FERC Grants LNG Export License to Cheniere--Who Will Win Next License?

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Written by John Egan for Industrial Info Resources (Sugar Land, Texas)--The April 16 decision by the Federal Energy Regulatory Commission (FERC) (Washington, D.C.) to grant a liquefied natural gas (LNG) export license to Cheniere Energy Incorporated (AMEX:LNG) (Houston, Texas) triggered cheers from gas interests but criticism from an unusual alliance of environmentalists, manufacturers and members of Congress. FERC's decision clears the way for Cheniere to build the first LNG export terminal in the lower 48 states.

FERC granted Cheniere the right to build and operate a liquefaction project capable of handling up to four LNG trains at its Sabine Pass terminal on the Louisiana Gulf Coast, which has operated for years as a little-used LNG import facility. Each train will be able to process up to 4.5 million tons of LNG per year. A unit of Bechtel Corporation (San Francisco, California) will provide engineering, procurement and construction (EPC) services to the project.

Cheniere plans to start by building two trains at Sabine Pass, which will take about $5 billion. Assuming Cheniere can raise the capital, construction of the liquefaction plant could begin this quarter, and the first shipment of LNG could take place in 2015 or 2016, the company said. The second LNG train is expected to come online six to nine months after the first train is operational.

Cheniere is said to be seeking $3 billion to $4 billion in debt financing before it can begin construction on its project. It has approached eight large financial institutions to help it arrange financing. Earlier this year, Blackstone Capital Partners IV, a large private equity investment firm, committed to invest $2 billion in the export terminal.

"The export license is a really big deal, because, right now, Cheniere has a billion-dollar LNG import terminal that's not making any money," Jesus Davis, Industrial Info's vice president of research for the Oil & Gas Production, Transmission and Terminals industries, said in an interview.

If Cheniere can build the Sabine Pass export facility, "it could be the beginning of a big shift in the U.S. LNG market," Davis continued. The U.S. has several LNG import terminals operating today, but they are little utilized. They were built in previous decades when the prevalent view was that U.S. gas reserves were inadequate to fully meet demand. But the shale gas revolution has upended that view. Today, the U.S. has a gas surplus, which has pushed prices down to about $2 per million British thermal units (MMBtu), less than half what it was a year ago.

"The U.S has never been a big factor in the global LNG market, either as an importer or exporter," Davis said. "But building Sabine Pass and one or two more export facilities could make an impact on the global LNG market."

He added: "I can understand the concerns from manufacturers and members of Congress that we not export our low-cost gas, when that could be used here to open or re-open factories. But we have a lot of gas, and because of its low price, we have an opportunity to sell it profitably to other markets in the world."

In contrast to today's low price for gas in the U.S., gas sells for $8-$10 per MMBtu in Europe and $16-$18 per MMBtu in Asia, Davis said. The price differential leaves plenty of room for profits after the added costs of liquefaction, transportation, and regasification, he said.

Although several other proposed LNG export terminals are seeking licenses from FERC, Davis said he doesn't expect the agency to issue a flood of other LNG export licenses--at least in the near term. Earlier this year, before FERC issued an export license to Cheniere, the U.S. Energy Information Administration (EIA), the statistical and analytic arm of the U.S. Department of Energy (DoE), concluded that LNG exports would increase the price of domestic gas. EIA's study, titled "Effect of Increased Natural Gas Exports on Domestic Energy Markets," cautioned that how much gas prices might increase would be a function of several factors, including how high and how fast exports rose.

Still, Davis said one more LNG export license could be granted this year. Some predict the next license could be awarded to the Cove Point terminal on the Maryland shore. That facility, operated by a unit of Dominion Resources Incorporated (NYSE:D) (Richmond, Virginia), has operated for years as a little-used LNG import facility. Cove Point's proximity to the Marcellus shale and an extensive existing gas pipeline network would tend to support licensing an export facility there.

Davis recognizes that Cove Point could be a strong candidate for the next LNG export license, but he doesn't think that will happen. "Producers in the Marcellus Shale don't need any help in moving their product," he said, noting its location near centers of consumer and industrial demand for gas. "But I would bet the next export license will go to a project on the Gulf Coast that could take advantage of all the cheap 'dry' gas in the Haynesville and Fayetteville shales. At today's gas prices, and given the absence of valuable natural gas liquids (NGLs) or crude oil in those formations, no one wants to drill for gas there. But a second Gulf Coast LNG export terminal would drive increased drilling in the gas in the Haynesville and Fayetteville shales."

A strong candidate for the next LNG export is a proposal from a unit of Sempra Energy (NYSE:SRE) (San Diego, California), which already operates an LNG import facility in Hackberry, Louisiana.The day after FERC granted an export license to Cheniere, Sempra's LNG business announced it signed contracts with units of Mitsubishi Corporation (TYO:7011) (Tokyo, Japan) and Mitsui & Company (NASDAQ:MITSY) (Tokyo) to develop and construct an LNG liquefaction plant and export facility at its Hackberry site.

"These agreements with Mitsubishi and Mitsui represent a significant step forward in the development of a liquefaction facility at our Louisiana LNG terminal to support international natural gas markets," Mark A. Snell, president of Sempra Energy, said in an April 17 statement. Octavio M. Simoes, president of Sempra Energy's LNG operations, added: "We look forward to supporting Mitsubishi's and Mitsui's objectives to develop North American gas resources and deliver LNG to worldwide markets through a tolling arrangement at our facility."

It would take about $6 billion to build a three-train liquefaction facility at Hackberry, Sempra estimated. The completed liquefaction facility is expected to consist of three liquefaction trains with a total export capability of 12 million tons of LNG per year, or approximately 1.7 billion cubic feet per day. Construction on the project is expected to start in late 2013 with operations to commence in late 2016.

Earlier this year, DoE granted the Sempra facility the right to export up to 12 million tons of LNG per year to any county that has a Free Trade Agreement (FTA) with the U.S. The energy agency is reviewing Sempra's application to export LNG to countries that do not have an FTA with the U.S. A trade agreement is pending review by the DoE. Cameron LNG expects to receive the required permits from the Federal Energy Regulatory Commission (FERC) and enter into a turnkey contract in 2013 for engineering and construction services for the project.

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