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Focus: Feedgas scramble looms for US liquefaction offtakers

14 Nov 2013 17:04:05 | glm

Offtakers from the planned Cameron LNG project this week secured some of their feedgas needs, but the majority of US LNG export projects still have to firm up their feedstock requirements.

Offtakers from US liquefaction projects under construction and development are starting to align both feedgas supply and trading capacity as the North American natural gas market is poised to redirect throughput flows.

With some of the offtaker expected to become some of the biggest gas buyers in the US domestic market, securing uninterruptible feedgas supply is key to the ensuring the viability of the projects.

And while liquefaction offtake agreements are being inked for periods up to 20 years, finding the same contra-balance from the US pipeline system may not be as clear cut.

“There’s going to be some redirection of flows,” said Tom Choi, natural gas analyst for Deloitte, a consultancy firm.

Choi said some risk-averse companies would want to prepare for firm capacity on an annual basis, but noted that enough capacity and supply was available on an uninterruptible basis.

So far, the US Department of Energy (DOE) has approved four export licenses for non-free trade agreement (non-FTA) countries, which give liquefaction projects unfettered authorisation to sell to key LNG importing nations, such as India, China and Japan.

Cheniere Energy’s Sabine Pass project, Freeport LNG, and Sempra Energy’s Cameron project in the US Gulf, and the 5.2mtpa Cove Point venture on the east coast are considered by some among the top brownfield projects likely to move quickest, given the commercialisation is completed for long-term capacity.

However, Choi doesn’t expect a dramatic impact on natural gas pipeline differentials, particularly where the US Gulf liquefaction projects are concentrated.

“There’s so much pipeline capacity going to the Gulf,” he said.

While the US Gulf brownfield projects are expected to start commercial operations from late 2015 onwards, the complexity of the domestic pipeline network – even with plenty of availability – has been cause for concern.

Risk appetite for US gas producers is just one factor to overcome, as well as the unwillingness to assign a chunk of a gas supplier’s portfolio for a sole offtaker’s needs.

“In the LNG business, people come in and want to see 20-year deals,” said one source close to the US-based projects. “But they’re running into a wall: they’re not finding producers on those 20-year deals.”

Spectra seals long-term pipeline capacity

Houston-based Spectra Energy this week finalised long-term contracts on its expanded Texas Eastern pipeline system for the company’s planned 12mtpa Cameron project in Louisiana.

The agreement will see France-headquartered GDF SUEZ secure long-term feedgas supply for over a third of its 4mtpa offtake from Cameron, with Japanese trading companies Mitsubishi and Mitsui each securing over 15% of their 4mtpa capacity. Under the deal, GDF SUEZ will purchase 200,000MMBtu/day (around 1.98 billion cubic metres (bcm)/year) of pipeline capacity starting in 2017, while Mitsubishi and Mitsui will each take 100,000MMBtu/day from 2014. This coincides with the projected on-stream date of the first train.

Two other companies also reached capacity deals with Spectra: US-based natural gas producer EQT Corporation, based in Pennsylvania, at 100,000MMBtu/day and Texas-based junior gas producer Range Resources, with 150,000MMBtu/day, both to be put into service by 2016.

Spectra’s first phase will deliver 250,000MMBtu/day as early as November 2016, according to the pipeline company. The second phase will expand by another 400,000MMBtu/day, starting in September 2017 and ramping up through December 2019.

The $150m Gulf Markets expansion effort by Spectra is part of the company’s overall strategy to create a bi-directional system, in order to supplement the northeast, southeast and Gulf coast markets, according to CEO Gregory Ebel.

“We have several other projects along the Gulf Coast and development to support additional LNG exports as well as industrial infrastructure needs,” he told a Q3 2013 results call last week.

New domestic hubs build momentum

The potential for new market hubs, created by the demand emergence of the US LNG offtakers as gas buyers, is a possibility.

Basis relationships are forecast to change: a recent Deloitte report indicated the eastern and western projected prices would dramatically shift, as the Marcellus shale is poised to weigh heavily on the mid-Atlantic market, particularly the key New York demand region. Growth from the Haynesville shale basin in Texas and Louisiana also is anticipated to cushion supply for the market, as well as the Eagle Ford basin for Texas.

Logistically, the Marcellus will require more reconfiguring into the pipeline system, since much of the production comes from new sources, said Choi. “In the Gulf, because there’s so much infrastructure already in place, we don’t see major changes required.”

Concerns on unfixed feedgas

However, some market observers are casting doubt on the challenges in securing feedgas supply, particularly in the negotiations from US gas producers.

Cheniere has enjoyed the first-mover advantage on securing non-FTA export approval from the US and long-term commercial agreements.

Rather than opting to develop Sabine Pass as a tolling facility as Cameron and Freeport LNG have, Cheniere’s strategy was understood to be to buy on natural gas market hubs in order to provide its long-term customers with gas. The first four train offtakers from Sabine Pass include UK-based portfolio seller BG Group, Spain’s Gas Natural Fenosa, India’s GAIL and South Korea’s KOGAS.

The planned six-train project relies upon Cheniere’s marketing subsidiary to secure the feedgas on behalf of its customers.

However, Cheniere has not yet publicly finalised any upstream supply or pipeline capacity agreements. A Cheniere spokesman said supply procurement was considered a commercially sensitive matter and declined to comment.

Sabine Pass’ first phase, which includes Trains 1 and 2 at 4mtpa each, will require about 1.1 billion cubic feet (bcf)/day (11.40bcm/year) of throughout, with each train rated at about 550 million cubic feet/day of output.

Mexican pipeline demand

In addition to competing LNG projects, south of the Texas border, the pull from Mexican pipeline imports will also be a considerable factor for US liquefaction offtakers.

In 2012, Mexico imported a record 2.1bcf/day – equivalent to almost four Sabine Pass trains – from the US through pipeline imports, which accounted for about 80% of all Mexican imported gas.

However, the ability for Mexico’s state-run oil and gas company Pemex to complete their planned Los Ramones pipeline expansions to bring Eagle Ford gas reserves to the states of Tamaulipas and Chihuahua will be key.

“It’s whether Pemex can get the capital to develop their domestic to develop their domestic resources, and will rely increasingly on imports, whether LNG or pipeline,” Choi said.

Besides existing pipeline exports, petrochemical demand from natural gas liquids – a lucrative export also as a result of the shale gas resurgence – is also expected to creep up on domestic US demand.

Gas supply will also be tapped by the growing amount of gas-fired electricity, particularly in the southeast region and in the south, where the Texas grid operator Electric Reliability Council of Texas (ERCOT) is also expected to expand.

Gas-focused companies could step in

Some companies involved in LNG exports have a built-in position in possessing ownership of gas along the supply chain as integrated companies, such as UK-based BP and France-based GDF SUEZ.

Spain’s Repsol, while not a direct offtaker of LNG from the US through a long-term contract, has a gas trading and origination position in the Maritimes Canada and northeast US. It will still maintain its Canaport LNG terminal in New Brunswick, Canada, after its acquisition of LNG assets closes at the end of 2013 with Shell.

Or this could mean an opportunity for independent natural gas marketing companies to step in, such as with Australian investment bank Macquarie’s US subsidiary, which acquired a natural gas trading company known as Constellation Energy in 2009.

In addition, the close proximity of the projects in the US Gulf – particularly in the states of Texas and Louisiana – have caused some concern that the capacity will be harder to carve out among the various offtakers.

“There’s going to be one big fight,” said one US-based source close to the project negotiations.

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