Centrica signs 20-year LNG export deal with Cheniere
The utility has struck a deal to buy LNG from the Louisiana Sabine Pass
UK utility Centrica has struck a 20-year deal with US independent Cheniere Energy to buy 89 billion cubic feet per year (cf/y) of liquefied natural gas (LNG) from the Sabine Pass plant in Louisiana.
The two companies hope to see the first delivery under the contract, which includes an option to extend for a further 10 years, in September 2018.
As part of the deal Centrica will buy LNG on a "free on board" basis, which gives it destination rights for the cargoes. It will also pay a purchase price which will be indexed to the US Henry Hub contract, which typically trades at around a third of the price of northwest European natural gas prices.
Centrica will pay Cheniere a firm price of $3 per million British thermal units (Btu), plus a fee of 115% of the prevailing Henry Hub price, for the procurement and liquefaction of the gas. On 25 March, the day the deal was announced, US Henry Hub prices were trading around $3.90/m Btu in New York.
Centrica said it also has the right to add an additional 205bn cf/y of import capacity at the UK National Grid's Isle of Grain LNG terminal in southeast England.
Cheniere's Sabine Pass development is, so far, the only one granted permission by the US Department of Energy (DOE) to export LNG to non-free trade agreement countries. The DOE is considering export applications from a further 19 projects.
Cheniere is developing six liquefaction trains, each with capacity of around 4.5m tonnes per year, near the Sabine Pass LNG terminal in Louisiana. Cheniere has begun construction of the first two trains and expects to start construction of the third and fourth trains this year. The permitting process and preliminary engineering work has also been initiated for the fifth and sixth trains, Centrica said.
The liquefaction project will make the Sabine Pass LNG terminal the first facility in the world capable of both exporting natural gas as well as regasifying imported LNG.
Centrica will export gas from the fifth LNG train at Sabine Pass, on which preliminary engineering work has already begun. The contract is subject to a number of conditions, including Cheniere receiving the necessary regulatory approvals for the DOE, securing finance, and announcing its intention to proceed with the fifth LNG train.
"Security of UK energy supply lies in diversity, so I am pleased that Centrica has announced that it has secured a long-term North American liquefied natural gas export contract with Cheniere Energy," the UK's Secretary of State for Energy and Climate Change, Ed Davey, said. "The UK already receives gas from a range of countries and we can now add the US to Norway, the Netherlands and Qatar as sources of supply."
Centrica says the 89 billion cf/y of gas will supply around 1.8m British homes.
The UK faces a looming electricity supply crunch as around 20% of the country's existing generating capacity will be shut down over the next 10 years. A combination of the global financial crisis, tough environmental targets for reducing carbon emissions and the closure of ageing power stations are all expected to tighten supply and may lead to higher electricity prices for consumers.
US gas prices have tumbled from around $10/m Btu in 2008 to around $3/m Btu last year as domestic shale gas production ramped up.
UK natural gas prices for same-day delivery soared to $22.80/m Btu on 22 March as a key pipeline that carries gas to the country from continental Europe was temporarily closed. This is more than double UK natural gas prices in February, according to data from pricing agency Platts. Recent cold weather in the UK and low natural gas stocks added support to prices.
The UK government is hoping to develop its own domestic shale gas industry and recently announced tax breaks in a bid to encourage would-be developers. The government gave the go-ahead for hydraulic fracturing (fracking) last year after an 18-month pause. The government banned fracking in May 2011 after Cuadrilla Resources' drilling operations caused two tremors near the city of Blackpool, northern England.
Cuadrilla said it has said it is sitting on 200 trillion cf of shale gas in the Bowland basin, northwest England. A new study by the British Geological Survey into the UK's shale gas reserves is due out soon.