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BG first in line for US Gulf LNG exports

UK group signs purchase agreement with Cheniere; US looks set for large-scale LNG exports

Kwok W Wan, LONDON: BG Group has signed the first purchase agreement for liquefied natural gas (LNG) exports from the US Gulf Coast. The UK firm has agreed a 20-year, 3.5 million tonnes a year (t/y) LNG purchase deal with Cheniere Energy to buy shipments from its proposed Sabine Pass export facility. The gas will be priced at 115% of Henry Hub, plus $2.25/million British thermal units (Btu), according to Cheniere.

“This is a ground-breaking agreement for BG, providing first-mover advantage in securing LNG exports from the US Gulf Coast,” said chief executive Frank Chapman. “It is the first agreement of its kind in the region and secures early access to the rapidly emerging commercial opportunities driven by material increases in US gas reserves.”

Cheniere chairman Charif Souki said: "Entering this agreement is a significant milestone for our project and we look forward to finalising additional commercial agreements and proceeding with the development of the first two [LNG-production] trains."

The Sabine Pass LNG-import terminal started commercial operations in 2008, but construction of a 9 million t/y liquefaction plant is expected to start in 2012 with first exports in 2015. The deal with BG, which is still subject to conditions and approvals, could signal the US is ready to export LNG on a large scale – the 1.5 million t/y plant at Kenai, Alaska, has been sending cargoes to Japan since 1969.

US exports becoming reality

The boom in shale-gas production – from nothing in 2006 to 4.3 trillion cf last year – has kept US gas prices flat, at around $4/million Btu, and left many newly built LNG-regasification terminals idle. The US imported 431 billion cf of LNG in 2010, according to government data, utilising just 8.5% of the country’s capacity.

Depressed North American prices make LNG exports an attractive way to make use of idle import terminals. Prices for LNG delivered to Europe are over twice as high as US gas prices, at around $8-10/million Btu, while Asian prices are higher still, at $15-17/million Btu.

To recoup billions of dollars of infrastructure investments, terminal owners are turning to exports to capitalise on the US’ shale-gas resources. The US Department of Energy (DOE) has approved LNG exports of up to 16 million t/y from Sabine Pass; and BG is hoping to turn the Lake Charles terminal – where it holds import capacity – into an export plant. The DOE has already approved shipments of 15 million t/y from Lake Charles to countries with US free-trade agreements, while another application to allow exports to all countries is under consideration.

But although five US export terminals are under consideration, which would equate to 58 million t/y of LNG export capacity (requiring nearly 8 billion cf/d of feed gas), it is unlikely they will all materialise, according to Pan Eurasian. For a 20-year period – the lifetime of an export project – the consultancy said UK gas prices would need to be consistently $4/million Btu higher than US Henry Hub, while Asian prices would need to be $7/million Btu higher.

Although this is the case now, partly because March’s earthquake in Japan has nearly doubled regional LNG prices, investment in US export capacity relies on prices remaining at these high levels. “The key question, for a decision about LNG export infrastructure investment in the US relies, wholly or in part, on Asian LNG markets – do you really believe this price anomaly will persist until 2035?” Pan Eurasian said.

Earlier this month, energy analysts Facts Global Energy forecast that a modest 7.5 million t/y could potentially be exported from the US, which will hit the market in the next three to five years.

The five US terminals under consideration are: Sabine Pass (16 million t/y), Lake Charles (15 million t/y), Freeport (12 million t/y), Cove Point (7.5 million t/y), and Cameron (7.5 million t/y).

BG bullish on LNG

But BG was very positive about its LNG business in its third-quarter financial statement. Despite a 14% fall in quarterly operating profit, to $620 million, compared with last year, the firm remained bullish. “In LNG, we expect total operating profit for 2011 to be some $2.4 billion, exceeding previous guidance,” said Chapman.

BG diverted 35 of its 56 LNG cargoes to Asia and 12 to South America during the third quarter. Only six were delivered to the US and two to Europe. And diversions to Asia are likely to continue, with BG estimating that Japanese LNG demand to increase by 6 million to 12 million t/y over the near term, and 9 million to 12 million t/y in the long term, as a result of March’s devastating earthquake.

Japan has been importing more LNG to make up for reduced nuclear power capacity, although it has also hinted at restarts of reactors, which have been shut for routine maintenance.

Separately, BG has signed a deal to supply 3.5 million t/y of LNG to India’s Gujarat State Petroleum. The 20-year agreement is expected to start in 2014. India is expected to increase LNG imports to feed its fertiliser industry

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