Whether its another expansion of a major interstate pipeline or lining up more contracts for a new liquefied natural gas (LNG) receiving terminal in the Gulf of Mexico in the current subdued global market, there are always “uncertainties,” said Sempra Energy CEO Donald Felsinger, but he likes Sempra’s position in the North American gas markets. That was the essence of Felsinger’s remarks during a second quarter earning conference call with financial analysts Thursday.
As a major equity player with Kinder Morgan in the Rockies Express Pipeline (REX) segments, Felsinger said he and others from Sempra recently participated in a meeting among REX backers in which all of the cost estimates for the pipeline were shoved upward, putting the current overall estimate for REX and its expansions eastward at $5.6 billion, of which Sempra is responsible for $1.4 billion.
“There are always the regulatory uncertainties, and we have had quite a few conditions from the Federal Energy Regulatory Commission [FERC] that we have to meet,” Felsinger said. “As we look at the environmental and routing conditions, there is always the chance that costs can change, but we think that the $5.6 billion is a good number with what we know at this time.”
While noting “a lot of progress” in recent months in getting gas flowing on REX, Felsinger said the project still faces the challenge of severe cost increases on the eastern-most segments of the proposed pipeline. He attributed the increased cost pressures to labor escalations and changes in the preferred route.
When fully operational, REX will provide about $650 million in equity investment for Sempra, which Felsinger estimated will provide about $70-80 million of annual profits to the San Diego-based energy holding company. “That’s an attractive return on investment.”
Felsinger said that the current “high-cost environment” makes it harder for new pipeline projects to compete with REX. “Early on, we were able to lock-in certain costs, such as steel and labor, for the first half of the pipeline,” he said. “That type of hedging is not available in the current cost environment. REX or any other new pipeline could not be duplicated today at the same price.”
In this environment, building the last, so-called northeast expansion of REX into New England is not a sure thing, according to Felsinger, and a smaller competitor may end up moving into that market.
In the LNG sector, Sempra’s senior officials think they are sitting in a strong position with the North Baja California, Mexico, and Cameron, LA, facilities providing a return on investment even when they are not operating at full capacity. And if they are right, a new influx of LNG supplies will be hitting the global market in the next couple of years.
“We’re in a better position than other people that are in the space today,” Felsinger said. “There is no urgency for us to go out and do something where we give away capacity. We’re sitting here with full contracts at Costa Azul [North Baja] and contracts at Cameron, on which in total we’re getting about a 9% unlevered return.
“We’re now looking at what is happening upstream with the [global] LNG supplies, and we see them coming on stream.”
Sempra COO Neal Schmale said he is talking to many people in the industry about capacity at Cameron, and the key point is that Sempra’s “fundamental view is that the LNG market hasn’t changed that much. It is absolutely true there is a little bit of a slowdown because these [liquefaction] plants have taken longer to come on stream, but over the lifetime of our facilities we think the economics are going to be as we thought they were originally.”
By the end of 2009, the world LNG supply will be increased by about 50%, Felsinger said. “This bodes well for us because a lot of this gas will be looking for a home. Our terminal at Cameron is going to be looked at as an excellent location in terms of access to pipelines, storage and markets. We think it is one of the better terminals in that region.”
Other industry leaders recently have also pointed out the expected increase in LNG importing facilities around the world. Shell’s head of global LNG Kathleen Eisbrenner told a GasMart audience earlier this year that while there are 17 countries currently importing LNG, that number is expected to grow to 29 by 2012, while demand in countries like India and China continues to grow. She particularly noted the additions of importing facilities in Brazil, Argentina, Uruguay and Chile which will be looking for supplies during their winter, a time when excess supplies had been directed to filling U.S storage (see Daily GPI, May 22).
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