Kinder Morgan's Next LNG Export Terminal

Summary

• Going over the potential conversion of the Gulf LNG import terminal in Mississippi to an LNG export terminal.
• Kinder Morgan Inc. owns half of this facility and would take lead as operator in the event that this project gets approved.
• Previous guidance calls for the Gulf LNG terminal to be upgraded to export 11.5 million metric tons of LNG per year.
• The cost of this development is estimated to run $8 billion.

Kinder Morgan Inc. (NYSE:NYSE:KMI) is currently working on converting an existing liquefied natural gas import terminal, often referred to as a regassification terminal, to an LNG export terminal down in Georgia. The project, known as the Elba Liquefaction and EEC Modification development, will soon be operational. More importantly, those interested in Kinder Morgan Inc. should note that this conversion project may not be some one-off endeavor. Kinder Morgan Inc. also owns half of an existing LNG import terminal in Pascagoula, Jackson County, Mississippi. Known as the Gulf LNG facility, this LNG import terminal was completed in 2011 for a development cost of $1.1 billion. However, in light of America becoming the largest natural gas producer in the world and ultimately a net exporter of natural gas, the terminal is now a stranded asset that is never used. Let’s go over how Kinder Morgan Inc. can change that.

Asset overview

The Gulf LNG terminal is owned by Gulf LNG Holdings Group, which is half-owned and operated by Kinder Morgan and half-owned by a large collection of investment entities. Currently, the terminal is connected to four interstate pipelines (including the Transco system) and a gas processing facility. The pipeline connections are particularly relevant because they could be converted and upgraded to supply natural gas to the terminal instead of being positioned to take gas away from the facility.

Two LNG storage tanks that each have 160,000 cubic meters of storage capacity, a single dock that can handle vessels with up to 250,000 cubic meters of storage capacity, various pumping and compression capabilities, electricity infrastructure, and other related infrastructure are also already present at the Gulf LNG terminal.

At the end of 2017, Kinder Morgan reported the carrying value of its share of the Gulf LNG asset at $461 million. It appears Kinder Morgan has long-term contracts with two firms, one in Italy and one in Angola, to receive LNG supplies from those nations. While those supplies aren’t ever going to arrive, Kinder Morgan gets paid a small fee to maintain the terminal in operational readiness as stipulated in those agreements that were signed during a different era. A small portion of that fee goes to the Port of Pascagoula.

Readers should note that the Angolan firm is the consortium the runs the Angola LNG venture, and that the Italian firm is Eni (NYSE:E). Eni contested the long-term supply agreement, which dates back to December 2007, last year. The argument basically boiled down to Eni realizing that the terminal will never be used and its desire to terminate the agreement so it can save on the fees paid to Gulf LNG, with the Kinder Morgan-led venture asserting that Eni has no grounds to contest the agreement. The agreement was supposed to last until 2031, but earlier this year the arbitration panel ruled that the agreement should be terminated. It appears the agreement with Angola LNG is still in place, but that too may be terminated.

In 2017, Kinder Morgan’s equity stake in Gulf LNG Holdings Group made the firm $47 million in earnings, which has declined by $1 million each year since the end of 2015. Based on the apparent DD&A expense of $24 million the 50% stake in Gulf LNG Holdings incurred in 2017, it seems this asset was generating roughly $70 million in cash flow to Kinder Morgan before other considerations. In light of the termination of the agreement with Eni, it is likely this asset will soon generate only a marginal amount of cash flow if any going forward.

Synergies

What really matters is Kinder Morgan’s ability to convert the Gulf LNG terminal into an export terminal. By leveraging the existing infrastructure in place, Kinder Morgan can dramatically cut down on development costs while growing its footprint in the lucrative LNG export space. Beyond making money via the arbitrage play that is American LNG exports (difference between Henry Hub + liquefaction costs and Asian/European LNG prices), there are other synergies at play here. There is a greater need for natural gas infrastructure when America is able to produce larger amounts of gas as new export opportunities become available.

However, other than the Florida Gas Transmission system, none of the pipelines connected to the terminal are owned by Kinder Morgan (the FGT system carries gas to Florida and isn’t positioned to carry natural gas to the terminal). So, the dynamic effects would be felt farther upstream (such as greater need for gas gathering infrastructure at the fields producing the gas that eventually will be exported). On a side note, it is possible that this facility could be connected to the various gas takeaway pipelines Kinder Morgan is building out of the Permian Basin, ensuring rising Permian supplies can reach an end buyer. That would be a prime example of the synergies LNG export terminals create for midstream giants like Kinder Morgan.

Project overview

Looking now at the project at hand, what Kinder currently envisions is building a major LNG export terminal in two phases. Once completed, the terminal would be able to export 11.5 million metric tons of LNG per year. Past development cost assumptions point towards this being an $8 billion endeavor, with the first phase requiring $5 billion in capital expenditures. Take that guidance with a grain of salt, as construction on this potential project is still a long ways off. These expenditures are required to build-out gas pre-treatment, liquefaction, and export capabilities alongside the existing infrastructure already in place.

As things stand today, Kinder Morgan is still seeking to obtain the proper federal approval for converting the import terminal to an export terminal. There is also a need to obtain some local and state permits as well, which should be relatively easy once the federal government gives the go-ahead (assuming that’s the case). The last thing I can find in regards to the project timetable is that the Federal Energy Regulatory Commission announced its intent on preparing an initial EIS (environmental impact statement) that concerns “the potential environmental impacts of a proposal to add natural gas liquefaction and export capabilities at the existing Gulf LNG Terminal in Jackson County, Mississippi.”

I will note that there is limited information on the progress of the regulatory process at this stage. Beyond the regulatory hurdles, the next big step is securing long-term contracts from buyers looking to import US LNG. That shouldn’t be too hard given enough time, especially as this project won’t see construction start anytime soon (meaning that it would come online after the wave of US export terminals are already completed and after global LNG demand has grown materially to absorb those additional volumes, and then some).

As I’ve noted in past articles, Royal Dutch Shell (NYSE:RDS.A) (NYSE:RDS.B) expects global demand for natural gas, especially LNG, to be voracious over the coming decades. That assessment is backed up by research conducted by OPEC (Organization of Petroleum Exporting Countries) and the IEA (International Energy Agency), creating a prime opportunity for Kinder Morgan.

Final thoughts

There is still a ton of work to do before Kinder Morgan Inc. and its various partners in the potential Gulf LNG export development get to a positive final investment decision, but this is a project both readers and interested investors should keep an eye on. Kinder Morgan Inc. is close to starting up the Elba LNG export facility and may decide that the economics of converting an existing LNG import terminal to an export terminal are strong enough to move forward with a similar endeavor. Time will tell, but leveraging existing LNG infrastructure to cut down on development costs while capitalizing on cheap American natural gas supplies looks like a winning combination to me. Thanks for reading.

Disclosure: I am/we are long KMI, RDS.B, BP. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.