheniere’s business model includes natural gas supply procurement and transportation as well as liquefaction. During the fourth quarter the company emerged as one of the largest physical buyers of natural gas in the U.S. market, acquiring more than 1.5 Bcf/d, Feygin said.

“We've quickly increased our intake at the [Sabine Pass] plant to more than 2 Bcf/d to feed liquefaction on the third train, which...is deep into the commissioning process and has started LNG production.”

Being a major buyer of gas means being a major pipeline capacity holder, too.

“Together, our two [liquefaction] projects [Sabine Pass and Corpus Christi] are one of the largest pipeline capacity holders in the country with more than 5 Bcf/d of firm capacity on eight pipeline systems,” Feygin said. “This capacity represents an annual expenditure of approximately $400 million in capacity payments between our two project companies but will ensure our ability to effectively manage intraday volume variances, price volatility and effectively operate as one of the largest gas buyers in the U.S.”

The Cheniere supply portfolio taps supply basins from around the United States. Recently, Feygin said, Cheniere struck its first supply deal to receive Montney Shale gas from a Canadian producer at a Henry Hub index price.

Cheniere has cargos available to sell into the short-term market now and soon will have more when the third train comes online at Sabine Pass, Feygin said.

By the end of Q4, the [marketing] group had sold and delivered 28 cargoes from the Sabine Pass terminal. The group also manages an LNG shipping portfolio needed to handle the volume coming from Sabine Pass and has chartered more than 20 tankers. Cheniere is one of the top five holders of LNG shipping capacity.

The company has uncontracted capacity at both Sabine Pass and Corpus Christi available under either FOB (free on board) or DES (delivered ex ship) terms, “...which allows us to be more flexible and creative with what we can offer buyers,” Feygin said. “Our global origination team continues to target customers with contracts on a range of terms, quantities and lengths, including LNG to power projects that are facilitated by floating regasification.”

Through Cheniere Partners the company is developing up to six trains at Sabine Pass. Each train is expected to have a nominal production capacity of 4.5 million tonnes per annum (mtpa). Commissioning on Sabine’s third train began in September. “Based on the current construction schedule, Cheniere Partners expects to reach substantial completion for Train 3 in the first quarter of 2017 and Train 4 in the second half of 2017,” the company said. Construction of Train 5 began in June 2015.

At Corpus Christi Cheniere is developing up to three trains, with each expected to have a nominal production capacity of 4.5 mtpa of LNG. Construction on Trains 1 and 2 began in May 2015, and as of Dec. 31, the overall project completion percentage was 49.2%. Train 3 is under development, with all necessary regulatory approvals in place.

Cheniere Energy Inc. reported net income of $109.7 million (48 cents/share), for the fourth quarter compared to a net loss of $291.1 million (minus $1.28), for the comparable 2015 period.  For the year Cheniere reported a net loss of $610 million (minus $2.67) compared to a net loss of $975.1 million (minus $4.30), for the comparable 2015 period.

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