Sempra Energy (ticker: SRE) has received approval from the Federal Energy Regulatory Commission (FERC) to build the second liquefied natural gas (LNG) export plant in the United States, according to a company press release on June 19, 2014. The plant will be located in Hackberry, Louisiana and will have a capacity of 1.7 Bcfe/d. Construction is scheduled to begin in 2015 and is estimated to cost $9 billion to $10 billion.
The issue of exporting resources in the United States has become a hot topic in recent months. The dilemma with Russia and the European Union magnified the situation, and Russia recently cut off its gas supply to Ukraine. Gazprom (ticker: SIBN.ME), Russia’s state exporter, raised rates to $485.00/Mcf for Ukraine – approximately 26% higher than the average price of $385.00/Mcf for its European customers. By comparison, United States residential consumers paid an average of $10.33/Mcf in 2013. According to the FERC, landed LNG spot prices in Europe are estimated to be more than double the prices in the United States.
The United States responded by announcing a “major overhaul” of the LNG export review process in May 2014.
Under the new format, the Department of Energy will decide if the project fits national interest while the FERC will continue to evaluate the environmental impact and make the final decision. Bringing online any LNG project will make an immediate impact – the United States exported roughly 3.75 Bcf/d (332 MBOEPD) in 2013. Its export totals will nearly double once the Sabine Pass and Hackberry plants become fully operational.
An additional 13 export terminals have been proposed to the FERC and are currently awaiting approval. Click here to view the map.
In BP’s (ticker: BP) 2013 Annual Energy Outlook, global LNG consumption is expected to grow 4.3% per year and will account for 15.5% of worldwide gas consumption by 2030. China and Southeast Asia are expected to be the main customers for LNG. In the same period, BP believes production from shale gas will triple.
According to the BP report, North America will become a net exporter of gas by 2017, with exports reaching as much as 8 Bcf/d by 2030.
In the Sempra Energy press release, E. Scott Chrisman, Vice President of Commercial Development for Sempra, said, “The liquefaction project is an international collaboration with our partners from Japan and France to create a world-class facility to deliver reliable LNG supplies for more than 20 years to some of the largest LNG buyers in the world.”
The only other approved LNG plant in the US is in Sabine Pass, Louisiana, and is managed by Cheniere Energy (ticker: LNG). The plant was approved in 2012 and the first two liquefaction trains are on track to be completed by 2016. Expected cost for the two trains is roughly $6 billion and processing capacity will be 1 Bcf/d. Expansion for two extra trains has been approved and will boost the facility’s capacity to 2 Bcf/d. Cheniere is considering the proposal of another two trains, which would bring the total at Sabine Pass to six. According to Cheniere, the plant is “strategically situated to provide export services given its large acreage position, proximity to unconventional gas plays in Louisiana and Texas, its interconnections with multiple interstate and intrastate pipeline systems, and its premier marine access less than four miles from the Gulf Coast. “
As evidenced by the map on the right, the majority of natural gas pipelines flow to the Gulf and Midcontinent. Cheniere’s site says its plant will have access to production from five of the six major US shale plays, including the Barnett, Haynesville, Woodford, Fayetteville/Arkoma and Eagle Ford.
LNG Issues down the Road: Are the Plants Too Costly?
Cheniere’s construction of Sabine Pass is ahead of schedule and costs are within the expected range, but LNG build-out on an international level has not gone as smoothly to date. Australia has approved 12 LNG export projects, but 10 of those plants are either behind schedule or have exceeded preliminary budgets by as much as 50%. British Columbia is pressing to construct the Kitimat plant north of Vancouver, but cost estimates for the terminal, along with infrastructure build-out for pipelines, has been placed as high as $280 billion.
Royal Dutch Shell (ticker: RDS.B) recently disturbed the LNG waters by claiming only a fraction of the large scale gas export projects will be built. “Costs in the oil and gas sector are still on the rise and outpacing inflation,” said Matthias Bichsel, a member of Shell’s Executive Committee. “Gas projects are extremely price-sensitive because the margins are so thin.”
Bichsel’s comments are supported by several companies attempting to either sell down or exit their projects entirely. The same day of Sempra’s announcement, GDF Suez (ticker: GSZ.PA) and Santos (ticker: STO.AX) mutually agreed to terminate an Australian LNG project because it was not commercially viable.
Because of the United States’ vast midstream system, LNG exports are expected to come more easily. At the LNG in BC conference in May, Edward Kelly, Vice President of Natural Gas at IHS CERA, said: “The U.S. projects are starting on second base. They’ve got the harbor, they’ve got the tanks there, they have natural gas infrastructure in place, [and] they’re offering a clear model for North American gas price exposure.”
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