LNG Ready for Export

 

COMPANIES THAT BUILT TERMINALS to import liquefied natural gas during the past decade watched shale gas development boost supply and restrain prices. Now a handful of them are preparing to profit nicely

Cheniere Energy Partners' recent October announcement of the first sale-and-purchase agreement for liquid natural gas from its Sabine Pass LNG receiving terminal capped a nearly decade-long effort to profit from the trade in supercooled gas. When construction of the terminal in Cameron Parish, La., was completed in mid-2009, it was the largest LNG terminal in the world, with 4 billion cubic feet per day of regasification capacity. By then, however, development of unconventional gas resources had already upset the gas industry's economics, and Cheniere had obtained a Department of Energy permit to re-export LNG.

Cheniere's Sabine Pass plant is one of three with permits to re-export, and it accounted for 35 percent of all the LNG shipments from the United States in 2010. "Re-exporting is a niche business," said Andrew Ware, Cheniere spokesman. Cheniere uses Sabine Pass as an arbitrage tool, receiving LNG for which the company has long-term contracts, then storing it and re-exporting it when the price is high in other countries, he said. Since November 2010, Cheniere and seven counterparties have signed nonbinding memoranda of understanding that the company will now seek to convert into sale-and-purchase agreements, Ware said.

LNG terminals have resorted to re-exporting to earn a return on their investment. "The industry overbuilt gasification facilities" in the early 2000s when gas prices were high and proven U.S. gas reserves were declining, said Stephen L. Thumb, principal, Energy Ventures Analysis, Rosslyn, Va. The rapid development of shale gas since 2004 has knocked the props from under gas prices, making LNG imports uncompetitive. As a result, most LNG terminals have all but shut down. In 2010, only two of 11 U.S. terminals had utilization rates greater than 18 percent. Sabine Pass, at 3.1 percent, was higher than six of the remaining nine terminals. Of the plan to liquefy U.S. gas for export, Thumb said, "This is an entirely new model for LNG."

Besides Cheniere, five other companies are applying for export permits. Dominion Gas Transmission has applied to add 1 billion cubic feet a day of liquefaction capacity to its Cove Point LNG terminal in Maryland. Southern Union is seeking a permit for 2 billion cubic feet a day of liquefaction added to its Lake Charles LNG terminal in Louisiana. Freeport LNG Development is planning 1.8 billion cubic feet a day in Texas, and Fort Chicago Energy Partners has announced its intention to construct 1.2 billion cubic feet a day of liquefaction at Jordan Cove LNG terminal in Coos Bay, Ore. As this was being written, Sempra LNG applied for a permit to export 1.7 billion cubic feet a day from its Cameron terminal in Louisiana. Nearly all say their plans call for operation in 2016 or 2017.

Cameron LNG is one of two terminals owned by Sempra LNG, a nonregulated unit of Sempra Energy. "Sempra LNG has serious interest from significant creditworthy counterparties who want to procure liquefaction services from Cameron LNG on long-term, 20-plus-year tolling arrangements," said Paty Ortega Mitchell, spokeswoman. Cameron would export its first shipment no later than seven years after the just-submitted application is approved.

In Oregon, construction of the Jordan Cove terminal has not even begun, but plans are to build the liquefaction plant first, including all the parts of the plant that are common to both importing and exporting LNG. "Many components are identical," said Bob Braddock, project manager. The plant may be converted to bidirectional operation when the economics of importing LNG justify it, he said. The estimated cost of the terminal and a 234-mile pipeline is $5 billion, with structured financing, he said.

How exporting LNG may affect the pipeline network is not clear. "The cost of new natural gas transmission infrastructure needed over the next 25 years is projected to average approximately $5.7 billion per year," said a June 2011 report from the Interstate Natural Gas Association of America. "Historically, the industry has proven its ability to finance and construct this level of infrastructure. Industry investments in pipeline infrastructure alone equaled or exceeded $8 billion per year in three of the past four years," it added.

Conversion of a half-dozen LNG terminals to bidirectional operation seems unlikely to contribute much to the demand for new midstream infrastructure. For one thing, four of the six terminals that have applied for LNG export permits are located in the energy-producing Gulf Coast area and five already have pipelines to transport regasified LNG to the transmission network. They can be modified at a modest cost to operate bidirectionally. Still, the INGAA report included LNG exports on a list of potential "Big Market Movers" that could "create significant changes in the market." Once all of them enter service, their demand may add upward pressure to gas prices.