Industry analysts following flows of liquefied natural gas (LNG) will be drawing another arrow on their maps if Cheniere Energy Partners LP (Cheniere) is successful in a bid to add liquefaction services at the Sabine Pass LNG receiving terminal in Cameron Parish, LA.
Adding liquefaction would transform the terminal into a bi-directional facility capable of liquefying and exporting gas in addition to importing and regasifying foreign-sourced LNG. Using infrastructure at the existing regasification facility would reduce liquefaction facility development costs far below those of a greenfield project, Cheniere said.
A number of industry analysts and executives have suggested that the U.S. Lower 48 could become an LNG exporter; however, many have also said that such a scenario is years away. If Lower 48 export capability is developed, it would be good for producers in a couple of ways, independent energy analyst Pat Rau told NGI last year.
“If U.S. producers had the ability to export domestic production in the form of LNG, they would benefit in two ways: (1) by the margins they achieved from the actual LNG they export, and (2) by the higher margins they get on their domestically sold gas simply because they have the option of exporting gas to worldwide markets,” he said (see Daily GPI, Jan. 8, 2009).
Most vocal among producers who’ve suggested that the United States should export some of its gas is Chesapeake Energy Corp. CEO Aubrey McClendon. “We make a great widget here, and it’s valued at ‘x’ here and ‘2x’ around the world, we have to figure out a way to get it on a boat with linkage to world prices…We are studying that right now. We have to have linkage for U.S. gas to world markets. And we’re dedicated to achieving that linkage,” McClendon said nearly two years ago when he also hinted that his company was involved in LNG export plans (see Daily GPI, Aug. 4, 2008).
The company said it anticipates that LNG export could begin as early as 2015. Cheniere plans to make a request to the Federal Energy Regulatory Commission (FERC) to begin the National Energy Policy Act pre-filing process by the end of June.
Some analysts have speculated that exporting LNG from the U.S. Lower 48 would be a no-go as releasing supplies into the world market would be seen as diminishing America’s energy independence.
“It was just a matter of time before someone was brave enough to take on the political battle it may entail [to be able to export LNG],” analysts at Pan EurAsian Enterprises Inc. said Friday. “While this follows the Kitimat [LNG] decision not to build an LNG import facility but instead build a liquefaction, export facility [see Daily GPI, May 26], it strikes us as courageous. Kitimat is in Canada, and that is quite different.”
The analysts also made the point that as the oil and gas industry lobbies for more access for exploration and production activities, the desire to export gas would appear to contradict the argument that domestic supplies need to be developed wherever they can be.
“But, if the projections being bandied about concerning the vast potential for production of gas from shale formations are anything like accurate, then it may be in the economic interests of the industry, and the country, to export LNG,” the Pan EurAsian analysts said. “This will be the argument, and it will be interesting to watch it unfold.
Based on preliminary estimates, the expected fee for bi-directional services at Sabine Pass would be about $1.40-1.75/MMBtu. The service would allow customers to source gas supply from the U.S. pipeline grid at prices indexed to Henry Hub.
“We believe current market fundamentals have created an opportunity for the U.S. to offer natural gas to global markets at competitive prices,” said Cheniere CEO Charif Souki. “The U.S. is experiencing an increase in natural gas production, primarily driven by unconventional gas plays, while natural gas demand in the U.S. continues to lag behind market projections.
“Due to the depth of the markets in South Louisiana with an abundance of supply and existing pipeline infrastructure, we can provide an additional outlet for U.S. natural gas production while offering a low-cost source of supply for global buyers seeking alternatives to oil-indexed contracts.”
During a conference call with financial analysts to discuss the project — the company’s first-ever conference call, Souki said — the CEO allowed that Chesapeake is backing the project and has offered up to 500 MMcf/d of production; however, no agreements have been signed.
Souki noted the recent evolution of gas shale plays in the United States. While the Barnett Shale of North Texas used to be king, it has been overtaken by the Haynesville and Marcellus shales with the Granite Wash and the Eagle Ford emerging quickly. “It appears that the drilling is going to continue at a very, very fast pace for a reasonable period to come with a commensurate increase in production,” Souki said.
He noted that the Northeast is becoming “saturated with indigenous gas,” thanks mainly to the Marcellus, which means Gulf of Mexico region gas is going to have to stay in the Gulf region or be exported.
LNG from Cheniere’s project would go to Europe and possibly Asia, Souki said, as well as to some extent to South America. The argument that taking supplies out of the United States would be detrimental to the nation’s energy security doesn’t fly with Souki.
“There’s a ton of LNG on the globe right now and it doesn’t know where it wants to go, but it doesn’t want to come to America at $4,” Souki said. “You’ve got ships running around in circles not quite sure where to go. Taking a Bcf a day out of the 62 Bcf/d of production in the U.S. is not going to make a difference.”
Last year Cheniere received approval from FERC to modify Sabine Pass for re-export of cargoes (see Daily GPI, June 2, 2009). Re-export is a means of taking advantage of inefficiencies in the LNG marketplace, Souki told NGI last December (see Daily GPI, Dec. 14, 2009). “I think if you see an opportunity because there’s an inefficiency in the market you take it,” he said. However, he added at the time that he did not expect the re-export of cargoes to become commonplace or to continue for long in the United States.
Last March Cheniere Marketing LLC applied for a permit to export on a spot basis over a two-year period up to 500 Bcf of previously imported LNG.
Earlier this year Cheniere and J.P. Morgan struck a deal that gave the gas and power trading house access to regasification capacity at Sabine Pass (see Daily GPI, April 5). That same month Gazprom Global LNG Ltd. (GGLNG) and Sempra LNG, a subsidiary of Sempra Energy, signed an agreement to allow GGLNG to supply LNG to Sempra’s receipt terminal in Cameron Parish, LA (see Daily GPI, April 23).
Souki said J.P. Morgan is on board with the liquefaction project, which is in line with what Paul Posoli, J.P. Morgan head of global power, gas, coal and emissions, described as the firm’s view of gas markets back in April.
“It’s becoming more obvious to us that trading North American gas and trading European gas independently from one another doesn’t make sense. Although five years ago the two really did trade independently from one another,” Posoli told NGI.
Souki said Friday that Cheniere has begun pursuing contractual arrangements related to the LNG liquefaction and export project and has received indications of interest from both potential gas buyers interested in capacity and U.S. gas producers interested in committing supply to the project.
“Furthermore, we believe the opening of new markets for U.S. natural gas would reduce price volatility, increase stability in markets, and support continued energy investments in the U.S,” he said.
The Sabine Pass site can accommodate up to four LNG trains capable of processing approximately 2 Bcf/d. The capacity of each train would be approximately 3.5 million tons per annum (mtpa). The initial project would include two trains with liquefaction capacity of approximately 1 Bcf/d. Expansion would be considered based upon customer interest.
Cheniere estimates that it can construct liquefaction capacity comparable to liquefaction expansion economics since the terminal already has many of the needed facilities for an export terminal. Cheniere would use existing infrastructure, including five storage tanks and two berths, as well as Cheniere Energy Inc.’s 94-mile Creole Trail Pipeline, which would be reconfigured as a bi-directional system.
The 853-acre Sabine Pass site is strategically situated to provide export services given its large acreage position, proximity to unconventional gas plays in Louisiana and Texas and its interconnections with multiple interstate and intrastate pipeline systems, Cheniere said.
Cheniere said it plans to work with Bechtel Oil, Gas and Chemicals Inc. to design and construct the liquefaction facilities, using the ConocoPhillips Optimized Cascade liquefaction technology.
Analysts questioned Souki about the company’s ability to finance the project. While not providing details on projected project costs — except to say that Cheniere’s export project will cost less than Kitimat’s because it requires less new infrastructure — Souki said long-term contracts would be enough to secure the necessary financing.
He said the approximate $1.50/MMBtu take-or-pay rate plus fuel costs has been attractive to parties with whom the company has discussed the project. In fact, Cheniere has been told, “‘If you need a few more cents to make it work, please don’t hesitate,’ which is a very unusual bargaining position,” Souki said.
The United States currently exports LNG only from Alaska, and some plans for a pipeline from the state’s North Slope to deliver gas to Lower 48 markets include the potential for LNG export to Asian markets as well (see Daily GPI, May 20; May 19, 2008).
Cheniere owns 100% of the terminal, which is now operating with sendout capacity of 4 Bcf/d and storage capacity of 16.9 Bcfe. Cheniere Energy Partners is a subsidiary of Cheniere Energy Inc.
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