Four years ago Cheniere Energy announced plans for four liquefied natural gas (LNG) import terminals along the Gulf Coast: one at Sabine Pass, one at Corpus Christi, another in Freeport, TX, and the last at Brownsville. Industry experts dismissed the plans of the tiny, virtually unknown company as premature, maybe even a little nuts. A lot has changed since then.
“When we started four years ago, nobody was breathing down our neck,” noted Cheniere Chairman Charif Souki in an interview with NGI. “Initially it wasn’t, ‘they are going too far, too fast,’ initially it was ‘what they hell are they doing?’
“We’ve come a long way.”
World energy leader ExxonMobil Corp. and at least a half-dozen other energy giants have copied Cheniere’s LNG plans and are muscling in on its territory. In fact, ExxonMobil also has planned four terminals and has occupied two sites Cheniere previously owned. Two of ExxonMobil’s projects would be built less than a few miles from where Cheniere currently is planning its own terminals. But the small energy company isn’t concerned.
“I would say that this country started realizing that maybe there was something that needed to be done about 18 months ago,” Souki said. “I commend FERC for being really on the ball. About 18 months ago, [FERC Chairman] Pat Wood started saying something needs to be done here. Then Alan Greenspan kind of put the finishing touches on that. Now there’s a feeding frenzy.”
Souki predicts that although there are about 18 LNG terminals currently planned for the Gulf Coast/offshore Gulf region, there will only be four or five new projects eventually built there.
“Our Freeport, TX, project has a high probably of occurring,” he said, noting that the project has received preliminary environmental approval from FERC. “Sempra already has its permits and is working with commercial issues at its Cameron project [in Hackberry, LA].
“I’m a little bit more of a skeptic on the offshore facilities because the technology is still untested, unproven and extremely expensive,” he said. “I think it will happen, but I think we are maybe one generation too soon. If you can’t find onshore facilities, then, yes, the offshore facilities would happen. But onshore facilities are at a huge cost advantage.”
According to Souki, offshore LNG projects are three to five times more expensive to build than onshore facilities. “If you take the Lake Charles tariff as the benchmark for U.S. facilities, it’s right around 30 cents/MMBtu plus 10 cents more to get it to the Henry Hub. I think you can build onshore facilities at a fraction of that today, maybe about 50-60% of that. The offshore facilities cost one to two times as much as Lake Charles and would end up costing at least 60 cents/MMBtu to regas and whatever the additional pipeline cost is to get it to Henry Hub.”
But in order to build onshore facilities, you have to find the right locations, and that isn’t easy. The Gulf Coast region has been picked over time and again. Cheniere believes it has several of the best locations in hand. ExxonMobil has ended up taking what remains, including two sites that Cheniere previously had rejected.
Souki said ExxonMobil’s Sabine Pass, TX, project will be difficult for a number of reasons. “We had that site under option for a year and we decided not to pursue it. It would have upset a lot of wetlands. There is a tremendous job of excavation that needs to be done at that site, and that would have posed a problem with spoil material in terms of where to dispose of it.”
The site is next to a wetlands refuge and across the waterway from residences on Sabine Lake. Souki also said it poses difficult water navigation problems because of its close proximity to the main shipping channel. “A ship moored is never completely protected from passing ships if something would go wrong,” he said. “It’s a low-probability type of event, but an incident like that did happen at Elba Island [Southern LNG’s terminal in Georgia] a couple of years ago. It could have been much worse if a ship had been moored there at the time that an out-of-control ship hit the dock.”
He said that Cheniere has chosen a better location, farther down toward the open water in a cove that is angled so that ships can come and go easily but are better protected from channel traffic.
Nevertheless, the concerns that arose over the ExxonMobil location aren’t necessarily project killers, said Souki. In fact, the E&P major already has Texas Gov. Rick Perry on board. “My suspicion is that with enough money and enough time you can probably resolve some of those issues. The wetlands you can mitigate. The spoil disposal is more of a problem. I’m pretty sure it’s a matter of money. But it’s a lot of excavation. And you can always post tugs [boats] on a permanent basis around your mooring for protection if you want to. It’s just expensive and cumbersome.”
ExxonMobil also could run into excavation and spoil disposal problems at its Corpus Christi site, which was previously owned by Cheniere, he said.
Despite his criticisms, however, Souki is not concerned about having to rub elbows with the energy giant, partly because Cheniere and ExxonMobil have different LNG business models and because he believes there is more than enough market need in the United States for LNG supply.
“Our model is very different than ExxonMobil’s model,” he said. “We are here to do business with anybody. ExxonMobil wants the facility just for itself. We don’t care if we work with Shell, BP, ExxonMobil, ConocoPhillips, whomever. We are just providing a service for a fee. They pay us rent and then can use our facility.”
Unlike many other LNG project planners, Cheniere is building its projects to be the operator, not the supplier. Its business plan avoids the costs associated with building liquefaction facilities overseas, building ships and signing long-term supply agreements.
Cheniere’s first major contract at its Freeport, TX, LNG terminal was with an industrial customer rather than a LNG supplier. Dow Chemical signed an agreement for 3.6 million tons per year of foreign-sourced LNG (500 MMcf/d) at Freeport for a period of 20 years, beginning in 2007.
Souki’s major concern is not LNG oversupply and competition but rather domestic demand destruction because of high gas prices. “My major fear is that in the short term when we can’t bring in LNG, that prices continue to go up. It would destroy a lot more demand. That is more of a concern because once the demand is destroyed it is very hard to bring back. You would have more industries leaving the country.
“Consumers are concerned. In fact we’ve been contacted by many companies who said ‘can you do the same thing for us [that you did for Dow] because at $4/MMBtu for 20 years we know we can stay in business, but $6 one day, even if we get $3 the next, is too much.”
That’s why Cheniere thinks there’s a sufficient market for more than one facility at the same location and as many as five new LNG terminals along the Gulf Coast. “I would urge people who think they have a good project to continue to develop them. [ExxonMobil] will be taking care of only ExxonMobil” but there are a lot of other customers to take care of, he said.
With a 62 Bcf/d gas market in the United States, LNG is almost insignificant at 2.5 Bcf/d. And right now it is cheaper to bring in LNG than it is to develop gas in the Gulf of Mexico.
That’s not going to change, said Souki, “because you can land LNG at $3.50 all day long from all over the world. Today to explore in the Gulf of Mexico if you can’t count on a $4 gas price it is very difficult. Exploration costs are trending higher. The offshore Gulf of Mexico represents about 14 Bcf/d of production on a very high decline rate. I’m reasonably confident that there is a lot of room for LNG at $4/MMBtu.”
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