U.S. LNG Exports: Increasingly A Reality

U.S. LNG Exports: Increasingly A Reality
February 19, 2013 |

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

The past two months have been marked by a whole series of significant announcements in the U.S. LNG sector indicating that large-scale natural gas exports from the U.S. and Canada are firmly on track to become a reality. The headlines included three major long-term LNG supply agreements and the decisions by Chevron and Royal Dutch Shell to take equity stakes in LNG export projects. The announcements have several important implications and suggest that the LNG exports will not only have material consequences for the North American natural gas market but are already impacting pricing mechanisms of the entire international LNG trade.

http://seekingalpha.com/article/1202741-u-s-lng-exports-increasingly-a-reality

The recent news adds up to a critical mass of evidence suggesting that several large proposed facilities now have strong chances of moving forward. Moreover, the very competitive Henry Hub linked pricing formula - that seems to have emerged as almost a standard for U.S. based projects - should continue to attract strong demand from LNG buyers, particularly in Asia, and additional off-take contract announcements are likely to follow. As two large projects - Sabine Pass Liquefaction and Freeport LNG Expansion - are getting close to being fully subscribed, other projects will likely gain leverage in securing long-term agreements that are pivotal to obtaining project financing.

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(Source: FERC)

In terms of timing, it appears now that several significant North American projects may almost simultaneously pass or closely approach the finish line, with combined in-service capacity likely exceeding (possibly, significantly) 6 Bcf/d by the end of 2018. The ramp up in demand for feed gas from LNG export facilities will coincide with the expansion of gas-fired power generation (material capacity additions are expected already in 2014-2015) and growth in demand from the petrochemical industry. These three demand factors, which will be coming together in a relatively tight timeframe, should provide the much needed relief to the oversupplied natural gas markets in the U.S. and Canada and may result in the switch in the natural gas pricing regime from growth containment to expansion. However, such demand-driven inflection point in the North American natural gas fundamentals is probably still few years away.

The aggressive marketing of LNG liquefaction capacity by the U.S. projects spells bad news (and shrinking operating margins) for global LNG trade in general. With the availability of Henry Hub linked LNG imports on the horizon, oil-based LNG pricing in Asia - the major pivot of profitability for merchant cargoes and proposed LNG developments around the world - may no longer be feasible within a few years. Henry Hub may in fact become a new price-setting reference point for the global natural gas trade, impacting exporters from Australia to Russia.

The North American LNG has several distinct advantages relative to competing with potential supply from many locations around the world:

· Massive, reasonably priced natural gas resource in the ground and highly sophisticated and efficient E&P industry capable of quickly ramping up supply;

· A wide selection of severely underutilized regasification facilities, with existing pipeline access, that can be used for brownfield liquefaction expansions (reduces the cost of construction as much as two-fold relative to greenfield projects);

· Stable and secure political and legal environment;

· Importantly, a unique high-capacity pipeline network that allows the sourcing of feed gas from almost any location across the continent and eliminates the need for a captive upstream component of the project.

As a result, the U.S. LNG exports have cost advantage in three of the four major components of the LNG value chain: the upstream (shale/tight gas and highly productive extraction industry), midstream (pipeline grid and liquids processing in place), and downstream (low-cost brownfield expansions already connected to the pipeline network). The disadvantage is the expensive transportation to key consumer markets in Asia (even with the Panama Canal expansion, which should cut voyages to the Asian markets by as much as 7,500 nautical miles).

(click to enlarge)
(Source: FERC)

Freeport LNG. Last week, on February 11, Freeport LNG announced a binding 20-year liquefaction tolling agreement with BP (BP) for 4.4 million tons per annum of LNG (mtpa). BP's participation is significant and adds another strong vote confidence by an Oil Major in the viability of the U.S. natural gas exports. The contract follows the LTAs with Osaka Gas (OSGSF.PK) and Chubu Electric Power (CHUEF.PK) for a total of 4.4 mtpa that Freeport LNG executed in June 2012. All the contracts are linked to Henry Hub pricing and cover the first two liquefaction trains. Exclusive LTA negotiations for the third liquefaction train are currently under way and are expected to be completed soon. Freeport LNG is a proposed three-train export expansion of the existing receiving terminal located on the U.S. Gulf Coast near Freeport, Texas, (the map above). Total liquefaction capacity is expected to be 13.2 mtpa (1.8 Bcf/d) and may cost over $10 billion. The project is controlled by four investors: Michael S. Smith, Zachry American Infrastructure, Dow Chemical (DOW), and Osaka Gas.

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(Source: Freeport LNG Development, February 2013)

Cameron LNG. On February 6, TEPCO (TKECF.PK), the largest Japanese utility and the operator of the infamous Fukushima nuclear plant, announced that it intends to purchase from the U.S. Cameron LNG, via trading companies Mitsui and Mitsubishi, 0.8 mpta of LNG under a 20-year LTA. The contracts will be linked to Henry Hub pricing. TEPCO is currently among the world's largest LNG buyers. As a result of Fukushima nuclear accident in 2011, the utility's annual fossil fuel costs to run its thermal plants exploded to $30 billion, as all of its nuclear reactors remain idle. This is the first time that TEPCO enters into a long-term LNG contract based on a U.S. natural gas price index, in departure from traditionally oil-based pricing. Importantly, TEPCO has recently announced a plan to contract for up to 10 mpta of LNG, of which approximately half is expected to come from the U.S., which likely indicates that additional purchase volumes may be under negotiation with other U.S.-based projects. The news adds Cameron LNG to the list of highly probable export projects, alongside Cheniere's Sabine Pass and Freeport LNG. Cameron is a proposed export expansion of the existing receiving terminal located on the U.S. Gulf Coast near Hackberry, Louisiana, owned by Sempra Energy (SE). Total liquefaction capacity is expected to be 12 mtpa (1.7 Bcf/d). First deliveries from train one are expected in 2017, with the project completion in 2018.

http://seekingalpha.com/article/1202741-u-s-lng-exports-increasingly-a-reality