A contract signed last week for the liquefaction and export of domestically produced natural gas lends further credibility to the shale gas optimism that has swept the energy industry in recent years, and it could quiet skeptics who think the United States isn’t poised to become an exporter of gas to global markets.

A unit of global liquefied natural gas (LNG) player BG Group has agreed to buy domestic LNG from Cheniere Energy Partners LP’s Sabine Pass Liquefaction LLC, marking the first sales contract for the company’s U.S. Gulf Coast facility and the first for export of LNG from the Lower 48. The reservation charge to be paid to Cheniere is worth $8.2 billion over the 20-year life of the contract.

Cheniere Energy Partners owns 100% of the Sabine Pass LNG receiving terminal on the Sabine Pass Channel in western Cameron Parish, LA, and was the first to propose adding liquefaction capability to a U.S. regasification terminal to enable export of liquefied domestic gas, particularly that from shale plays (see NGI, June 7, 2010).

BG Group’s BG Gulf Coast LNG LLC has agreed to buy 3.5 million metric tons per year of LNG. Sabine Pass Liquefaction is planning to develop the ability to produce 9 million metric tons per year in the first phase of its project. Last May Sabine Pass Liquefaction received authorization from the U.S. Department of Energy (DOE) to export up to 16 million metric tons of LNG for export to all countries with which trade is permissible.

“This agreement gives BG Group an early entrance to the U.S. gas export market,” said BG Group’s Martin Houston, executive vice president and managing director for Americas and global LNG. “Exports have become and are expected to remain economically attractive due to increases in the North American gas supply base resulting from, among other things, existing and future development of abundant shale gas reserves.”

The contract news brought a big payday for Cheniere Energy Inc. shareholders. The company’s stock soared more than 68% to close at $10.32 on 10 times the normal volume. Shares got as high as $10.95 intraday but didn’t reach the 52-week high of $12.81. Last month Cheniere Energy Partners said it expected to net about $60 million from public offerings, some of which would be used to fund liquefaction development costs at Sabine Pass.

Cheniere spokesman Andrew Ware told NGI a final investment decision on the project likely would not be made until Cheniere has contracted 7 million metric tons of the initial 9 million metric ton capacity. “We anticipate having more agreements in place in the near future,” he said Wednesday.

In September analysts at Pan EurAsian Enterprises Inc. said, “…[A]t most, two LNG terminals to export domestically produced gas in the U.S. will be built in the U.S. over the next five years. However, unless the Marcellus Shale area supports one terminal, we believe that it is more likely [that] no export terminal will be built in the U.S.” (see NGI, Sept. 19).

On Wednesday the Pan EurAsian analysts said they had “been dubious that Cheniere would get anyone to sign up [for the project], and frankly, we are surprised. But BG is a very astute operator who must see something we don’t.”

Cheniere Energy Partners said Sabine Pass already has many of the facilities needed for an export terminal, making the project more economic than greenfield liquefaction. The project would use its existing infrastructure, including five storage tanks and two berths at the Sabine Pass terminal, as well as Cheniere Energy Inc.’s 94-mile Creole Trail Pipeline, which would be reconfigured as a bidirectional system.

Via Creole Trail the liquefaction facilities could source gas from NGPL, Transco, Tennessee Gas Pipeline and Florida Gas as well as the Bridgeline intrastate system, Ware told NGI. He said no gas supply agreements were in place for the project.

BG Group spokesman David Byford said Cheniere would be responsible for sourcing the natural gas needed to fulfill its commitment to supply LNG. As for where BG Group would take the cargoes, Byford would not speculate except to say cargoes could be sold into any country that has the appropriate Free Trade Agreement with the United States. “We don’t comment on specific sales arrangements,” he said.

BG Group is active in more than 25 countries on five continents.

BG Gulf Coast is to pay Sabine Pass Liquefaction $2.25/MMBtu for the annual contract quantity of 182.5 million MMBtu regardless whether it buys any LNG cargoes. The fixed charge, which works out to $410.6 million annually, is to be paid ratably on a monthly basis with 15% subject to annual inflation adjustment. Over the 20-year life of the contract the fixed charge is $8.2 billion. The contract includes an option for extension of up to 10 years. LNG cargoes would be loaded on BG’s vessels.

BG Gulf Coast also is to pay a contract sales price for each MMBtu of LNG delivered that is equal to 115% of the settlement of the New York Mercantile Exchange Henry Hub futures contract for the month in which the relevant cargo is scheduled, according to a Cheniere regulatory filing. Based on current prices the fixed and variable costs would add up to $6.68/MMBtu.

In May Societe Generale analyst Laurent Key opined on Cheniere’s prospects at Sabine Pass. “The goal for Cheniere will be to lock in a Henry Hub-Japanese crude cocktail price spread of future cash flows in order to get the right [financial] backing,” he said then (see NGI, May 30).

Over the last several months Cheniere has touted talks with numerous parties around the world that might be willing to take LNG from Sabine Pass (see NGI, Feb. 21). However, until now the company has been mum about progress toward contracts.

According to Cheniere, LNG exports from Sabine Pass could begin as early as 2015. The deal with BG Group is conditioned upon further regulatory approvals needed by Sabine Pass Liquefaction, project financing and a final investment decision by Cheniere.

“BG is one of the largest participants in the global LNG markets and will be a strong foundation customer for our Sabine Pass liquefaction project,” said Cheniere CEO Charif Souki. “Entering into this agreement is a significant milestone for our project, and we look forward to finalizing additional commercial agreements and proceeding with the development of the first two trains.”

The Sabine Pass terminal currently has regasification and sendout capacity of 4 Bcf/d and storage capacity of 16.9 Bcfe. It is being designed and permitted for up to four modular LNG trains, each with a nominal capacity of 4.5 million metric tons per year. Each LNG train is expected to enter operation six to nine months after the previous train. Commencement of construction is subject to regulatory approvals and a final investment decision contingent upon Cheniere Partners obtaining satisfactory construction contracts and entering into long-term customer contracts sufficient to underpin financing of the project.

BG Group, which is not an investor in the Sabine facilities, said it is continuing to pursue an expansion of the Lake Charles, LA, LNG import terminal to provide liquefaction services in a joint venture with Southern Union (see NGI, May 16).

Authorization has been received from the DOE to export up to 730 Bcf of natural gas per year (approximately 15 million metric tons) from Lake Charles to countries that have a free trade agreement in place with the United States (see NGI, Aug. 8). These countries are Australia, Bahrain, Singapore, Dominican Republic, El Salvador, Guatemala, Honduras, Nicaragua, Chile, Morocco, Canada, Mexico, Oman, Peru and Jordan, according to DOE. The agency is reviewing an application to export gas from Lake Charles to countries that do not have a free trade agreement with the United States.

“We don’t see exports from Lake Charles and then this third-party [Cheniere] transaction as being mutually exclusive,” Byford said. “We’re still in the early stages of Lake Charles and no final decision has been made on it yet. If we were to proceed with Lake Charles, initial exports wouldn’t be expected until 2018, whereas exports are expected from 2015 from the Sabine Pass facility.”

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