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BP lines up for US LNG with Freeport capacity deal

14 Feb 2013 13:24:41 | glm


BP has put down the foundations to expand its global supply portfolio, after entering into the burgeoning US liquefaction sector by signing an agreement to lift LNG from the Freeport LNG project in Texas.

The UK-headquarted major will take 4.4 million tonnes per annum (mtpa) of capacity over a 20-year period through a binding tolling agreement with the existing import terminal, which is planning to export 13.2mtpa through three liquefaction trains.

BP will join Freeport LNG's first two offtakers - Japanese utilities Osaka Gas and Chubu Electric Power, which signed long-term tolling agreements for 2.2mtpa of capacity each on the first train in July 2012. BP will take the entire capacity of the second train, Freeport LNG said in a statement on 11 February.

This deal is UK major's first foray into US liquefaction, and will build on its existing Atlantic Basin portfolio. As the largest shareholder across the Atlantic LNG (ALNG) venture in Trinidad, it lifts 2mtpa directly from ALNG Train 4, and markets nearly 5mtpa from the other three trains to Spain-based buyers.

The agreement will also see BP absorb LNG priced on the US Henry Hub price benchmark into its portfolio, supporting its recent efforts to land long-term supply deals with northeast Asian buyers by offering LNG that is either fully or partially hub-indexed.

In November 2012, the UK major signed a 100% Henry Hub-indexed preliminary agreement to supply Japan's Kansai Electric with 500,000 tonnes per annum of portfolio LNG (see GLM 23 November 2012).

This came on the back of a firm supply agreement with Chubu for 8m tonnes over a 16-year period starting in April 2012, with the volumes understood to be partially indexed to a gas price benchmark.

Train 3 capacity deals by year-end

With the marketing effectively complete on the project's first two trains, Freeport CEO Michael Smith said that the developer's efforts are now focused on marketing capacity from the third 4.4mtpa train, with expectations that a deal could be closed by year-end.

Final investment for the first two trains is also expected to be reached by the fourth quarter of 2013, with Train 1 expected to start operations in the fourth quarter of 2015, and the first LNG at Train 2 nine months later.

Financing for the third train will is expected to be finalised sometime in 2014, Smith said.

The cost estimate for the three-train project, excluding new-build pipeline costs, remains about $7bn, according to Smith.

"We are going to go out to the market for a significant amount of private equity, and then go to the commercial banks - similar to what Cheniere did," he said.

Smith said it would be up to the offtakers to decide on building a pipeline to feed into the terminal, although a small connection exists to the Houston Ship Channel and Katy Hub.

"The primary source for the Freeport LNG liquefaction project will be the South Texas (Eagle Ford) basin, but Freeport LNG will be able to obtain gas from the larger US market from an extensive pipeline network," said a BP spokesman.

Shell was understood to have been initially been in talks with Freeport for capacity across trains 2 and 3, after it signed a heads of agreement with Freeport LNG in May 2012. However, after the exclusivity agreement expired shortly after the start of 2013, market sources speculated that Shell was no longer interested in joining up with Freeport.

Then, in January, Shell allied instead with US pipeline operator Kinder Morgan at the 2.5mtpa Elba Island LNG export unit in Savannah, Georgia, which will give full capacity to Shell.

Freeport LNG holds the next non-free trade agreement (non-FTA) export application pending for consideration before the US Department of Energy.

The initial 10.2mtpa application is expected to be taken up for a decision after 25 February, when the US federal agency closes its response comment period on a commissioned study on the proposed impacts of increased LNG exports.

According to Smith, a decision could be expected as early as the end of March, given that the agency has at least 30 days to consider the application.

"The three contracts that we currently have in place require non-FTA approval, and we're very, very confident that we'll get that approval," he said.

The project's second application for exports calls for another 10.2mtpa - or about 1.4 billion cubic feet/day (40 million cubic metres/day) - and is fourth in the pending applicant queue. This would be required for the third train.

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