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December 2008

Vol. 13, No. 51 Week of December 21, 2008

Sempra’s Mexican LNG terminal: one cargo

Terminal has cash flow, although just one ship since Baja California facility opened in May; Tangguh will send cargoes in 2009

Allen Baker

For Petroleum News

Darcel L. Hulse is a man supervising a new billion-dollar LNG port, with a second one about to be completed. Only a single ship has called at his existing port near Ensenada, Mexico, since it began commercial operation in May.

But Hulse, Sempra LNG’s president and CEO, has rent coming in from Shell, a contract for cargoes from Indonesia starting in mid-2009, and optimism about a new reality in the world LNG trade.

He thinks that new reality will bring his ports some real business, even though U.S. gas prices are well below what Asian markets are paying.

Not just price

“The issue really isn’t just price,” Hulse said in a Dec. 2 interview with Petroleum News. “It’s supply versus demand globally. If we’re in an oversupply situation, some of those cargoes will flow to the United States.”

And he thinks that situation is coming just months from now:

“We’ll start seeing it (excess supply) next year or in 2010.”

With broad Asian experience as president of Unocal Asia-Pacific Ventures before coming to Sempra, Hulse is a man to be heard — even if his predictions fly in the face of conventional wisdom about the LNG market.

Conventional wisdom, from analysts in and out of government, predicts tight supplies in the next few years, and major shortages of LNG in the world market a few years hence.

“They ignore a recession and declining demand, with very robust supplies coming into the market,” says Hulse. “Forecasts are never exactly accurate.”

Broader economics

Besides, he says, LNG projects most often have an oil or condensate component as well as the gas, so it pays to produce even if gas prices are relatively low. “About 80 percent of the gas in the world and the LNG traded in Asia has got some oil formula in it. It’s artificially tied to a scarce commodity.”

Much of the world’s LNG production has been tied up in long-term contracts of 20 or 25 years, particularly in Asia. Big utility customers in Japan, Korea and Taiwan have been willing to pay a premium to ensure long-term supplies.

But Hulse is hoping that the emergence of Qatar as an LNG superpower will open things up and LNG will turn into a commodity with an active, competitive spot market.

Qatar’s flexibility

Qatar is positioned to send cargoes just about anywhere in the world, and the nation sits on one of the largest gas fields ever found. The nation has new modern ships and can reach either shore of North America for a transport cost of about $2 per thousand cubic feet of gas equivalent, he figures.

“Qatar has a unique position — I think they’re viewing the world totally differently,” he says. “In a commodity market, the greatest virtue I can have is optionality to capture the peaks in all the markets. Qatar has large supplies and equal costs to either basin (Atlantic or Pacific). They have great flexibility as long as they don’t contract it all up.”

LNG as commodity

Hulse thinks that LNG will become a global commodity, with worldwide price competition, once the markets of Europe, Asia and North America are connected.

At that point, unless prices change dramatically, the U.S. will be the customer of last resort, and will get shipments when producers can’t get a higher price somewhere else.

“We have tremendous storage capacity in the United States. We have absolutely the world’s largest and most flexible gas market and transportation system. If there’s excess LNG capacity in the world, it’s going to find a market,” he says. It’s cheaper to sell the gas at a lower price than to shut down expensive production capacity, he notes.

Damien Gaul, analyst with the Energy Information Administration, confirms that the market may be heading in the direction Hulse is suggesting — toward a spot market mentality and a surplus to be directed to the U.S.

“There’s some expectation that there may be increased supplies coming up,” Gaul said in a late-November interview. “A lot of it will depend on the severity of the winter; also on the severity of the downturn in the economy.

“When you talk about trends in the marketplace, there is some real flexibility,” he said. “These ships are carrying 3 billion cubic feet (equivalent in LNG). It’s worth $20 million or more. These cargoes are making decision on the open sea (to chart a course to a different port). It’s really making a difference on a real-time basis.”

Profitable operation

Meanwhile, Sempra can operate its Energia Costa Azul port with revenues from a 20-year capacity contract with Shell, which signed the deal when it was controlling owner of the Sakhalin 2 project in Siberian Russia. Sempra LNG showed a profit of $4 million for the parent company in the third quarter, with just the one ship calling in the port, along with two test cargoes.

But Gazprom is now in control at Sakhalin 2, and 60 percent of the initial production there is going to Japanese customers. The first cargo is expected to load Feb. 19. Some Sakhalin LNG could come to Sempra’s port later this year, but not enough to fill Shell’s 500 million cubic feet of daily capacity.

Shell later decided to send its 25 percent share of the LNG from the Chevron-led Gorgon project off Australia to Sempra’s terminal, replacing or supplementing the Sakhalin cargoes. But Gorgon has been delayed repeatedly, and still doesn’t have the go-ahead from Chevron, Shell and ExxonMobil to start construction. On top of that, U.S. prices have shrunk markedly.

Cargoes from the BP-led Tangguh project in Indonesia are set to take the remaining half of the capacity at Sempra’s Baja port. That would bring in half a billion cubic feet a day if all of it arrives. But the agreement allows the Tangguh consortium to divert up to 50 percent of the cargoes as long as Sempra gets compensation for its costs, Hulse said. Tangguh is set to start shipping LNG in the second half of 2009.

Gulf terminal coming

Over on the Gulf of Mexico, Sempra is putting the finishing touches on its Cameron LNG terminal near Lake Charles, La., with initial capacity of 1.5 bcf daily. Italy’s Eni has contracted for 600 million cubic feet of daily capacity, and Sempra is talking with other parties about the rest of the capacity, Hulse said. That project will come in at more than $800 million, he said, and will be finished in the second quarter.

Sempra has approval from the Federal Energy Regulatory Commission to build a third terminal at Port Arthur, Texas. That port would have a capacity of 3 bcf daily.

Hulse says that project is on hold. “Port Arthur is pushed out in the distance,” he said. “We will not launch Port Arthur until we have enough contracts.”

With current terminals already able to handle about ten times this year’s imports, it may be a while before that project gains traction.






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