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Sempra Sells Out LNG Export Capacity

San Diego-based Sempra Energy filled out its liquefied natural gas (LNG) dance card last week, announcing late Wednesday that is has inked a third and final commercial development agreement with a subsidiary of GDF Suez SA to develop the final liquefaction train at its proposed Cameron LNG export terminal in Hackberry, LA.

Sempra senior executives in a conference call Thursday noted that the company faces stiff competition. CEO Debra Reed and President Mark Snell attempted to make a case for Sempra's proposed $6 billion joint venture LNG export facility at the under-used Cameron site in Louisiana, while acknowledging that there are limits to the global LNG market.

"There is an awful lot of concern about exporting a tremendous amount of gas, but one thing we have to remind ourselves is that the LNG market, while it is big, is a fixed amount, and we have lots of competition around the world to sell that gas," Snell said. "Right now, we think there is a potential kind of excess demand in the near term of as much as 20 million metric tons a year, and it is mostly driven by Japan's desire to switch to more gas-fired power generation as it shuts down its nuclear fleet."

In April Sempra signed its first two agreements with Japanese industrial giants Mitsubishi Corp. and Mitsui & Co. Ltd. to develop and construct the proposed liquefaction facilities at Cameron (see NGI, April 23). Under those deals, Sempra would negotiate tolling agreements with the two companies for two-thirds of the facility's projected capacity. The agreement calls for GDF Suez taking the final 4 million metric tons per year of LNG from the proposed 12 million metric ton per year facility that expects to turn out the equivalent of 1.7 Bcf/d of LNG. Sempra hopes to start construction of the LNG export facilities by late next year. Mitsubishi and Mitsui signed similar deals, taking 8 million metric tons per year combined.

Like earlier deals with the Japanese firms, the French-originated GDF agreement binds it to fund all development expenses, including the design, permitting and engineering, as well as to negotiate a 20-year tolling agreement based on agreed-upon terms outlined in the commercial development agreements, according to a Sempra spokesperson.

More broadly, Snell said he cannot foresee a situation in which 20-30 Bcf/d would be exported. "It is probably not that big a market right now," he said. However, in Japan alone he also sees a potential for up to 10 Bcf/d of added LNG, and the Sempra Cameron facility has a proposed total capacity of something less than 20% of that (1.7 Bcf/d).

"There is a potential export market, but it is not unlimited, and I don't think the U.S. has to worry that we are going to have a large portion of our domestic gas supply go offshore," Snell said.

The liquefaction facility would use Cameron LNG's existing facilities, including two marine berths capable of accommodating Q-Flex sized LNG ships, three LNG storage tanks of 480,000 cubic meters and vaporization capability for regasification services of 1.5 Bcf/d. Sempra said the majority of the new facilities' $6 billion price tag will be project financed with the rest coming from the three project partners in a joint-venture arrangement.

Octavio M.C. Simoes, president of LNG operations, said fully contracting the capacity of the proposed export facility "moves us into the next phase of our plan to develop and construct this project at the Cameron site," which has less than half of its LNG import capacity contracted.

E. Scott Chrisman, vice president for Sempra LNG's commercial group, pointed out that Mitsubishi, Mitsui and GDF Suez are among the largest participants in the global LNG business, and as such, they provide "foundation customers" for Sempra's first attempt at a liquefaction project. The latest deals are "a major milestone" for the project, which still needs federal approvals to build the facility and to export to non-free trade agreement nations, which make up the bulk of the global LNG trade.

Cameron LNG has inked an engineering service contract with Foster Wheeler AG for project development, front-end engineering design to support Federal Energy Regulatory Commission applications, and support for engineering/construction contracting.

Regarding Sempra's West Coast LNG import facility along the Pacific Coast in North Baja California, Mexico, Snell said Sempra has taken a look at the option of exporting from that site, too, although he pointed out there is less land available at Energia Costa Azul compared to Cameron. "We're definitely taking a look at it. Our top priority is to get Cameron online and move that forward." Reed reminded the analysts that unlike Cameron, Costa Azul is fully contracted as an import facility under 20-year agreements.

As to how Cameron stacks up against the clear U.S. LNG export front-runner, Cheniere Energy Inc.'s Sabine Pass LNG facility near Cameron, executives emphasized that Cameron customer/partners give it added leverage in the marketplace throughout the Far East.

Sempra still has several milestones to pass that could take the rest of this year and most of next year, according to Snell. They include a DOE export license that is expected later this year, a Federal Energy Regulatory Commission (FERC) permit to construct the export facilities. "We've got a ways to go, but we're off to a very good start," he said. Separately, Reed said she expects the FERC approval process to be completed in the second half of next year.

For 1Q2012, Sempra's overall gas operations recorded $1 million in net income, compared with $63 million for the same quarter last year. Overall, Sempra reported $236 million (97 cents/share) in quarterly earnings, compared with $254 million ($1.05) for the same period in 2011.

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