LNG:

Export terminal developer touts the global benefits of cheap U.S. gas

HOUSTON -- The developer of a proposed liquefied natural gas export terminal along the Gulf Coast is urging global LNG buyers to shop around for supply deals tied to lower U.S. gas prices.

Comments by Cheniere Energy Inc. CEO Charif Souki here at the largest annual U.S. gathering of oil and gas executives tossed a wrench into a near-consensus among sponsors of LNG export projects in Australia that gas sold to Asia's biggest economies should remain tied to expensive crude oil.

Souki, whose company filed plans with U.S. regulators Tuesday to expand a proposed LNG export facility in Sabine Pass, La., said long-term gas export contracts are crucial, but the pricing terms should be up for negotiation.

"Producers that are with us now have an advantage because they can offer things to the potential customer," Souki said. "You won't see any of them saying, 'One price fits all, and it's based on your need for the gas, and therefore I'm going to make you pay through the nose.' I don't think that works on a long-term basis."

Souki also told reporters at the IHS CERAWeek conference yesterday that the Obama administration isn't obstructing LNG exports from the United States.

"We have clearly a lot of supply and not enough demand, and we don't know what to do about that," Souki said. "They've been very measured with the steps they've taken, but they've not at all been obstructionist."

Through its Energy Department, the Obama administration has started paving the way for U.S. LNG exports. Opposition in Congress has mellowed a bit, but some influential manufacturers are concerned that exporting U.S. natural gas and tying it to an international market will drive up domestic natural gas prices. Gas is used as a feedstock for chemical and plastics makers, and it is a growing source of electricity as utilities replace their coal-fired power plants with gas-burning plants.

Price fuels, or hampers, infrastructure

The wide gap separating the high price of globally traded LNG sold to customers in Asia and the low price of gas produced and sold in the United States has opened up a debate about whether Japan, South Korea, China and India will continue to pay for natural gas shipments based on $100-a-barrel oil. Because of a supply glut, U.S. gas has been selling for around $3.50 per million British thermal units. By contrast, gas shipped to customers in Japan sold for as much as $18 per MMBtu when demand surged after the country's Fukushima Daiichi nuclear disaster two years ago.

But to LNG executives in the throes of an infrastructure boom, an Asia gas price tied to oil is needed to guarantee investment and, increasingly, to justify development costs. The total cost of building plants to super-freeze gas into a liquid that can be shipped across the oceans is approaching $200 billion for the 11 LNG export terminals under construction today. A relatively small number of companies are bearing those costs.

Chevron Corp. is a co-sponsor of the $52 billion Gorgon LNG export project in Australia. It is the oil giant's largest single infrastructure project. The sponsors of Gorgon and six other LNG export terminals under construction in Australia have watched their costs go through the roof. Cost inflation has ranged from 20 and 40 percent in Australia and Papua New Guinea, where Exxon Mobil Corp. has an LNG project.

The sheer cost of building out LNG plants to feed Asia's energy demand appears to have hardened Chevron and other investor-owned LNG producers when it comes to talk of changing their pricing model.

"LNG projects are large and capital-intensive. They're becoming more complex and challenging to bring online," said Peter Coleman, CEO of Woodside Energy, a major LNG producer in Australia. "The projects must be underpinned by long-term supply contracts."

Coleman said he expects North America to export about 50 million tons of natural gas yearly when the building boom shakes out. That will occupy about 10 percent of the world market. Australia will provide 25 percent, and Qatar will provide 20 percent.

Gas hub price 'not appropriate' for Asia

Participating in a panel discussion here, a top Chevron executive said the idea of shifting from oil-indexed natural gas import prices in Asia to a gas "hub" price that is independent of global oil prices -- similar to the U.S. Henry Hub gas trading point -- is a non-starter.

A gas hub price is "not appropriate" in Asia, said Joseph Geagea, president of Chevron's gas and midstream division. "New resources of LNG can only be developed if competitive pricing provides returns for all investors," Geagea said.

The U.S. gas system is unique because of its financial liquidity and well-developed and integrated infrastructure that guarantees gas can move throughout the U.S. market easily. Those things aren't in place in Asia, Geagea asserted, where each country acts in its own self-interest.

"Unless and until those things are in place, it's premature to talk about an Asian hub," Geagea said. "Every country in Asia has been acting in its own self-interest. That doesn't lend itself to liquidity and [cooperation]," he said.

"The present debate on pricing, it's been opened in a big way by nearly all of the Japanese buyers and Chinese buyers," said Philippe Sauquet, president of gas and power for France's Total SA.

"It's a debate that needs to be discussed and hopefully closed between buyers and sellers," Sauquet said.

On Tuesday, Houston-based Cheniere said it filed initial applications with the Energy Department and Federal Energy Regulatory Commission to add 9 million metric tons of yearly gas export capacity to its terminal in Sabine Pass, La. That's two extra LNG liquefaction "trains" on top of four it had already planned.

Cheniere's Souki said yesterday that so far, his company has signed a supply contract for 2 million metric tons of that additional export capacity. Total in December signed a 20-year contract to use that export capacity, pending regulatory approval and financing.

"We will only do deals on a Henry Hub basis because that's the only way for us to not take any risks," Souki said.