Providing coverage of Alaska and northern Canada's oil and gas industry
October 2012

Vol. 17, No. 43 Week of October 21, 2012

No time to waste on LNG

Sabine Pass seeks permission to speed up construction; not all favor Henry Hub

Gary Park

For Petroleum News

The Sabine Pass proponent has applied to the Federal Energy Regulatory Commission to accelerate construction of its LNG export project in Louisiana — hardly a surprise given the need to take advantage of prices being dangled by a Japanese LNG customer.

While proponents of Canada’s LNG are digging in, determined to negotiate oil-indexed prices, Sabine Pass has already done deals tied to Henry Hub gas prices for the Sabine operation.

And estimates of the returns it stands to make indicate that its haste is justified.

Shigeru Muraki, executive vice president of Tokyo Gas, told a gas conference in London earlier in October that the U.S. shale gas boom could supply LNG to Japan at sustainable prices up to 40 percent lower than current oil-indexed capital prices.

He said Asian consumers are currently paying about $17 per million British thermal units, Btu, for LNG imports under oil-linked pricing mechanisms, which Japanese buyers increasingly view as “no longer acceptable.”

If shale gas enters the LNG market there is an opportunity for sellers and buyers to discuss the “most appropriate price level to provide a return on investment for the sellers and for the healthy and sound development of the market,” Muraki said, estimating that price could be $10-$12 per million Btu.

He said the cost of future U.S. LNG plants could add $3 per million Btu to Henry Hub prices and transportation costs to Asia could add $2.50-$3 per million Btu.

Muraki said gas consumers in Asia want stable prices that are not linked to oil, which has caused large price volatility in recent years.

BG Group CEO disagrees

But Frank Chapman, chief executive officer of the United Kingdom’s BG Group, told the conference he was less enchanted with using Henry Hub as a reference price, noting that the cost of shipping U.S. LNG to Asia now exceeds the cost of U.S. gas and conversion, while transportation is very capital-intensive.

He said the U.S. LNG export industry has barely started and future projects will take some time to reach the starting line.

“U.S. domestic gas prices cannot be the ultimate determinant of gas price in other global markets,” Chapman argued. “But we do not expect this to drive a convergence of Henry Hub prices and Asian term prices. We expect gas prices to remain highly regional for the foreseeable future.”

Sabine Pass, which has long-term agreements with BG Gulf Coast LNG, Gas Natural Fenosa, Koreas Gas and GAIL, seems confident with its decision to march to the Henry Hub drummer and what it told FERC is an “overwhelmingly positive market response to the liquefaction project,” which FERC authorized in April to proceed with a 2.2 billion cubic feet per day export project.

In its new application, Sabine Pass has sought permission to build the two liquefaction trains of Stage 1 immediately, and move to two or more trains in Stage 2 when market demand warrants, although capacity for the second stage has already been sold.

The proponent has asked FERC to approve its request by February 2013 so that it can meet contractual obligations under its sale and purchase agreements.

Conversions to LNG

Meanwhile, the annual conference of the Canadian Society for Unconventional Resources was told that converting large engines in the North American oil patch to LNG from diesel could create a strong rise in natural gas demand.

Robert Taylor, manager of the reservoir studies team at Halliburton in Calgary, said two major gas producers said the market opportunity for LNG-powered engines could eventually soar to 31 bcf per day, having a “very significant immediate effect” in North American gas prices.

He said the fact that natural gas for LNG engines is stored at a temperature of minus 162 degrees Centigrade enables more gas to be stored, so vehicles can travel much greater distances before refueling.

Taylor said Royal Dutch Shell already plans to open three LNG fueling stations in Alberta later this year, while Clean Fuels Energy in the U.S. plans to open 150 fueling stations by the end of 2013.

Although cautioning that his estimates were “extremely approximate,” he said LNG could be provided for 20 percent to 40 percent less than the cost of diesel at current commodity prices, but conceded that the savings depend on how far the fuel must be shipped from its supply source.

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