CME, Cheniere to develop US LNG futures contract

The CME Group has reached an agreement with Cheniere Energy to develop the first physical US LNG futures contract.

Houston-based Cheniere agreed that its Sabine Pass LNG export terminal in Louisiana will be the delivery location for the contract. The $20bn Sabine Pass terminal came on line in February 2016 and is the only LNG export facility along the Gulf coast. The facility is the largest single consumer of US natural gas supply, with average intake of 2.8-3 Bcf/d (79-85mn m³/d). Three other Gulf coast terminals are scheduled to start operating by next year.

Chicago-based CME is in the early stages of developing the contract and does not know when it will be available to the market or how long into the future it might go out, CME global head of energy Peter Keavey told Argus.

The parameters of the contract, including volumes and potential linkages to various price indexes, will be determined with the input of market players, Keavey said.

"In recent years, the shale revolution has unlocked abundant supplies of natural gas here in the US, creating new risks and opportunities for producers, processors, consumers and traders," Keavey added.

Cheniere chief commercial officer Anatol Feygin told Argus that "this agreement is the first step toward a new LNG futures contract that can bring greater transparency and liquidity to the liquefied natural gas marketplace."

Because LNG export terminals are so expensive, they need to sell most of their output under take-or-pay long-term contracts to get financed. Historically most of those contracts have been linked to oil prices, as major LNG consuming markets in Asia do not have liquid gas hubs.

US LNG has changed those dynamics by linking long-term LNG offtake prices to liquid Henry Hub spot gas prices and allowing customers to resell their supplies without sharing profits. That increased liquidity has exposed US LNG offtakers to not only Henry Hub price risk, but also risks associated with LNG prices around the world, often at illiquid markets such as northeast Asia.

Cheniere charges its long-term Sabine Pass customers take-or-pay liquefaction fees of $2.25-$3/mmBtu. If customers want LNG they pay Cheniere an additional fee of 115pc of the final Nymex Henry Hub prompt-month settlement for a month in which a cargo is scheduled.

"Through its Sabine Pass liquefaction facility, Cheniere is delivering Henry Hub-indexed natural gas to the world in the form of LNG," Keavey said. "This agreement with Cheniere is significant because it will be the foundation for developing a new LNG risk management tool for producers, consumers and traders around the globe, while further cementing the role of Henry Hub natural gas futures as the global gas pricing benchmark."

Other US LNG export terminals could also serve as locations for physical contracts as the come on line in the coming years if there is enough market interest, Keavey said.

Four liquefaction trains are operating at Sabine Pass and a fifth is scheduled to come on line later this year or early next year. Cheniere is also building a three-train facility in Corpus Christi, Texas, with exports to start late this year or early next year.

Each Cheniere train has baseload capacity of 4.5mn t/r, equivalent to about 620mn cf/d (17.5mn m³/d) of gas, and peak capacity of 5mn t/yr.

The six major LNG export terminals that have been built or are being completed in the US would have combined baseload capacity of about 60mn t/yr and peak capacity of about 70mn t/yr. Four of those are along the Gulf coast and two on the east coast.