May 15, 2012
The uptick in domestic production of natural gas from unconventional sources, such as fracking, has resulted in an oversupply where the price of natural gas hit a decade low in April 2012. While the glut of domestic supply has kept prices in the U.S. around $2 per Million British Thermal Units (MMBtu), prices can be anywhere from four to ten times higher in Europe and Asia where natural gas imports are heavily relied on. We believe that this will be a long-term trend as foreign demand for liquid natural gas (LNG) is unlikely to slow down as China is moving toward cleaner energy sources. Japan, the world’s third largest energy consumer, relied on Nuclear power for 30% of their electricity generation before the recent earthquake and subsequent disaster at Fukushima; currently all of the country’s reactors are offline. Germany is also closing reactors and pursuing other sources of energy to replace the reliance on nuclear energy.
With such a significant discrepancy in price, there is a clear opportunity for U.S. companies to export low-cost natural gas to Europe and Asia. The only obstacle is the physical means of transportation. Natural gas cannot be exported in its gaseous state; it must be processed with expensive refrigeration and purification equipment to produce exportable LNG. Currently, there are no active LNG export facilities within the lower 48 states but market dynamics and the opportunity to export LNG has piqued the interest of some large financial institutions.
Cheniere Energy (AMEX: LNG)
- February 2012 – Private equity giant Blackstone announced that it had made a $2 billion equity investment in Cheniere Energy Partners to partially fund the Sabine LNG project.
- March 2012 – Temasek (Singapore’s state investment fund) and RRJ Capital jointly invested $468mm in Cheniere Energy to back the planned LNG export facility.
- April 2012 – The Federal Energy Regulatory Commission (FERC) approved Cheniere’s proposed LNG export facility; this was the first approval of a liquefied natural gas export facility in the U.S. in over 40 years.
- Total cost of the LNG export facility is estimated to be around $4.5 to $5 billion and it will be able to produce 16 million Metric Tons Per Annum (mtpa).
- Demand is already evident as Cheniere has already locked into long-term contracts (20- 30 years) with several companies in Europe and Asia.
Sempra Energy (NYSE: SRE)
- Sempra Energy has been approved by the US Department of Energy (DOE) to export up to 12 million mtpa of LNG. The company is currently awaiting approval from the FERC to move forward with their planned $6 billion LNG export facility in Hackberry, LA.
Dominion (NYSE: D)
- Dominion has been approved by the US Department of Energy (DOE) to export up to 7 million mtpa of LNG. The company is planning to add the ability to export LNG from its existing Covepoint, MD import facility.
Chevron (NYSE: CVX)
- Chevron has a majority interest in two large LNG export projects: the Gorgon and the Wheatstone, both located on the western coast of Australia.
- The Gorgon project began construction in late 2009 and will cost approximately $37 billion; it is expected to have a 15 million mtpa production capacity.
- The Wheatstone project began construction in late 2011 and will cost approximately $29 billion; it is expected to have a 9 million mtpa production capacity.
- The focus of these facilities will be exporting LNG to Asia. Much of the output capacity at both facilities has already been committed with long-term contracts.