Rising costs are accompanying an unprecedented building surge in liquefied natural gas (LNG) and pipeline/storage projects in North America, leaving companies like Sempra Energy that are far along in project development sitting in strong bargaining positions, a panel of industry CEOs and CFOs emphasized Thursday at the Citi Power, Gas and Utilities Conference in Charleston, SC. Even with ever-higher costs, the panelists think lucrative returns will continue for all three gas sectors — LNG, pipelines and storage.
A record $30 billion of capital investments in play currently for major gas infrastructure projects was the prime reason for assembling a panel to explore the question of “Natural Gas Pipelines & Storage: Managing Record Growth in an Inflationary Environment; Can Returns Remain Steady?” The conference moderator noted that pipeline material costs have risen more than 50% in the last 12-18 months, but amidst this financial and inflationary pressure regulators are very happy with all the infrastructure being built, and so is the investment community.
Key points made by executives from Sempra Energy, Spectra Energy Transmission, AGL Resources and NiSource were:
“The facilities we have under construction, and others under way, definitely have a cost advantage to any new projects,” said Mark Snell, Sempra CFO. However, he said on the West Coast the “bigger barrier to competition” rather than cost has been California not allowing an LNG facility to move ahead. “The consensus is coming around, at least for the time being, that there is only going to be one West Coast facility for a while [Sempra’s Costa Azul along North Baja].”
While rising costs have more direct impact on future contracts and fuel prices in terms of domestic pipeline and storage projects, the LNG business is global and the $800 million to $1 billion receiving terminals are a relatively small part of the value chain that involves multi-billion-dollar investments in exploration/production and shipping, Snell said. “It is the tail wagging the dog on the LNG value chain,” Snell said.
“Facilities that are currently under construction are going to fill up over time and continue to be used,” he said. “But you see a lot more customers now who are interested in making sure they have the option to deliver LNG in different areas. They are buying capacity in more than one facility — they want to have deliverable capacity in Europe and in the United States because the arbitrage is far more valuable than the capacity charges they have to pay.”
Even with the inflationary pressures on the more domestically based pipeline and storage projects, “this is still a good environment to invest in whether it is LNG, pipeline or storage facilities,” said to AGL Resources CEO John Somerhalder. “It all seems to balance out even with the higher costs.”
The keys for shippers are “diversity of supply and diversity of access,” so the higher future charges are not dampening interest in marketers and shippers in these projects, according to both Martha Wyrsch, CEO of Spectra Energy Transmission; and Sempra’s Snell.
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