While there are many upstream players with access to large amounts of liquefied natural gas (LNG), many of them don’t have access to markets, and San Diego-based Sempra Energy’s vision is to provide a “gateway” to these markets through its trading/merchant energy marketing unit and two permitted LNG receiving terminal sites.
Generally, Sempra’s “metrics are improving,” and Wall Street is increasingly taking notice, Sempra’s Don Felsinger told a Banc of America Securities energy/power conference last Tuesday in Las Vegas.
“The fact that we are one of the few physical players (in energy trading) gives us a real advantage,” said Felsinger, head of Sempra’s global enterprises unit. “Not only do we see liquidity from counterparties, like financial institutions, when it comes time to make delivery we can perform that role, and most financial institutions don’t have the back-office infrastructure to make physical deliveries.”
With two fully permitted LNG terminal sites Sempra appears to be in an excellent position, but in response to questions about the company’s often-stated commitment to not proceed with construction until there are sufficient contracts to guarantee a minimum return on their investment, Felsinger said that if they don’t get the contracts they need and want, Sempra can always sell the fully permitted sites and then look for other investment opportunities.
“Hopefully, we can have the majority of the contracts in place to lock in these terminals all at once, but if we don’t, we have had numerous offers to buy these sites, so we would turn around and sell them,” said Felsinger. The company is talking to banks now to determine how each of its contracts theoretically would be structured, the takeaway pipelines and all of the other issues, so it can be determined which would be project financed and which might be financed off Sempra’s balance sheet.
In response to other questions from the conference attendees, Felsinger reiterated that Sempra doesn’t want to be in the LNG supply business taking risk on the fuel. It sees itself as a facilitator for marketers and governments with LNG that is “stranded” right now for lack of a contracted market. The upstream investment in pipelines, drilling, liquefaction and shipping facilities, along with ships, is a much bigger (7 to 10 times greater), multi-billion-dollar investment than the receiving terminal end of the supply chain where Sempra is committed to investing about $1.5 billion over the next few years.
So each of the potential LNG sources has different requirements, said Felsinger, noting Sempra has to weigh the relative strengths of each. Ideally, they would like about five suppliers for each terminal with 500 MMcf/d equivalent of LNG under 20-year contracts, he said, but in reality that is not how it will work out for the two Sempra terminals — one at Costa Azul (1 Bcf/d) on the Pacific Coast of North Baja and the other, Cameron (1.5 Bcf/d), on the Gulf of Mexico coast in Louisiana.
“We’re talking to all sorts of different governments, different producers and different marketers, all of whom have LNG they would like to get to market,” said Felsinger. He encounters “a whole different set of issues” with each party with whom he talks. “You ask yourself, would you like to do a 20-year deal with a major (gas producer) that has a double-A credit rating, or would you rather do a deal that is more attractive with a government that doesn’t have a solid credit rating but it has a history of 15 or 20 years of performance in the energy arena? As we look at these, we try to determine going forward which of these make the most sense for us.”
None of the potential deals are the same, he said. Some suppliers would like to contract for four or five years because they are still uncertain about the U. S. market, something Felsinger said, lingers because no one is confident how long natural gas prices will stay relatively high.
“One of the challenges we had going back a year ago was that many people were not believers yet that the gas prices we were seeing would be sustainable. The attitude was ‘we don’t want to spend 4 to 7 billion dollars upstream if a long-term market is not there’. But they might have excess existing capacity that would allow five years of deliveries without a lot more upstream investment.
“For the first time we’re seeing in countries like Indonesia where they have previously relied on the super-majors (producers) to market their share that they (the countries) have now taken that role back to market their share. Indonesia is trying to define how it, as a country, will market its own gas and not be dependent on super-majors, who may have a conflict because they have gas in different countries. The host country always wants to make sure its gas gets to market first.
“We’re in the middle of all that. There is a lot of interest in terminals. In the last seven or eight months, the market is trying to see which of the competing players will actually be in a position to build some of these facilities. They are looking to see who has the wherewithal to build (on the Baja and Gulf of Mexico coasts).”
While Sempra is trying to work out contracts and the best way to structure its $1.5 billion investment in LNG, Felsinger said the company can count on predictable earnings for its two major utilities, along with about $100 million in annual earnings from its merchant power plant operations that total about 2,700 MW, and another $100 million-plus annually from its energy trading operations.
In trading, Felsinger said Sempra currently has the third biggest natural gas trading operation, averaging 13 Bcf/d, and 18th in the nation in electricity trading, handling about 82 billion kWh in the third quarter this year.
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