Macquarie Group and Freeport LNG said Monday they have agreed to jointly develop and market liquefaction capacity that will allow the export about 1.4 Bcf/d from the existing LNG import terminal in Freeport, Texas.
The companies' proposal to export US natural gas is the second announced this year by a US LNG terminal operator. Cheniere Energy unveiled a similar plan in June and in September received US Department of Energy approval to export about 800 Bcf/year from its import terminal at Sabine Pass, Louisiana, to free-trade agreement countries. The company is awaiting approval of its plan from the Federal Energy Regulatory Commission.
At the time it announced its plan, Cheniere said increased production of gas from US shale formations and lower-than-expected domestic demand has made exports attractive for US terminals originally built to import gas.
The proposed Freeport liquefaction facility would initially target the premium Asian market, which is buying LNG at oil-indexed prices, Nicholas O'Kane, senior managing director and global head of Macquarie's energy markets division, said in an interview.
Half the proposed liquefaction capacity would be marketed by the Freeport LNG-Macquarie venture, with the other half offered to existing holders of import capacity at Freeport LNG. ConocoPhillips owns 1 Bcf/d of import capacity at Freeport LNG, Dow Chemical owns 500,000 Mcf/d, Mitsubishi owns 150,000 Mcf/d and Macquarie owns an unspecified amount of capacity.
Michael Smith, a 20% equity owner in Freeport LNG and a half owner of the partnership that operates the terminal, said it is soon to say whether any of the owners of import capacity would be interested in export capacity. The combined nameplate capacity of the four proposed liquefaction units would be 1.32 Bcf/d, but the Macquarie and Freeport expect to be able to produce at least 1.4 Bcf/d on a baseload basis because the units would likely be able to operate at a higher level, Smith said. The venture plans to seek US permission to export LNG equivalent to as much as 1.5 Bcf/d, he added.
Freeport LNG is located close to the Eagle Ford shale play of south Texas, where China's state-owned CNOOC has a major presence. Producer Chesapeake Energy earlier this month completed the sale of one-third of its 600,000 oil and gas leasehold acres to CNOOC for $1.08 billion.
Smith and O'Kane said the proposed liquefaction venture has been speaking with a number of potential Asian capacity holders and Smith implied that CNOOC is one of those companies.
"You read the same papers as I do, and there have been announcements of foreign companies acquiring US reserves in shale plays, including the Eagle Ford, which is around the corner from or plant," he said. "I can't speculate if those companies are going [to lease liquefaction capacity], but we are going to talk to them."
The liquefaction plants would not be built without long-term contracts with customers, Smith said, adding that the venture is eyeing contracts of at least 20 years. But because the project plans to use relatively small trains, Smith said the companies believe they can commercialize the facility with as little as 200,000 to 250,000 of Mcf/d of liquefaction capacity under-long contract, from one or two customers. "But based on demand we're seeing, the odds are more likely than not that we'll be building the entire thing out," he added.
Capacity holders could buy gas indexed to US Henry Hub prices or potentially enter into long-term agreements with US producers to buy gas at oil-indexed prices, Smith said.
An industry source said Asian customers might want to buy US gas at oil-linked deals under long-term contracts if the price would be below that of oil-indexed contracts with Asian LNG producers. Although at current prices that would make the US LNG more expensive than US Henry Hub gas, in the long run such a strategy could provide a hedge against spikes in US spot gas prices, while also guaranteeing lower prices than LNG produced in Asia, the source added.
Asian LNG prices would need to be about $4.00-$4.50/MMBtu higher than US gas prices to make LNG shipments from Freeport LNG to Asia profitable, Smith said. And European prices would have to have a premium of about $2.50-$3 to US prices to make deliveries to Europe economical, O'Kane added.
The scheduled expansion of the Panama Canal in 2014 to allow the passage of standard-sized LNG vessels would make deliveries to Asia at least about $1/MMBtu cheaper, Smith said. The expanded canal would be able to accept LNG ships with capacities of as much as 170,000 cubic meters (equivalent to 3.65 Bcf of gas), he said.
Freeport and Macquarie's plans building all the proposed facilities would be $2 billion, equivalent to a unit cost of $182/mt of annual production, significantly cheaper than proposed new liquefaction plants in Australia, some of which have estimated unit cost of $1,500-$2,000 mt of annual production. But the Freeport LNG proposal cost does not include the cost of producing and gathering gas, while the Australian projects include that in their overall cost.
Cheniere has said it would primarily target European customers initially and would charge about $1.50/MMBut for export and import capacity. Smith and O'Kane declined to say how much Freeport LNG would charge for liquefaction capacity, saying negotiations are ongoing.
Freeport LNG and Sabine would not be in competition because of the abundance of gas in the region, Smith said.
Freeport LNG plans to file applications in December with the US Department of Energy and the Federal Energy Regulatory Commission for its export license, Smith said.
The companies' proposal to export US natural gas is the second announced this year by a US LNG terminal operator. Cheniere Energy unveiled a similar plan in June and in September received US Department of Energy approval to export about 800 Bcf/year from its import terminal at Sabine Pass, Louisiana, to free-trade agreement countries. The company is awaiting approval of its plan from the Federal Energy Regulatory Commission.
At the time it announced its plan, Cheniere said increased production of gas from US shale formations and lower-than-expected domestic demand has made exports attractive for US terminals originally built to import gas.
The proposed Freeport liquefaction facility would initially target the premium Asian market, which is buying LNG at oil-indexed prices, Nicholas O'Kane, senior managing director and global head of Macquarie's energy markets division, said in an interview.
Half the proposed liquefaction capacity would be marketed by the Freeport LNG-Macquarie venture, with the other half offered to existing holders of import capacity at Freeport LNG. ConocoPhillips owns 1 Bcf/d of import capacity at Freeport LNG, Dow Chemical owns 500,000 Mcf/d, Mitsubishi owns 150,000 Mcf/d and Macquarie owns an unspecified amount of capacity.
Michael Smith, a 20% equity owner in Freeport LNG and a half owner of the partnership that operates the terminal, said it is soon to say whether any of the owners of import capacity would be interested in export capacity. The combined nameplate capacity of the four proposed liquefaction units would be 1.32 Bcf/d, but the Macquarie and Freeport expect to be able to produce at least 1.4 Bcf/d on a baseload basis because the units would likely be able to operate at a higher level, Smith said. The venture plans to seek US permission to export LNG equivalent to as much as 1.5 Bcf/d, he added.
Freeport LNG is located close to the Eagle Ford shale play of south Texas, where China's state-owned CNOOC has a major presence. Producer Chesapeake Energy earlier this month completed the sale of one-third of its 600,000 oil and gas leasehold acres to CNOOC for $1.08 billion.
Smith and O'Kane said the proposed liquefaction venture has been speaking with a number of potential Asian capacity holders and Smith implied that CNOOC is one of those companies.
"You read the same papers as I do, and there have been announcements of foreign companies acquiring US reserves in shale plays, including the Eagle Ford, which is around the corner from or plant," he said. "I can't speculate if those companies are going [to lease liquefaction capacity], but we are going to talk to them."
The liquefaction plants would not be built without long-term contracts with customers, Smith said, adding that the venture is eyeing contracts of at least 20 years. But because the project plans to use relatively small trains, Smith said the companies believe they can commercialize the facility with as little as 200,000 to 250,000 of Mcf/d of liquefaction capacity under-long contract, from one or two customers. "But based on demand we're seeing, the odds are more likely than not that we'll be building the entire thing out," he added.
Capacity holders could buy gas indexed to US Henry Hub prices or potentially enter into long-term agreements with US producers to buy gas at oil-indexed prices, Smith said.
An industry source said Asian customers might want to buy US gas at oil-linked deals under long-term contracts if the price would be below that of oil-indexed contracts with Asian LNG producers. Although at current prices that would make the US LNG more expensive than US Henry Hub gas, in the long run such a strategy could provide a hedge against spikes in US spot gas prices, while also guaranteeing lower prices than LNG produced in Asia, the source added.
Asian LNG prices would need to be about $4.00-$4.50/MMBtu higher than US gas prices to make LNG shipments from Freeport LNG to Asia profitable, Smith said. And European prices would have to have a premium of about $2.50-$3 to US prices to make deliveries to Europe economical, O'Kane added.
The scheduled expansion of the Panama Canal in 2014 to allow the passage of standard-sized LNG vessels would make deliveries to Asia at least about $1/MMBtu cheaper, Smith said. The expanded canal would be able to accept LNG ships with capacities of as much as 170,000 cubic meters (equivalent to 3.65 Bcf of gas), he said.
Freeport and Macquarie's plans building all the proposed facilities would be $2 billion, equivalent to a unit cost of $182/mt of annual production, significantly cheaper than proposed new liquefaction plants in Australia, some of which have estimated unit cost of $1,500-$2,000 mt of annual production. But the Freeport LNG proposal cost does not include the cost of producing and gathering gas, while the Australian projects include that in their overall cost.
Cheniere has said it would primarily target European customers initially and would charge about $1.50/MMBut for export and import capacity. Smith and O'Kane declined to say how much Freeport LNG would charge for liquefaction capacity, saying negotiations are ongoing.
Freeport LNG and Sabine would not be in competition because of the abundance of gas in the region, Smith said.
Freeport LNG plans to file applications in December with the US Department of Energy and the Federal Energy Regulatory Commission for its export license, Smith said.
