Sempra Energy is sure that Merill Lynch will opt out of its contract to bring 500 MMcf/d through the new Sempra Cameron LNG terminal in Louisiana, according to the CEO of Sempra’s LNG unit, Darcel Hulse, who spoke at the company’s financial analysts meeting Thursday in New York City.

Merrill’s expected supply from Papua New Guinea has slipped and therefore it doesn’t want to “go live” yet, Hulse said, adding that eventually, “they’ll probably be back with us.” While he doesn’t see the supply longer term as a “total loss,” it can’t be counted on in the the next three to five years, he said.

Sempra two years ago inked a 500 MMcf/d deal for a portion of the Cameron plant capacity with Merrill Lynch Commodities Inc. — a 15-year, full-service deal, giving the company the capability of importing 3.7 million metric tons of LNG annually. The deal was contingent upon Merrill finalizing its LNG supply arrangements (see Daily GPI, March 10, 2006).

“Depending on the timing of Merrill Lynch Commodities’ arrangements, Sempra LNG would have the flexibility to service the capacity agreement from either the first [1.5 Bcf/d] phase of Cameron’s development, to be completed this year, or its proposed [1.15 Bcf/d] expansion, which could be completed in 2010,” a Sempra spokesperson said at the time the contract was announced.

For now there is a loss in the LNG unit carried from quarter-to-quarter related to the Merrill contract, according to Sempra COO Neal Schmale. Hulse said Sempra is doing “everything it can” to replace those volumes, and “there are a lot of potential things teed up. The next thing we need to see is a new liquefaction facility with some of the parties we have been negotiating with,” he said.

Overall, with four assured contracts for LNG supplies that will begin at the Costa Azul facility in North Baja California, Mexico, and Cameron, Sempra has a locked-in single-digit return on investment. When the other supplies fill out those two terminals — such as the replacements for Merrill’s 500 MMcf/d — Sempra will be drawing double-digit returns, Hulse said.

In 2008 Sempra will still show a loss of $40-60 million for its LNG operations, Hulse said because of pipeline charges and other upfront costs that kick in once commercial operations begin. He expects the first modest profit in the unit for 2009 ($20-40 million), and the real profits to begin rolling in about 2012 ($140-170 million).

It is in 2012 when Sempra estimates that there will be 12.5 Bcf/d of new LNG capacity coming on-line worldwide.

Hulse said Sempra does not accept the common assumption in the industry that Asia and other overseas markets are going to outbid the U.S. for LNG. He acknowledged that Japan, for various reasons, has a much higher price for LNG now, but over the long term things tend to even out, he said.

Half of the Indonesian LNG cargoes that Sempra has under contract through BP for its North Baja facility can be diverted to a higher-priced market, “but we get paid whether the gas shows up or not, and the half that they are obligated to deliver satisfies our contract with Mexico’s CFE [federal electric generation agency],” Hulse said.

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