Story by the Australian Financial Review

Woodside Petroleum has sealed a deal to buy 20 years of liquefied natural gas from a $US11.5 billion ($14.1 billion) terminal to be built in Texas, but with no softening in the pricing despite the plunge in global crude oil prices since a preliminary agreement was struck in mid-2014.

The step forward for Woodside’s emerging LNG trading business came after US LNG export pioneer Cheniere Energy sealed a $US8.4 billion debt deal on Wednesday to help finance the Corpus Christi project, which will be built by private firm Bechtel.

Cheniere will build two LNG trains at the site, with a total 13.5 million tonnes a year of capacity, almost as big as Chevron’s Gorgon project in Western Australia, which will however cost almost five times more at $US54 billion. The Texas investment will also cover three storage tanks, two docks for LNG tankers and a gas pipeline. First production is due in 2018.

Woodside said there was no change in the key terms announced last year for the 850,000 tonnes a year of LNG it will buy from Corpus Christi. Under the deal, it will pay 115 per cent of the monthly US benchmark gas price, called Henry Hub, plus an extra amount of $US3.50 ($4.31) per million British thermal units for the LNG from Corpus Christi. It said those terms were in line with those signed by other buyers from the project.

However, since the terms were agreed last year, oil prices have plunged, and despite a modest recovery still remain more than 40 per cent lower than last year’s peak.

The weakness in oil has fuelled debate over how competitive US LNG will be in Asia, where most existing supplies are priced against crude.

Hedged bets

Before last year’s dive in oil prices, LNG exported from the United States was expected to have a clear competitive advantage over many Asian sources because US prices are typically linked to Henry Hub prices instead. But now that pricing advantage has mostly disappeared. How competitive US LNG exports will be in future depends largely on the path of US gas prices and of global crude oil.

Still, with supply sources now in both Australia and the US, Woodside has hedged its bets.

Woodside is buying LNG from Corpus Christi free-on-board, so it will also have to cover costs for shipping to customers. Where it can ship the LNG is subject to approval by US export authorities.

Citigroup analyst Dale Koenders said he was looking for Woodside to give a guide on its aspirations in LNG trading at its investor briefing in Melbourne next week, but signalled that the profit contribution from the division was likely to remain relatively small.

Mr Koenders told clients in a note that if Woodside continued to make margins of 5 per cent on its trading business, then 1 million tonnes a year of LNG trading volumes could add about $US30 million of earnings before interest and tax on an annual basis.

Chief executive Peter Coleman said on Thursday that the LNG volumes Woodside will take from the US project, starting in the December quarter of 2019, “complement Woodside’s existing portfolio and provide a very strong base for Woodside to leverage new volumes from Browse, Kitimat and other sources of supply”.

The deal with Cheniere includes an option for an additional 10 years of LNG supply and a clause that allows Woodside not to take the LNG at all if it gives enough notice and pays $US3.50 per MMBTU for gas not purchased. As it stands, the deal accounts for about 12 cargoes a year.


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