Korea Steps Up: Cheniere Energy Finds Buyer for Louisiana LNG

The rush to sell off the excess natural gas supply in North America just received a bump from the largest single buyer of liquid natural gas in the world, South Korea’s Kogas. Starting in 2017, American natural gas exporter Cheniere Energy (AMEX:LNG) will supply the Korean buyer over a 20-year deal that was announced yesterday.

The deal holds some historical value, as it would pave the way towards the first U.S. LNG export plant in almost 50 years. Coming out of the proposed Sabine Pass export plant in Louisiana, global consumers would be open to purchase American natural gas, which is at a discount due to an abundance of supply coming from technological advancements and the reopening of major shale plays.

Kogas, which is a state-run entity, is slated to purchase 3.5 million tonnes per year (mtpa) of LNG from the third of four production units scheduled for construction at Sabine Pass, known as Train 3. With a total capacity of 18 mtpa available from the completed facility after all four units are constructed, the deal with Kogas brings the company’s sold obligations to 16 mtpa, with the remaining 2 mtpa slated for Cheniere’s own portfolio.

To put into perspective, 3.5 mtpa would take up 70% of the proposed Kitimat, BC LNG plant’s capacity on the Canadian side of the border. But while these LNG export opportunities are enticing, especially with Asian prices for natural gas fetching nearly five times the value seen in North America, the LNG terminals will barely make a dent in the continent’s supply excess.

As mentioned in a previous article on LNG exports, I mentioned how Chesapeake Energy (NYSE:CHK) was forced to cut its natural gas production by 8%, which amounted to a reduction of 182.5 billion cubic feet of gas per annum. This reduction represents roughly the same supply that Kogas will be purchasing from the Sabine Pass facility. For Chesapeake, it’s too bad that it couldn’t blow off some its excess supply to an LNG facility to make their natural gas supply more economic.

But with multiple others supplying natural gas numbers in the same ballpark as Chesapeake, the sector as a whole would require quite a few more Sabine Passes to be constructed. And given the current climate surrounding the issue of energy dependence, environmental costs and reduced capital availability to finance these major constructions, it still doesn’t look like LNG is a savior for the gods of gas.

The Sabine Pass facility is estimated to be able to handle around 2 billion cubic feet per day of gas, which represents 3% of US daily production. The Kogas deal comes at a price tag of $3 per mmbtus, plus a 15% premium over the Henry Hub price. The other deals for the facility are Britain’s BG group’s deal for $2.25 per mmbtu, plus the 15% premium, as well as two more deals with Spain’s Gas Natural Fenosa and GAIL India.

With prices at a low point, producers are going to look for the best price they can get for their gas, and LNG represents an open marketplace with a premium attached. From a domestic policy side, it’s a shame that more uses for dry gas aren’t being developed to capitalize on this cheap, abundant energy supply. While we are engaged in security measures to protect oil supplies in unstable regions, an opportunity is perhaps being missed on this side of the ocean with a safe and stable natural gas supply being held behind pipe for economic reasons, shipped elsewhere or worse… flared off.

Unfortunately, the costs for retrofitting coal power facilities into natural gas plants are too much of a deterrent for the United States to invoke a natural gas renaissance. At least for now, an opportunity to share some of this gas bounty with the world is moving forward, and Korea, which needs natural gas and is willing to pay for it, will be helped by this deal.

G. Joel Chury
Editor in Chief
VantageWire.com

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