Cheniere's 20-Year Gas Deal Brings U.S. Export Terminal Closer
Comment of the Day

November 22 2011

Commentary by Eoin Treacy

Cheniere's 20-Year Gas Deal Brings U.S. Export Terminal Closer

This article by Todd White for Bloomberg may be of interest to subscribers. Here is a section:
Cheniere Energy Inc. signed a second natural-gas supply contract in three weeks, boosting its chances of building the first export terminal in the continental U.S.

Gas Natural SDG SA of Spain agreed to load 3.5 million metric tons of liquefied natural gas a year from Houston-based Cheniere's proposed Sabine Pass terminal in Louisiana for 20 years beginning in 2017, the companies said in statements after the market closed in the U.S. Cheniere rose as much as 12 percent in Frankfurt trading.

Production from shale fields has made the U.S. the world's largest gas producer and seen prices collapse 75 percent from 2008's highs, opening the prospect of ship-bound exports.

Yesterday's deal, following a 20-year contract with BG Group Plc, may ensure cash-strapped Cheniere gets financing to build the first phase of its $7.2 billion Sabine export terminal, Societe General said.

"Cheniere now has an incentive to build it as fast as possible," said Thierry Bros, a senior analyst for European gas and LNG at Societe Generale in Paris. "The banks will now have secured cash flow" to repay debt on the export facility.

Cheniere fell 1.9 percent to $11.48 a share in the U.S. yesterday before the news, which it called "another milestone" for Sabine. The 7 million metric-ton capacity target was met for exports, "which is expected to support the construction" of the first two export lines at the facility, Cheniere said in its statement.

Eoin Treacy's view Natural gas prices below $4 make a great deal of unconventional supply uneconomic. However, it is often expensive to shut in once tapped and companies are racing to get wells drilled before permitting expires. The result is that the excess supply situation may continue for a while longer.

From the perspective of potential demand the ratio of West Texas Intermediate Crude Oil / Henry Hub Gas prices has never been so favourable. Anyone considering new infrastructure has a compelling reason to consider natural gas over oil. The coal/natural gas ratio is equally favourable.

The fact that the USA's natural gas market is deregulated offers an attractive proposition to those selling gas into markets where prices are linked to crude oil. While UK natural gas is also deregulated, its price more closely reflects that of mainland Europe. Prices continue to trend higher in sharp contrast to the weak environment present in North America.

Cheniere Energy Inc broke out of a two-year base late last year and remains in a ranging consolidation consistent with a first step above the base. It is currently testing the upper boundary and a sustained move below $8 would be required to question potential for a successful upward break. (Also see Comment of the Day on September 21st and 19th).

BG Group and Gas Natural aim to take advantage of the arbitrage between the US and European and Asian markets. They are unlikely to be the only participants once the USA's export capacity is up and running. It may take time for economics to overcome inertia but there is certainly a valid argument for dispensing with oil linked contracts altogether.

The cost argument for natural gas has never been more compelling. Anyone seeking to control energy costs will be compelled to consider natural gas in a deregulated market for the commodity. The most logical solution would be to incentivise car manufacturers to develop a more technologically advanced natural gas fuelled range of vehicles.

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