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Centrica connects with Cheniere for US LNG exports

28 Mar 2013 15:28:42 | glm

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UK utility Centrica took the US liquefaction plunge on Monday, signing a 20-year contract with Cheniere Energy to lift 1.75m tonnes per annum (mtpa) of LNG from the planned fifth train of the Sabine Pass project in Louisiana.

Under the terms of the agreement, Centrica will purchase cargoes on a free on board (FOB) basis for a fee of 115% of the prevailing Henry Hub price, in addition to a $3.00/MMBtu liquefaction fee, similar to the terms of other Sabine Pass offtakers. The 20-year agreement also includes an option for a 10-year extension, with first deliveries targeted for September 2018.

The Centrica agreement on the 4.5mpta Train 5 follows an agreement from France-based Total, which signed for 2mpta of Train 5 offtake earlier in the year. The train's subscription is now 3.75mtpa.

In a statement, Centrica said that the deal is subject to a number of conditions including Cheniere receiving the relevant regulatory permissions, securing finance, making a final investment decision (FID) and issuing a notice to proceed with the fifth LNG train.

Both Centrica and the UK government hailed the agreement as a breakthrough in efforts to bolster the country's security of supply, as the UK becomes increasingly import dependent with the decline of its indigenous gas production.

"In an increasingly global gas market, this landmark agreement represents a significant step forward in our strategy, enabling Centrica to strengthen its position along the gas value chain and helping to ensure the UK's future energy security," Centrica chief executive Sam Laidlaw said in a statement.

Full 2012 data released by the UK's Department of Energy and Climate Change (DECC) on Thursday underlined the extent of the growing import dependence, with domestic production falling by 14.1% in 2012 to 452TWh (41.99 billion cubic metres), its lowest level since 1985, as the outage at the Elgin offshore field exacerbated the long-term production decline.

LNG imports, however, have also fallen sharply as more flexible Qatari LNG has been diverted on a mid and long-term basis to higher-priced Asian markets. Flows of LNG to the UK plummeted by more than 8m tonnes to 10.18m tonnes in 2012, according to customs data, as the UK bore the brunt of the demand pull on flexible cargoes from Asia and South America.

Centrica turns to LNG for flexibility

Centrica currently holds a three-year import deal with Qatargas for up to 2.4mtpa, although the UK company was understood to have failed to agree pricing terms for a long-term agreement with the Qatari supplier in 2011. With that contract set to expire in 2014, Centrica has stepped up its LNG import ambitions.

The UK utility signalled a shift in its strategy at its annual results presentation last month, with Laidlaw stating it would focus less on its domestic electricity business and more on developing upstream assets in North America, which could provide a natural hedge for its offtake from Sabine Pass.

The spread between US Henry Hub prices and the UK's national balancing point (NBP) benchmark would allow Centrica to bring LNG into its capacity at the Isle of Grain terminal at around $9.50-9.60/MMBtu, based on current futures prices - well below current UK and European prices but comparable with NBP futures prices. However, the deal provides Centrica with destination flexibility, allowing the UK utility to divert the volumes elsewhere should the price differential between the US and UK narrow.

A Centrica spokesman said it had yet to make a decision on how many vessels it would require to lift the volumes.

Cheniere starts Train 6 marketing

Cheniere's plans to develop Trains 5 and 6 at Sabine Pass are still awaiting regulatory approval from the Department of Energy, although preliminary engineering work has commenced.

The permitting process for the fifth and sixth trains has also started through the US Federal Energy Regulatory Commission (FERC). Marketing for commercial agreements on the 4.5mtpa capacity Train 6 is underway, a Cheniere spokesman said.

Cheniere is the only company with the sole export license to sell LNG to nations that have free trade agreements (FTA) with the US, as well as to countries without free trade agreements, which include Japan and India.

Sabine Pass is authorised to export 18mpta for its first four trains, which total 16mpta of subscribed capacity to four main offtakers: Spain's Gas Natural Fenosa, UK-based BG Group, Korea's KOGAS and India's state grid operator GAIL.

On 27 February, Cheniere filed a request seeking to export about 2mpta of LNG, following the sales and purchase agreement with Total to trade with both FTA and non-FTA nations.

The US-based company plans to submit an application for Centrica's contract in coming weeks.

Cheniere did not immediately comment on its intentions for the remaining 750,000 tonnes per annum of capacity on Train 5, and it was not clear whether the company would reserve the capacity for its own use.

The company has previously stated that it plans on utilising 2mpta across the first four trains for its own trading purposes.

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