LNG Export Plant Verges on U.S. Approval Amid Shale Glut

04 13, 2012 by Bloomberg

Cheniere Energy Inc. (LNG), the natural gas importer that lost $1.2 billion in a decade, is poised to become the sole U.S. exporter of fuel from the shale bonanza that’s turned the nation into the world’s biggest gas producer.

The government may decide as soon as next week on Cheniere’s request to build a $10 billion Louisiana plant that would be the largest in the U.S. to liquefy gas and load it onto ocean-going tankers.

As the only company with a 20-year Energy Department license to export continental liquefied gas to nations without U.S. free-trade agreements, Cheniere will have a near-monopoly on selling LNG to some of the biggest gas importers -- Japan and Spain -- which currently pay as much as nine times more for the fuel than it costs in U.S. markets. All rival export-license requests are on hold while the Energy Department studies the potential economic impacts of shipping abroad.

“The global LNG market is tight and spot prices are going to be quite high at least until 2018,” when several new Australian LNG export projects are scheduled to ramp up, said Asish Mohanty, senior global LNG analyst at Wood Mackenzie, the Edinburgh-based energy researcher.

U.S. exporters that start shipping before 2018 have the best chance of recovering capital costs and reaping a profit within a few years, “before prices start softening,” he said.

Houston-based Cheniere probably will get the go-ahead to build, although the timing is uncertain and approval will come with conditions attached, David Wochner, a partner in the Sutherland Asbill & Brennan LLP law firm’s energy practice, said during a March 22 Argus Media Ltd. conference in Houston.

Reviewed Next Week

The Federal Energy Regulatory Commission, or FERC, is scheduled to discuss Cheniere’s project at an April 19 meeting in Washington, according to an agenda posted on the commission’s website yesterday.

Gas output from U.S. wells has surged, pushing prices to a 10-year low as intensive drilling techniques enabled explorers such as Devon Energy Corp. (DVN) to tap reserves in shale formations.

Cheniere, which as recently as October was judged by Standard & Poor’s to be on the verge of default, has more than doubled in the stock market in the past year on its exporting prospects, even as the company sold shares four times. The Texas company counts hedge funds D.E. Shaw & Co. and Steve Cohen’s SAC Capital Advisors SP among its larger investors, according to data compiled by Bloomberg.

Asian and European utilities are eager to buy U.S. supplies that are about 90 percent cheaper than gas from traditional producers such as Yemen, Mohanty said.

Rival Proposals

Aside from Cheniere’s Louisiana project, there are two other proposed export plants pending before the FERC: a second Cheniere project, planned for Corpus Christi, Texas, and Freeport LNG Development’s proposal for Freeport, Texas.

Seven companies, including Freeport, are seeking Energy Department permission to export to non-free-trade agreement nations.

Cheniere Chief Executive Officer Charif Souki’s next step after clearing U.S. approvals will be to complete fundraising for the project. The liquefaction terminal will be built next to Cheniere’s LNG import facility that has been mostly idle since opening in 2009, thanks to the same domestic supply glut now driving Souki’s export plans.

The new plant he envisions will begin operations in 2015 or 2016 and be able to ship 18 million tons of LNG annually, worth about $1.7 billion at current prices.

Blackstone Group LP (BX), the New York-based private-equity firm, agreed in February to invest $2 billion in Cheniere’s export plant, a pledge that Souki said will help attract other financing.

Four Share Sales

Separately, Cheniere sold shares four times in the past year to avoid a cash crunch while awaiting a construction permit from FERC. The company had $1.2 billion in losses during the 2002-2011 period, according to data compiled by Bloomberg.

Cheniere’s most-valuable asset may be its Energy Department license to ship domestic gas to nations that aren’t U.S. free- trade partners. The U.S. has free-trade agreements with 18 nations, of which only South Korea is a major gas importer, according to a Commerce Department website. South Korea’s free- trade agreement went into effect on March 15.

Japan and Spain -- neither of which are within the circle of U.S. free-trade partners -- imported 4.12 trillion cubic feet of gas in 2009, the most recent year for which data was available, the U.S. Energy Department said in a June 2011 report. The Energy Department is scheduled to update its global LNG import data on June 29.

Japanese Demand

Japan alone imported 3.21 trillion cubic feet of the fuel in 2009, or 37 percent of all the gas exported worldwide that year, Energy Department figures showed. Japanese demand is expected to climb to replace power generation lost as a result of the 2011 earthquake and tsunami that triggered a nuclear meltdown at the Fukushima power complex.

With no gas reserves on their own soil, Japanese companies were paying $20.87 per million Btus to attract Yemeni LNG in January and $18.43 for Algerian shipments, according to figures from Japan’s Customs Bureau.

The question for would-be U.S. LNG exporters is whether the spread between North American and overseas gas prices will persist long enough to capture profits, said Michelle Michot Foss, chief energy economist at the University of Texas’ Center for Energy Economics in Houston.

As exports add to growing demand for North American gas, prices will rise and narrow the gap that made the U.S. an attractive fuel source in the first place, she said.

‘Tricky to Pull Off’

“It’ll be marvelous if anyone can pull this off but it’s going to be pretty tricky,” Foss said in a telephone interview. “The arbitrage is huge but the problem with the arbitrage is that no one is positioned to take advantage of it right now, and when everyone jumps in, the arbitrage will disappear.”

Given rising political pressure from U.S. chemical producers and power generators alarmed by the potential for an export-driven rally in domestic gas prices, federal regulators probably will restrict the number of export licenses, Mohanty and fellow Wood Mackenzie analysts said in a March 28 report.

After issuing Cheniere’s export permit last year, the Energy Department put all other pending applications on hold while it studies the future economic impacts of exporting gas.

In the past 6 1/2 years, U.S. gas lost 87 percent of its value as wells drilled into shale formations disgorged more of the fuel than domestic markets could absorb. As the surfeit expanded, prices plunged to $1.971 per million British thermal units yesterday from a record $15.78 in December 2005.

Price Rise Impact

As early as 2018, exporting LNG could raise U.S. prices above $9 per thousand cubic feet, which is roughly equivalent to a million British thermal units, or Btus, the Energy Department said in a Jan. 19 report.

The price shock would prompt power producers to burn more coal as a cheaper alternative, and spur more imports of gas from fields in western Canada, the department said.

“Increased natural-gas exports lead to higher domestic natural-gas prices, increased domestic natural-gas production, reduced domestic natural-gas consumption and increased natural- gas imports from Canada via pipeline,” the department said in the January report.

After 2018, U.S. exports will have a tougher time winning supply deals as the new Australian plants add to world LNG supplies, pressuring prices and erasing some of the current price advantage of U.S. gas, Mohanty said.

“Post-2018, the picture becomes quite uncertain,” Mohanty said in a telephone interview from Houston.

Rich Gas

Asian demand for North American gas also will be muted because of differing content standards between the continents, Mohanty said.

In the U.S., liquid components of the gas stream such as butane and ethane tend to be separated from the methane to prevent pipeline clogs and so that they can be used by chemical producers. Asian import plants designed to handle so-called rich gas from Indonesia or Malaysia won’t run as efficiently on stripped-down U.S. supplies, he said.

The only current LNG producer exporting U.S.-produced gas outside the group of free-trade partners is Houston-based ConocoPhillips (COP), owner of a liquefaction plant on Alaska’s Kenai peninsula (91401MF) that opened in 1969.