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Seasonality not expected in Sabine Pass LNG term deals

08 May 2017 21:11 (+01:00 GMT)
Seasonality not expected in Sabine Pass LNG term deals

Houston, 8 May (Argus) — Cheniere Energy does not expect its long-term customers to have notable seasonal swings in exporting US LNG, but the company may have seasonal swings in exporting its offtake.

"We do not expect out of the foundation customers to have any real seasonality in the shipping," Cheniere chief executive Jack Fusco said last week in an earnings call. "We may have some seasonality in our excess cargoes."

Almost all long-term customers at Cheniere's Sabine Pass LNG export terminal in Louisiana have the right to cancel cargoes, so such customers could alter their US volumes based on global seasonal demand. But because the customers would have to pay liquefaction fees whether they take cargoes or not, they are widely expected to take almost all their volumes to mitigate potential losses, even when LNG prices are low.

The only Sabine Pass customer that does not have the right to cancel cargoes is Indian state-owned gas company Gail, according to copies of contracts that Cheniere filed with the US Securities and Exchange Commission. Cheniere declined to discuss why Gail's contract is different, but Gail has a lower credit rating than all the other long-term customers, according to Cheniere presentations.

Gail has a 20-year deal to buy 3.5mn t/yr, equivalent to about 483mn cf/d (13.7mn m³/d) of gas, of Sabine Pass supplies starting in 2018.

Gail would pay a liquefaction fee of $3/mmBtu for all its capacity plus an LNG fee of 115pc of the final Nymex Henry Hub monthly settlement price for the month in which a cargo is scheduled.

The other long-term customers at Sabine Pass — Shell, Gas Natural, Korea Gas, Total and Centrica — only have to pay their respective liquefaction fees and would pay the 115pc Nymex LNG fee only when they take cargoes. They must notify Cheniere about two months in advance if they do not want a cargo.

If Gail does not take a cargo it must still pay Cheniere the liquefaction and LNG fees. Cheniere under the contract must use "reasonable efforts" to sell that cargo to other parties. If Cheniere earns a profit such sale, that revenue would be deducted from what Gail owes Cheniere, but Gail would have to compensate Cheniere for any costs related to the sale, such as transportation and marketing.

Because the other long-term Sabine Pass customers are widely expected to take almost all their cargoes, Gail may not have a significant disadvantage in its contract.

Gail also has a contract for 2.3mn t/yr of capacity at the Cove Point LNG export terminal in Maryland scheduled start operating late this year. Gail is only required to pay Cove Point owner Dominion a liquefaction fee and would procure its own gas when it wants a cargo.

Cheniere is building five liquefaction trains at the $20bn Sabine Pass terminal, each with peak capacity of 5mn t/yr and baseload capacity of 4.5mn t/yr. The first three trains are on line. Train 4 is scheduled to start operating in the second half this year and train 5 in the second half of 2019.

Cheniere has contracted 19.75mn t/yr of output to its long-term Sabine Pass customers, and has the right to market any excess production on its own. The company expects its liquefaction trains to operate more efficiently in the winter, so it may have less LNG to market on its own during the hot and humid Gulf coast summers, it said in the earnings call. Cheniere expects to have a clearer understanding of the magnitude of seasonal production swings after this summer, because this will be the first summer when multiple trains are operating.

Higher production in the cooler months will coincide with expected higher Asian demand during the northern hemisphere winter, Cheniere said. The company's marketing revenues likely will be higher in the winter because Asian spot prices typically would be higher.

Sabine Pass exported 43 cargoes in the first quarter, with 22 of those marketed by Cheniere and 21 sold under long-term contract.

So far only Shell's 20-year contract has started, but Gas Natural can take about 2mn t/yr under a so-called pre-commercial agreement. Gas Natural's 20-year deal is scheduled to start about September, while the Korea Gas contract is expected to begin in June. Total's and Centrica's deals are scheduled to start in late 2019.