Cheniere Energy Inc. (LNG:US) won federal approval to build the largest U.S. natural-gas export terminal as drillers who extract the fuel from shale formations struggle to find domestic buyers to absorb a glut.
The Federal Energy Regulatory Commission approved an order yesterday that will let Cheniere build a $10 billion plant adjacent to its Sabine Pass gas-import terminal in Cameron Parish, Louisiana, about 170 miles (274 kilometers) west of Baton Rouge. The Houston-based company said its 91 percent owned Cheniere Energy Partners LP hired eight financial institutions to borrow $4 billion to help fund the construction.
As surging shale-gas drilling pushed U.S. production to a record, importers of liquefied natural gas have switched course and sought permission to export the fuel to booming energy markets in Asia. Cheniere will compete with LNG producers in Indonesia, Yemen, Qatar and Australia that charge customers in Japan and South Korea as much as as 10 times the price of U.S. supplies.
“Cheniere has been a first mover and a fast mover,” John Hirjee, an analyst at Deutsche Bank AG, said by phone today from Melbourne. “This will potentially help others who are looking to export LNG from the U.S. to use Cheniere as a template.”
The stock has more than doubled in New York trading in a year, even as Standard & Poor’s said Cheniere was close to defaulting for a lack of demand for its gas-importing services. Cheniere climbed 3.6 percent to $17.60 at the close in New York.
Gas for May delivery fell 6.5 cents to $1.951 per million British thermal units on the New York Mercantile Exchange, the lowest settlement price since Jan. 28, 2002. The futures have declined 35 percent this year, making gas the worst performer on the Standard & Poor’s GSCI Index of 24 commodities.
“Today’s order finds that the project can be constructed and operated safely and with minimal environmental impacts,” the federal agency known as FERC said in a statement yesterday.
The 55 pollution-control and other conditions placed on Cheniere’s permit by the FERC “didn’t reveal any hurdles that would appear to threaten a timely start of project construction,” Christine Tezak, an analyst at Robert W. Baird & Co. in Houston, said today in a note to clients.
Environmental groups including the San Francisco-based Sierra Club opposed the project, saying converting natural gas to liquid form emits carbon dioxide, which is linked to climate change. Some critics of the plan had also said exporting the gas would drive up costs for domestic users.
Customers Lined Up
Cheniere Chairman and Chief Executive Officer Charif Souki has lined up customers for much of the terminal’s planned export capacity. The clients are London-based BG Group Plc (BG/), Barcelona- based Gas Natural Fenosa, GAIL India Ltd. (GAIL) and Korea Gas Corp. (036460)
Korea Gas, the world’s biggest LNG importer, agreed in January to buy 3.5 million metric tons of the fuel annually from Cheniere. The contract may help the utility buy the fuel at prices about 30 percent cheaper than supplies from Asia, the state-owned South Korean company said in an e-mail today.
South Korea, Japan and Spain are the world’s largest gas buyers, according to the U.S. Energy Department. Japanese utilities were paying $20.87 per million Btus for Yemeni gas in January, more than 10 times current U.S. prices.
International gas prices have soared because of rising consumption by power generators and chemical plants, and to plug the energy gap stemming from the Fukushima nuclear meltdown in Japan last year. Overseas prices haven’t been pressured by the U.S. glut because North American supplies are mostly inaccessible to the rest of the world.
Gas prices outside of North America probably will remain elevated until at least 2018, providing U.S. exporters a window of opportunity to recoup capital costs and earn profits before the price spread between the U.S. and the rest of the world shrinks, Asish Mohanty, senior global LNG analyst at Wood Mackenzie, said in an April 9 telephone interview.
After 2018, U.S. exporters will face growing competition from new and expanded LNG projects in Australia that probably will expand global supplies enough to drive down international prices, Mohanty said.
The U.S. Energy Department granted Cheniere a permit last year to export to countries that aren’t free-trade partners with the U.S., a group that includes Japan and Spain. The terminal is scheduled to begin operations in 2015 or 2016.
Bank of Tokyo-Mitsubishi UFJ Ltd, Credit Agricole SA, Credit Suisse Group AG, HSBC Holdings Plc, JPMorgan Chase & Co., Morgan Stanley, Royal Bank of Canada and SG Americas Securities will arrange the $4 billion in borrowings announced yesterday, Cheniere Energy Partners said.
Cheniere on March 14 announced a stock offering, the fourth in less than a year, and it is negotiating a $2 billion pledge from Blackstone Group LP (BX:US) to cover costs of the export terminal.
The Sabine Pass export facility was backed by Louisiana lawmakers including Senator Mary Landrieu, a Democrat, and by General Electric Co. (GE:US), which will make equipment for the plant.
Cheniere is planning another export facility near Corpus Christi, Texas, which may begin operating by 2017 or 2018, CEO Souki said.
North American LNG
Aside from Cheniere’s Sabine Pass project, other pending export venture include Freeport LNG Development’s proposal for a plant at Freeport, Texas. Seven companies, including Freeport, are seeking U.S. Energy Department’s permission to export to non-free-trade agreement nations.
Apache Corp., the second-largest U.S. independent oil and natural-gas producer by market value, said last month it’s moving toward a decision to go ahead with its Kitimat LNG project in Canada this year.
“The dawn of North American LNG has arrived,” Neil Beveridge, a Hong Kong-based analyst at Sanford C. Bernstein & Co. said in a research note today. “We expect Sabine Pass to be the first of several LNG projects to be approved in North America, which will become a major new LNG exporting region.”
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