Having exited the global trading space and facing merchant power markets that are problematic, San Diego-based Sempra Energy will be placing renewed emphasis on its varied natural gas investments along with its California and foreign utilities. That was the essence of presentations at the energy holding company’s financial analysts’ meeting last Wednesday in New York City.
“In natural gas we are seeing a combination of low cost, abundant supplies in the United States from domestic shale production and increased demand for gas for power generation,” said Sempra CEO Donald Felsinger. “This will provide a number of opportunities for Sempra’s businesses. Lower gas prices reduce rate pressures on our utility customers and creates more opportunities to invest in natural gas infrastructure or peaking shale flows.
“Natural gas storage is economic at current market prices, and we plan to continue to invest in this sector,” Felsinger said.
Darcel Hulse, the CEO at Sempra LNG, said he personally does not think the current price differences will continue on a sustained basis.
In terms of global pricing, Hulse said that historically since 2000 prices around the world have remained very close until last year. “The question now is what are the prices going to do going forward? Are they going to converge again, or are they going to stay apart?” he asked rhetorically. That is the key question for Sempra.
“If they are going to forever stay apart, then you can justify liquefaction [investments] in the United States and send the [growing domestic-produced] supplies to global markets,” Hulse said. “If they are converging again, then it is going to be more difficult to ever do that, so that is the real issue going forward.”
For U.S. exports of liquefied natural gas (LNG) to pick up steam, the current significant wholesale gas price differences between North America and other major global markets will have to continue in the long term, according to Hulse.
Noting that Sempra does not have authorization to export multiple cargoes out of its LNG receiving terminal on the North Baja California Pacific Coast in Mexico, Hulse said with limited authorization from Mexican authorities there was a one-time export completed “with great success,” involving a cargo swap between the Atlantic and Pacific Basins. He called it a “unique opportunity” that Sempra intends to repeat.
The pricing conundrum creates what Hulse called “some unique challenges” for Sempra in the LNG business. While price separation would promote Sempra’s export plans, for imports, Sempra needs to have global gas prices converge in order to obtain additional supply for its two LNG terminals, which have one-third of their capacity currently without supply contracts, he said.
Two-thirds of the two terminals’ collective capacity is sold to what Hulse said are creditable counterparties under 20-year contracts, so what he calls the greatest opportunity to grow the LNG business is to “optimize out the unsold, remaining one-third capacity. Basically, in the short term, when we can’t get long-term contracts to fill that one-third there are a lot of things we can do, such as short-term options, cargo swaps, and we can reload cargoes at our Cameron [Louisiana] facility and export those.”
Sempra is now “eking out” profits from LNG, Hulse said, but its ultimate goal is to “try to get to the size of the business where we can control more molecules and distribute those molecules to the multiple markets around the world. With three major markets around the world, there are always opportunities for optionality among those markets.” He cited variables such as weather, nuclear power problems and other factors affecting the global LNG markets at any given time.
“There are opportunities to move cargoes around the world, if we can get our hands on the molecules to do that. So that is our ultimate goal in figuring out how we do that.” Hulse said there a several “opportunities” Sempra has been working on to do what he called “control the molecules.”
Sempra’s new, more gas-based strategy as outlined by Felsinger and several other senior executives is “narrower,” focusing on its utilities in California and South America and on “contracted energy infrastructure.” The company assumes that there is going to be increased conversions from older, more polluting coal-fired generation plants to natural gas.
“If you look at the age of coal-fired plants in the United States, 45% are more than 45 years old, so you look at the economics of meeting all the environmental requirements [for various air pollutants and greenhouse gas] and what you’re seeing is that a lot of the utilities with these coal plants are indicating they will retire a lot of them. So we are already starting to see increased use of gas to displace coal in some of these plants,” said Executive Vice President Debra Reed.
Citing an increase in U.S. gas reserves of 70% over the past 10 years, Reed said even with the current low wholesale prices for gas, the drilling for shale gas continues unabated. “While a lot of that is focused on the wet gas plays, the drilling is still continuing,” she said, adding that total U.S. gas production last year (58 Bcf/d) was at its highest level since 1973, with 25% coming from shale.
“What we can’t say for sure in looking at this picture is what natural gas prices are going to do in the future,” Reed said. “We don’t know if the current spreads between the United States and other areas is going to change over time. That’s why at Sempra for all of our gas plans we use the global forward curve for gas.”
Over the next five years, these forward projections are seeing gas prices stay in the range of $4.20/Mcf to $5.20/Mcf, with relatively low volatility. “We’re hoping this will give us some upside opportunities.”
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