A deal to sell a 60% interest in one of three proposed liquefied natural gas (LNG) receiving terminals along the Texas coast stalled on Friday, but the parties remained optimistic that the transaction will be completed before the end of this year, paving the way for a LNG terminal in Freeport, TX.

Cheniere Energy Co., which laid out a broad plan last year to build three LNG terminals along the Texas coast, agreed in August to sell the majority interest in its planned Freeport terminal to entities controlled by Michael S. Smith, CEO and majority-interest owner of Freeport LNG Development LP. Smith founded Basin Exploration Inc. and was Basin’s CEO and largest shareholder before selling it for $400 million to Stone Energy Corp. (see NGI, Nov. 6, 2000).

The original closing date was scheduled by Sept. 19. However, the date was moved to Dec. 13 to give Cheniere more time to acquire a waiver of third-party rights and to negotiate a definitive long-term lease for the Freeport terminal site. Due diligence already has been completed to Smith’s satisfaction except for these two items, said Cheniere, “however, there can be no assurance that these conditions will be met and that the transaction will be successfully consummated.”

The transaction would allow Cheniere to retain 40% interest in the Freeport facility. Freeport LNG also would pay Cheniere $5 million in cash, and spend up to $9 million to obtain permits and prepare the project for the construction phase with no further contribution by Cheniere. The cash payments to Cheniere included $1 million at closing; $750,000 on April 15, 2003; $750,000 Oct. 15, 2003; and $2.5 million 30 days after all construction permits are obtained.

“We are continuing to make good progress toward a FERC filing later this year for the Freeport LNG project,” said Charif Souki, Cheniere’s chairman. “In working closely with Michael through his due diligence period, we have become even more confident that his active participation will be of significant value to the project.”

Smith said he’s still interested in building LNG facilities, “particularly at Freeport,” adding, “I was gratified to read the recently reported comments of Pat Wood, chairman of FERC, highlighting the importance of building such terminals.” But he said that it would be “preferable to have a final lease in place prior to filing” with the Federal Energy Regulatory Commission. Smith added that the parties were working “diligently” with the Freeport Port Authority to finalize a lease.

Cheniere has already completed a feasibility study; initiated permitting with the Federal Energy Regulatory Commission; and met with Freeport agencies and planners. Cheniere also has executed non-binding memoranda of understanding (MOUs) to sell 650 MMcf/d from the proposed terminal, and said it has held discussions with several suppliers. Assuming “prompt” regulatory approval, Cheniere said construction of the Freeport terminal could begin as early as next year, with LNG imports arriving by late 2005 or early 2006.

Smith’s proposal would offer more LNG, stating that Freeport LNG would file a FERC application within 90 days of closing to build a 1 Bcf/d, state-of-the-art LNG regasification facility on Quintana Island near Freeport. The property would be leased from the Brazos River Harbor Navigation District. A nine-mile, 36-inch pipeline from the facility to the Stratton Ridge storage hub would be built to allow adequate take-away capacity from intrastate pipelines.

Freeport LNG will not take gas market risk nor will it own or ship any of the LNG to the facility,” said Smith. “It will operate the facility on a fee basis for throughput from major international oil and gas companies and large independents.” A substantial portion of services would be sold through 20-year long-term contracts, he said. Smith also would fund all of the costs until all of the required approvals were obtained.

“Freeport LNG believes that long-term project financing for this $300 million-plus facility will be readily available once Freeport LNG has long-term capacity reservations for 60% of the project’s throughput,” he said. When the transaction was first announced three weeks ago, Smith said,”Given the demand for regasification facilities, the primary risk is regulatory approval.

“I believe the site Cheniere secured at Freeport is one of the best locations remaining in the country for this type of facility. It has all the attributes needed for regulatory approval, a deep water harbor in a petrochemical area with large pipeline takeaway capacity, and the local support of the Port Authority and the surrounding community.”

The agreement contains certain limits for the time period on Cheniere’s right to file for FERC permits or engage in the sale of LNG capacity in competition with Freeport LNG. Cheniere said it will retain its options on LNG terminal sites at its other two Texas sites in Sabine Pass and Brownsville.

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