INTERVIEW: Sempra LNG sees shift away from tolling model

Author: Ruth Liao


HOUSTON (ICIS)--INTERVIEW: US utility Sempra, which is currently constructing the Cameron LNG export plant in Louisiana, is moving away from the original tolling model of its first tranche of contracts and toward either a free on board (FOB) or delivered ex-ship (DES) model, according to the new president of its LNG division, Justin Bird.

The agreements for its proposed Port Arthur project in Texas, a greenfield project developed by Sempra, are based on an FOB model, meaning Sempra would take on the supply and transport risk.

“We’re seeing the tolling model is not the current model,” Bird told ICIS.

US-based Cheniere was the first LNG export developer to adopt this contract structure for its long-term customers at the Sabine Pass and Corpus Christi projects. In order to do so, Cheniere has developed its own US gas trading team, secured pipeline transportation and domestic gas supply agreements, and is now the largest single buyer of natural gas in the US.

Sempra is looking to follow suit.

In its definitive agreement that Sempra reached with Polish incumbent PGNiG in December 2018, the announcement specified that Port Arthur LNG would manage the gas pipeline transportation, liquefaction and cargo loading. The 20-year deal is for 2mtpa.

Bird said the agreements at both Energia Costa Azul, Sempra’s liquefaction expansion project in Ensenada, Mexico, and Port Arthur are based on the sales and purchase agreement (SPA) model, rather than tolling.

Sempra signed heads of agreements (HOAs) with France-based Total, Japan’s Mitsui and Japanese gas company Tokyo Gas at Costa Azul, the company announced in November 2018, effectively selling out the export capacity for the first phase.

South Korean incumbent KOGAS also has a memorandum of understanding (MOU) with Sempra at Port Arthur for potential participation in the project.

Market sources said Port Arthur marketing discussions appeared advanced .

Manageable risk

Sempra LNG analysed the risks of procuring gas for their projects and managing basis risks. The company concluded that the risk was not much different from Sempra’s current activity in trading gas and power in other parts of its business, Bird said.

“We spent a lot of time at Sempra thinking about that transition [away from the tolling model],” he said.

For Costa Azul, which is located south of the US border, supply from the project would ultimately come from the Permian, Bird said.

Mexico’s regulatory risk would also have to be mitigated for the development of Costa Azul, which originally operated as an import terminal to bring in gas across the US border.

With the installment of a new president in Mexico, Andre Manual Lopez Obrador, otherwise known as AMLO, Sempra’s Mexican subsidiary IEnova is just one of the private energy companies developing natural gas pipelines in Mexico and facing community right-of-way issues.

Bird said that IEnova was working to reach out to the Mexican government and promote positive discussions around its efforts on project developments.

Potential for Port Arthur expansion

Bird also saw the potential for Port Arthur to expand beyond its first two trains, with the potential to increase to up to eight trains with an overall capacity of up to 45mtpa.

Port Arthur LNG is currently in the permitting stage for the first two trains totaling 11mtpa of LNG and up to three storage tanks.

Port Arthur received its Final Environmental Impact Statement (FEIS) from the Federal Energy Regulatory Commission (FERC) in January and is expected to receive its final FERC order later in the year, with its non-free trade agreement (non-FTA) to follow by the Department of Energy (DOE).