Investing In The LNG Market

| About: Cheniere Energy, (LNG)
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It was a classic miscue. Until just a few years ago almost everyone predicted a shortage of natural gas in the U.S. and Canada. In a rush to meet anticipated demand, companies such as Cheniere Energy (LNG) completed several LNG receiving facilities along the Gulf and East Coasts of the U.S. However, plunging prices from abundant shale gas turned the facilities into white elephants almost overnight.

In an abrupt turnabout, Cheniere and others are scrambling to add LNG export capabilities to the receiving terminals. Projects are planned in Louisiana (Sabine Pass), Texas (Corpus Christi), British Columbia (Kitimat), and elsewhere.

Booming Asian Demand

Low priced North American shale gas has turned gas markets topsy-turvy. U.S. prices are at record lows - just above $2/MMBtu. However, prices overseas are much higher. In Europe natural gas fetches 10/MMBtu. In Asia, at $15/MMBtu, it's even more. Long term contracts to ship LNG into the U.S. get renegotiated or politely ignored. The U.S. doesn't want the product and shippers would rather sell into high-priced Asian markets.

After the Fukushima disaster, Japan shut down almost all its nuclear power plants and is now the world's largest LNG consumer. In Southeast Asia strong population and economic growth has natural gas demand booming. Korea has always been a large LNG importer, China and India want more and more of it. The Philippines, Vietnam, and Pakistan are also looking to increase imports.

Why Transporting Natural Gas is So Difficult

Unlike oil, uncontained or liquefied natural gas goes whoosh and ... disappears into the air. So, pipelines must be laid to transport gas on land. This limits markets to urban areas and point sources such as industrial sites and power plants. Rural areas must make do with more expensive fuels such as propane.

Shipping gas overseas presents an even greater problem. It must be super-cooled to -260 degrees F in order to liquefy it. Then it's transported by special ships - LNG carriers - to receiving terminals for regasification, after which it is piped to markets. This costly process requires extensive infrastructure.

In all the Americas there are currently only three LNG export terminals. One is in Peru, a second in Trinidad and Tobago, and the third at Kenai, Alaska. None of these has ready access to North America's cheap shale gas. The Kenai facility was built over 40 years ago to ship gas -- now largely depleted -- from Cook Inlet.

North America's Scramble To Export LNG

As mentioned above, companies such as Cheniere are now hurrying to add export capabilities to existing LNG receiving terminals. Since the receiving terminals already have docking, storage, and pipeline infrastructure, it makes sense to look to them - in first - in essence making the terminals bi-directional.

In order to export LNG liquefaction units (called trains) must be built. Liquefaction facilities typically have 2-4 trains. Here is a world-wide list of LNG export terminals, both operational and planned. I used this site as a source for the ownership, status, and statistical information below.

Sabine Pass (Louisiana)

Cheniere Energy , through its subsidiary Cheniere Energy Partners (CQP) owns and operates the Sabine Pass LNG receiving port and facilities. Cheniere plans to add liquefaction capabilities with 4 trains producing up to 18 million tons per year. Bechtel will design and construct the project.

In late February, Cheniere entered into an agreement with Blackstone Energy Partners for $2 billion in initial financing. Bechtel has been awarded the construction contract. The project is budgeted at $10 billion and is expected to be completed in 2015.

Corpus Christi (Texas)

Due to strong interest in the Sabine Pass liquefaction terminal, Cheniere decided to go ahead with a second export terminal at its Corpus Christi facilities. Corpus Christi is near Eagle Ford shale gas - less than 100 miles away. This facility is designed to have 3 trains capable of producing 13.5 million tons per year. Commissioning is expected in 2017.

Kitimat (British Columbia)

The Kitimat facility is being jointly developed by Apache (APA), EOG Resources (EOG), and Encana (ECA). LNG exports from Kitimat, being on the Pacific and close to Asian markets, should have an advantage over the U.S. Gulf coast terminals. Two trains with an initial capacity of 5 tons/year is anticipated. First shipments are targeted in 2015.

An export license for Kitimat was granted on October 13, 2011 and an interim regulatory agreement was announced this March. Kitimat is located on the Haisla nation reserve. The Globe and Mail has a review of the Kitimat project along with an interesting image showing current worldwide natural gas flows.

Dominion Cove Point (Maryland)

Dominion Cove Point is yet another LNG import facility that is being envisioned for export. In October, 2011 the Department of Energy authorized Dominion Cove to enter into contracts to export gas to countries with free trade agreements with the U.S. Commissioning is expected in 2015.

Freeport (Texas)

Freeport LNG on Quintana Island, Texas -70 miles south of Houston, also has plans for LNG export. Freeport LNG Development (private) and ConocoPhillips are developing this facility. Commissioning is expected in 2016 with 3 trains having a capacity of 4.4 million tons/year.

Freeport LNG and Macquarie Energy (OTCPK:MQBKY) will jointly market the LNG. India is already in talks with Macquarie on buying the gas.


All the above facilities are scheduled to go operational in the 2015-2017 time frame. Assuming there are no construction delays, which is unlikely, then is the time at which cheap North American gas will finally have an outlet to Asian markets.

The Cheniere companies are in the forefront of U.S. LNG terminal construction. Until recently, their stocks have done quite well. However, investors should keep in mind that several obstacles loom. Financing, regulatory, environmental, and political hurdles must yet be overcome. In February legislation was introduced into the House of Representatives which would "suspend approval of liquefied natural gas export terminals."

This (protectionist) thinking is that exporting U.S. gas will cause price increases which, in turn, will hurt U.S. consumers. Delays to, or perhaps even denial of, U.S. LNG exports will negatively impact companies involved. At this point, Kitimat in Canada seems to have clearer sailing than its U.S. competitors.

Disclosure: I am long ECA.