Having long been a major importer of liquefied natural gas (LNG), the US is now poised to become a significant exporter of gas. Ingrid Norton reports.
Cheniere Energy, a Houston-based energy company, is preparing to convert its Sabine Pass LNG import terminal in the Gulf of Mexico into an export plant for LNG.
Cheniere, which is in the process of securing financing for the project, is the first company to secure the US government’s approval to export LNG to countries that the US doesn’t have a free trade agreement with.
Seven other projects are pending approval on the Gulf coast of the United States, while three projects in Canada are also vying to export LNG from British Colombia.
The conversion of Sabine Pass from an import to an export facility is emblematic of a larger market reversal, in which discoveries of massive shale gas repositories have pushed the US from being a net importer of LNG – long projected to become one of the world’s largest – to becoming a potential exporter.
According to a report by the US Energy Information Administration, the United States will be a net exporter of LNG by 2016, starting with a capacity of 1.1 billion cubic feet per day and increasing by an additional 1.1 billion cubic feet by 2019. The US will be an overall net exporter of natural gas by 2021.
Discoveries of massive shale gas reserves, strong domestic production, and increased demand for natural gas in Asia and Europe will continue to shrink imports of LNG by 30% in coming decades.
The prices of North American gas, indexed to the Henry hub, have consistently stayed between US$4-6 per million British thermal units (btu) over the past year and a half, while Asian and European prices have risen to double that, making exporting to higher-priced markets attractive for US companies.
According to a February Reuters report, forward prices in the UK reflect the potential of exports from the US to impact the market, with 2015 curve gas prices trading at US$9.4mn btu, mirroring the cost of shipping LNG to Britain.
Chuck Yost, president of Merlin Associates, one of the leading engineering consulting companies for LNG projects, says that more important is the US’s ability to meet rising demand in Asia. “The Gulf coast projects are going to be enhanced considerably when the expansion of the Panama Canal is complete in 2014,” says Yost. “That will allow Gulf coast exports to reach Asia and make the US potentially competitive with Australia.”
Change of direction
Andrew Ware, a spokesperson for Cheniere, has worked at the company since 2005 and has experienced the full reversal of the market for LNG imports in the US. He called the past several years “a rough ride”; the company sold its interests in an LNG terminal in Freeport to construct the regasifaction facilities at Sabine Pass in 2008.
It was to be the largest import terminal in the world, but by the time is was built and contracted, the market had flipped. The company incurred debt and had to lay-off employees. But the company’s early overreach also made it the earliest to realise the potential of LNG as an export and line up the necessary permits.
“We got out of the gate before everybody else in this market,” says Ware. “The project has fully sold out on a commercial basis.”
At the end of January, Korea Gas Corp (Kogas), the largest LNG buyer in the world, joined GAIL India, BG, and Gas Natural Fenosa by signing a 20-year sale and purchase agreement for LNG exporting at Sabine Pass.
Ware says that he considers the customers to be representative of the potential of US exports to go from the Gulf to Asia and Europe.
According to a January report from Poten and Partners, one of the major international consulting firms for LNG, the four buyers give Cheniere a guaranteed long-term cash flow of nearly US$2.3bn per year once the 18 million metric tonnes per year (MMt/y) project reaches full operational capacity in 2018.
The report says that Cheniere is finalising its financing package and hopes to reach its final investment decision by the end of the first quarter.
Cheniere, which is advised by Société Générale, has already signed an agreement with Bechtel to finance the initial 9 MMt/y phases, a US$3.9bn engineering, procurement, and construction contract.
Kogas is not an equity partner, though Korea’s export credit agency is likely to provide funding, according to Poten and Partners.
Terry Newendorp, CEO and founder of Taylor-Dejongh, an independent investment banking firm which specialises in project finance for oil and gas, says that the financing of Sabine Pass Liquefaction by Cheniere will be an important bellwether for other LNG export projects in North America.
He says that the reality that the US is no longer an importer only sank in during the second quarter of last year, as global LNG players realised they could no longer recover their costs of leftover seasonal cargos by selling to the US.
He refers to Cheniere as the cutting edge. “If you really want to secure a long-term off-take in the US, Cheniere is clearly the most advanced LNG project.”
Yet Cheniere doesn’t have the balance sheet to support the multi-billion dollar capital expenditures necessary to build LNG liquefaction facilities.
Newendorp says that worries about Cheniere’s fraught balance sheet – including an outstanding US$204.5mn debt, with US$298mn repaid in January – are fast being dispelled by robust interest in the project by investors. The US private equity firm, Blackstone Group, announced on February 27 that it will invest US$2bn in building the Sabine Pass liquefaction plant, which will break ground in June.
Newendorp calls the Blackstone investment “huge”. “There are plenty of rumours around Houston that the debt is already lined up,” he says. Cheniere’s ability to attract financing will be an important marker for companies considering building export LNG facilities in how EPC is handled, how bankers view the completion risk, and the capacity of markets to raise the necessary US$4-5bn dollars to finance the first stages of the liquefaction facilities.
Cheniere is the only US company that has received permission to trade to countries with or without free trade agreements (FTA). Other projects in Texas, Louisiana, Maryland, and Oregon have received approval to export to FTA countries, but not non-FTA countries.
US regulators are under pressure by domestic industrial interests that use gas and want to ensure that exported LNG does not impact US prices. In December the US department of energy temporarily ceased granting additional licenses to export US LNG while the department completed a review of the effects of LNG exporting on US markets.
The Canadian government is more readily committed to facilitating LNG exporting. Gas reserves have also been discovered on the Pacific coast of Canada, which is expected to export to Asia too.
A report from Rich Coleman, British Colombia’s minister of energy and mines noted that as of the close of last year, 1,000 cubic feet of natural gas costs less than US$4 in North America versus US$16 in Asia, and stated his commitment to have the first LNG export plant up and running by 2015, with three LNG exporting facilities in British Colombia by 2013.
“We do have an export market in Canada,” says Robert Dye, senior vice-president at Apache Corporation, which along with Encana Corp and EOG Resources, is developing Kitimat, an LNG exporting project in British Colombia designed to export at high prices to Asia.
“North American prices are fairly low so this gives us an outlet for some fairly material gas reserves. It gives a very nice opportunity to produce at what will hopefully be a good price,” Dye remarks.
Although no final investment decision has been reached by Apache, the corporation will most likely fund its development of Kitimat LNG through internally generated cash flow. When it comes to development in the US, Dye adds: “Whether we can get the permits in place to export remains to be seen.”
The US department of energy has received eight separate export applications from liquefaction projects totally over 13 billion cubic feet per day, according to the Poten and Partners report.
Political pressures to slow the production of LNG export facilities include two bills introduced by a US representative in mid-February. But the US department of energy has argued that such developments will create jobs and bring money into the US.
Philip Weems, a lawyer at King and Sterling who specialises in LNG contracts, says because it is still uncertain if the US government will place limitations on burgeoning LNG exports, the projects in Canada may end up racing ahead of other exporting projects.
“We’re talking about some of the largest financing in US history,” says Weems. “There’s no evidence yet that the banks will be very eager: 2012 will tell us that story.” GTR