U.S. liquefied natural gas (LNG) receiving terminal operators pushed to add more capacity at their facilities to prepare for what many thought would be an onslaught of needed gas supplies. But was it the right call?
Houston-based LNG developer Cheniere Energy last week said it was evaluating "strategic options" for its still unfinished Sabine Pass LNG terminal, which is nearing completion on the Louisiana coast. The terminal is slated to begin commercial operations in April, and once its ramps up, it would be the largest of LNG receiving terminal in North America. Cheniere, however, may not be running it.
"We do not believe that our current market valuation is reflective of the true value of this unique asset, and we are therefore exploring options to enhance value for our shareholders," CEO Charif Souki said last week. The company would prefer to remain independent, but at the right price, all options are on the table. Credit Suisse has been retained to handle any potential sales or joint agreements.
"The reality is we're a very small player with giants around us, so we're not for sale, but if some of our competitors want to buy us they wouldn't even notice," Souki told Dow Jones in an interview. "We're not for sale but we wouldn't be surprised if somebody tried to buy us." More than 20 parties have indicated they are interested in "potentially acquiring Sabine Pass or all of Cheniere."
The Sabine Pass terminal, designed with a peak send-out capacity of 4.3 Bcf/d, is scheduled to ramp up with an initial send-out capacity of 2.6 Bcf/d (see NGI, Nov. 19, 2007). It is designed to have 16.8 Bcf of LNG storage capacity with two berths capable of handling large LNG vessels. Capacity at the terminal has been contracted under 20-year agreements: 2.0 Bcf/d by Cheniere Marketing and 1.0 Bcf/d each by Total Gas & Power North America Inc. and Chevron U.S.A. Inc.
Souki noted that the Cameron Parish, LA, terminal is located on "853 acres of land remote from dense population and is just 3.7 miles from the open waters of the Gulf of Mexico. We do not believe that our current market valuation is reflective of the true value of this unique asset, and we are therefore exploring options to enhance value for our shareholders."
In addition to the Sabine Pass facility, Cheniere has proposed two other LNG receiving terminals that are in the early stages of development. And it holds a 30% stake in the Freeport LNG terminal in Freeport, TX, which is scheduled to be commissioned by mid-year. Together Cheniere's terminals would have an aggregate sendout capacity of 9.9 Bcf/d.
According to the Energy Information Administration (EIA), the United States currently has about 1.9 Tcf of annual LNG delivery capacity, or about 5 Bcf/d, which is more than double the amount of current imports. By the end of this year, estimated U.S. capacity is expected to be at 4.2 Tcf annually, or about 12 Bcf/d. New capacity expected to be added this year includes Sabine Pass LNG, Freeport LNG, Cameron LNG and Northeast Gateway.
LNG has been expected to fill in the gap between onshore supply and gas demand in North America. However, current LNG imports are running less than 1 Bcf/d as cargoes turned toward more expensive winter markets in Europe and Asia. Now some industry experts are concerned that U.S. capacity is overbuilt -- or on the verge of being that way.
How much LNG eventually will land at U.S. receiving terminals has been hotly debated in the past few weeks by industry, government agencies and pundits. Some see a virtual tidal wave of supply making it to North America and driving domestic gas prices lower (see NGI, Feb. 18a; Jan. 21). Others, including the EIA, expect fewer cargoes because of the lofty prices and voracious demand of Western European and Asian markets (see NGI, Feb. 18b). Energy industry pundits, meanwhile, say it is too early to tell how the LNG situation is going to play out (see NGI, Feb. 18c).
Cheniere's announcement came as no surprise to John Hopper, CEO of Falcon Gas Storage Co. Inc.
"I don't have a crystal ball, but...it's interesting that Cheniere would look to monetize that investment now versus later," Hopper told NGI. Cheniere may be "looking to recoup their investment" or they may feel cost pressures that have swept through the industry. The energy business in general has seen the cost to build skyrocket in the past year -- one of Falcon's storage projects was 8% above estimates, and that has turned into the norm, he noted.
"Everybody is experiencing cost pressure," he said. "We are experiencing it in construction, in labor. It's just a reflection in the industry. We manage our costs effectively because we do our work in house...but another consideration is that gas prices have run up, and Cheniere may have considered that." In any case, he said that down the road there will likely be "chronic supply shortages, and everyone will have to prepare to pay the price. It's good for storage, more LNG, but it matters where the LNG is landing, too. If there's more in south Louisiana, we'll need more storage to match up with the LNG.
"I'm not very good at predicting what's ahead for the market," said Hopper. "We don't know how much will be coming," but he said in any case, "we have to be willing to pay more for it. We can't compete with the prices overseas; they'll pay $15 to $20 [per Mcf]...During the winter LNG is going to go with the bid."
It also will not hit U.S. shores if there are problems in gas markets overseas. For instance, UK gas prices jumped 20% on Friday following an explosion and fire at Royal Dutch Shell plc's Bacton gas terminal in England, which handles North Sea gas. The Bacton terminal is a physical link to the European continent, and it handles as much as 20% of the UK's net gas imports.
Even if there is an undercurrent of stress in the U.S. LNG market, global energy companies still appear to want a piece of the North American action.
Houston-based Contango Oil & Gas Co., which had a 10% stake in the Freeport LNG terminal, last month sold its shares to Japan's Osaka Gas Co. for $68 million (see NGI, Feb. 11). And German utility RWE Group agreed to take a 50% stake in U.S. LNG developer Excelerate Energy LLC for $500 million (see NGI, Feb. 18d).
Potential buyers or investors in Cheniere could include Asian companies that want a way to move cargoes of LNG into U.S. markets in the summer, when demand for LNG in Asian markets is low, said Stacy Nieuwoudt, a research associate with Tudor Pickering Holt & Co. Buyers also could include major producers that don't have significant U.S. capacity for handling LNG, such as London's BP plc or Russian energy giant Gazprom.
"While any outcome is opaque at this juncture, the Sabine Pass terminal has long-term value, in our minds, within the context of indigenous U.S. decline curves (imported gas needed just to meet U.S. growth) and market entry by foreign buyers looking to gain a share of the U.S. natural gas market," wrote Friedman, Billings, Ramsey & Co. Inc.'s Rehan Rashid and Michael Jones.
The "bear case," they said, "is that the asset is never utilized (global demand is overwhelming), in which case shareholders should take profits now to avoid a complete wipeout, but we believe the upside from management's proactive strategy, the seasonality of global trade (which necessitates U.S. capacity for a summer storage put), and the $1.19/Mcf replacement value will yield more upside than down, warranting a bullish view going into the process."
The FBR duo gave Cheniere an "outperform" rating "as the company evaluates its options over the next six months, and we continue to value Cheniere based on natural market evolution whereby gas will not reach the terminal until 2014..."
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