Cheniere's Louisiana plant takes export lead in US
A company founded to import LNG is ready to begin exporting cheap US gas
In 2008, Cheniere Energy’s Sabine Pass liquefied natural gas (LNG) was to be the largest receiving terminal in the US – and the world.
But the plant, located in Cameron Parish, Louisiana, is now poised to lead the US into a brave new world of LNG exports.
In 2006 the Federal Energy Regulatory Commission approved 17 import terminals with more than 24 billion cubic feet a day (cf/d) of import capacity, or a third of gross US demand of 80bn cf/d. Sabine Pass was being configured to import 4bn cf/d, or more than a quarter of that need.
That was before shale gas transformed the US energy landscape. Cheniere chairman Charif Souki says the rise of unconventionals came on faster and stronger than anyone could have imagined. “In 2008 we had some suspicions that maybe the imports wouldn’t work, but we didn’t really know for sure,” he told Petroleum Economist in an interview in Houston.
“Clearly in 2008, when we realised that there was a threat to the business model of importing gas we started looking at all we could do.”
The least likely solution – exports – turned out to be the most logical, because US gas production continued to rise even as prices for the commodity fell. “You had the sense that we’d unleashed something that didn’t want to stop,” Souki says.
By 2009, the historical relationship between natural gas and oil prices had deteriorated to the point where gas was selling at a 20th the price of oil (on an oil-equivalent basis), compared with a previous range pricing it a sixth the price of oil. Souki and Cheniere seized the moment, by reversing course. “At the heart of the business opportunity is the difference between American gas prices and global oil prices”, he explains. “It was a no-brainer.”
The speed at which companies like Cheniere have managed to shift gears shows the agility of the US LNG sector to adapt to changing supply dynamics.
So far, Cheniere is the only company to secure coveted export licences to countries without US free-trade agreements (FTAs). Under US law, exports to non-FTA countries – including Japan and the United Kingdom – have to be approved by the Department of Energy (DOE).
Even as developers scrambled to build re-gasification capacity, US gas output reversed long-term declines and has since risen to record highs nearing 25 trillion cf per year in 2012.
Not surprisingly, the need for LNG imports has declined in direct proportion to the amount of gas coming from unconventional shale fields like Eagle Ford in south Texas.
US LNG imports peaked at 770.8bn cf in 2007, according to the Energy Information Administration. By 2012 LNG imports had fallen to 175bn cf – barely 1% of US demand and the lowest since 1999 – and are poised to keep falling 4% per year until they are virtually eliminated by 2035.
Now the question is what to do with those idle terminals. Attention has turned to reversing the flows, allowing the US’ growing gas supply to course out instead of in.
The backlog of applications has grown since 2010 when it became clear that shale gas would transform the US energy landscape.
There are now 19 applications in front of US regulators to convert terminals previously configured for imports, to exports. “Obviously everybody is trying to take advantage of the market,” says Mona Settodeh, of Houston-based LNG consultants CH-IV International. Settodeh has worked on every conversion project in the US, including Sabine Pass, which will remain capable of importing as well as exporting LNG.
“The important thing to remember is that these are not import terminals, they’re bi-directional terminals,” she says.
On 25 March Cheniere received approval to sell UK-based Centrica 89bn cubic feet per year for 20 years. It follows a similar agreement with BG on 26 October, 2011, that will see Cheniere sell 3.5m tonnes per year (t/y) for 20 years.
The deals were groundbreaking for their fiscal terms. On top of being the US’ first long-term LNG export deals, they also broke ground by offering sales based on Henry Hub pricing.
Under Cheniere’s contract with BG, LNG will be priced at a 15% premium to US spot prices plus a stipend of $2.25/m British thermal units.
At present prices, the deal is potentially worth $8bn over the 20-year term, with a possibility of a 10-year extension.
In that regard, Sabine Pass has a winning combination of geology and geography, situated in close proximity to booming US unconventional gas fields and international export markets.
Located at the widest point on the Sabine River, the facility is only 3.7 nautical miles from open water. Once it hits the Gulf of Mexico, gas can go east into the Atlantic basin. Expansion of the Panama Canal will allow US gas to reach Asian markets in China and Japan after 2015.
Cheniere’s success lies in being able to match buyers looking for lower-priced Henry Hub gas, which is fast becoming a global benchmark.
Souki envisions a future where the Gulf of Mexico is one of several “interconnected” hubs – opening a new era of global gas-on-gas competition.
In his perfect global market, all gas would be priced the same after accounting for differences in the cost of transportation.
That’s exactly what he thinks will happen in the next decade. “I don’t think linking the price of one commodity to another commodity makes any sense at all,” he says.
“When you distort the pricing mechanism because you’re indexed to oil what you are doing is encouraging additional production and discouraging demand by insisting on a price that is indexed to oil. Why not link to peanuts?”