Flexible destination liquefied natural gas (LNG) contracts, pipeline/storage inventory, a first-rate commodity trading unit and its newly found international banking partner have made Sempra Energy a global energy player, and the faster that LNG joins the global commodity markets, all the more successful it expects its Connecticut-based commodities business to become. That was the essence of what Sempra LNG and trading executives told the Wachovia Securities LNG Conference Nov. 13 in Houston.
The global market will dictate where LNG flows, Sempra LNG CEO Darcel Hulse said, and he is confident that the United States can successfully compete for those supplies as it has in other global commodity markets, ranging from oil to steel to precious metals.
"Marketplace dynamics and price will determine where the gas flows, and it will always govern that," Hulse said. "Once we get enough infrastructure in place in the United States as we do in oil, gas will begin to look like a commodity just as oil made the transition several years ago."
In this newly developing global marketplace for natural gas, the ability to employ both physical and financial arbitrage or hedging strategies will be determined by the combination of Sempra's infrastructure in terminal, pipelines and storage, its trading arm, and now its pending joint venture with the Royal Bank of Scotland, RBS Sempra Commodities LLP.
A key to playing physical arbitrage is having supply contracts with destination flexibility, Hulse said, adding that Sempra has that for half of the Indonesian gas it has under contract to come through its Costa Azul terminal, which is set to open early next year along the Pacific Coast of North Baja California, Mexico. "That's the foundation," he said. "And then you need firm regasification capacity."
Adding a different dimension is financial arbitrage, Hulse said. It requires playing the financial arbitrage between two markets. "You have to have a viable trading entity that is strong in both those markets, with the control of the cargo when it actually sails from its source," he said.
Sempra's trading in recent years has been growing globally, but "not as fast as we would have liked," said Christine Cantor, senior vice president with Sempra Commodities. "With our joint venture with RBS, we're expecting massive growth."
She calls the new partnership with RBS, which is scheduled to be closed in early January, "the perfect marriage," linking the fast-charging physical assets side of Sempra with the trading and now global financial expertise and leverage from RBS. Cantor said RBS' "AA" credit rating is "huge" for Sempra's fast-expanding trading operation.
With the RBS financing and access to major customers, Sempra's success in trading between various energy markets in the United States is going to be expanded globally, Cantor said. "We're not there yet, though; there is still some ways to go in terms of access to supplies and other issues."
Cantor said U.S. LNG imports have varied greatly in recent months and years, with month-to-month results that vary widely from positive to negative. However, she is less concerned about this than the volatility, which is always the trading unit's ally.
In announcing the partnership with RBS last July, Sempra CEO Donald Felsinger and other senior executives indicated that other parts of its business can benefit from the tie with the Royal Bank of Scotland, one of the world's largest financial institutions and a leader in financing major energy and natural resource facilities. They said RBS's global project financing leverage could significantly help Sempra's already substantial holdings in North American LNG projects.
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