To hear Corey Grindal tell it, Cheniere Inc. created the U.S. LNG export model when it decided to remake its Sabine Pass, La., import facility and designed its Corpus Christi, Texas, plant from scratch. Then it broke the mold.
A competitor wishing to follow the Houston company’s lead will either have to chart its own course or attempt to mimic Cheniere’s business plan.
Either way, it won’t be easy. To succeed, an export facility operator needs a stable, experienced labor force that will stay on from project to project. It needs long-term contracts with reliable customers. It needs access to infrastructure to enable it to deliver product, steady sources of financing, partnerships with a variety of producers and a procurement system that everyone can count on.
Cheniere has already checked off all of the above boxes. Sabine Pass is on track to produce first LNG in late 2015, with Train 1 revved up to 100% production by first-quarter 2016.
Pricing policy
Cheniere’s model begins with the supply price, which it tied to the Henry Hub price—the New York Mercantile Exchange contract—back in 2011.
“We are fully subscribed at Sabine Pass,” Grindal, Cheniere’s vice president for supply, told attendees at Hart Energy’s recent North American LNG Export conference in Houston. “We are fully subscribed for the first two trains at Corpus Christi and almost done for the third train, and the reason why is because we sell everything at 115% of that month’s settlement price. [The strategy was] very revolutionary in the LNG world in 2011 and 2012 because most of the LNG, if not all of the LNG at that time, was traded on an oil index for the Japan [Customs-Cleared Crude] cocktail, which was made up of a couple of different oil indexes.”
Cheniere also maintains transparency as a component of its strategy, an element that Grindal believes has been instrumental in propelling the company’s LNG projects far ahead of competitors.
“All of our contracts—except for a few specific things in different customer contracts—they are all the same,” he said. “So we don’t have special contracts, we don’t have most-favored-nation clauses in our contracts. They are all homogenous across customers.”
No tolling
The other factor setting Cheniere apart from the competition is that it eschews the tolling process and takes responsibility for the supply function. In the commonly used tolling process, a customer typically is charged for liquefaction, but is also responsible for securing supply, transport and shipping.
Taking on that risk made sense to Cheniere, Grindal said, because of the customers that Sabine Pass and Corpus Christi will serve. None, except for Total S.A. and BG Group plc, are engaged in U.S. domestic oil and gas markets.
Customers lined up for Sabine Pass are:
- BG Gulf Coast LNG (U.K.);
- Gas Natural Fenosa (Spain);
- Korea Gas Corp. (South Korea);
- GAIL (India) Ltd. (India);
- Total Gas & Power N.A. (France); and
- Centrica plc (U.K.)
Customers lined up for Corpus Christi so far are:
- PT Pertamina (Persero) (Indonesia);
- Endesa S.A. (Spain);
- Iberdrola S.A. (Spain);
- Gas Natural Fenosa (Spain);
- Woodside Energy Trading (Australia); and
- Électricité de France (France)
“The customers that we are selling to are primarily utilities in foreign countries that don’t have natural resources for themselves,” he said. “For them to not only get into the shipping business, which they are probably in, establishing a whole new group to be able to procure supplies within the United States, to be able to transport it across the United States after the terminal, and more than that, to manage the [temperature] swings [would be a major challenge].”
LNG, Grindal reminded the conference crowd, drops in temperature from 70˚ Fahrenheit as a gas to -260˚ as a liquid. The variability extends to the equipment involved in the cryogenic process, so relieving customers of this responsibility translates into a competitive advantage.
“That’s different than what you’ve seen in the Freeport project,” he said. “That’s different than Cameron LNG or Dominion Cove Point LNG or Elba Island. We’re the only one that takes it upon ourselves, and we think that will be the most successful model going forward.”
Plenty of space
The 1,100 acres that Sabine Pass occupies is useful for more than just hosting storage tanks large enough to serve as a parking space for a Boeing 747 jetliner. It allows Cheniere to store construction material on site as it arrives from foreign locales, then use when ready. Plants lacking such vast space depend on alternative means, such as modules that are manufactured overseas, shipped over and installed wholesale.
“Whether that’s cost-economic I can’t speak to,” Grindal said, “but I know that building on a beach down in South Padre—because I was also there as a teenager and in college, being from the Texas area—there’s not much room to do construction like we’re doing in Sabine Pass.”
Many options
Cheniere is experiencing no shortage of producers wishing to be the prime supplier to its plants, but will maintain contact with as many as possible as it seeks the best price. Grindal doubts that the Marcellus and Utica will be providing the cheapest supply in the future, though at this point, those plays will provide almost half of his supply. He sees potential in engaging with producers in the Permian Basin and Midcontinent.
“Much like a producer not wanting to sell all of its gas to one counterparty, we will not buy all of our gas from one counterparty,” he said. “We have enabled over 70 producer contracts. When I say that we are talking to all the producers across the United States, I really mean it. We will buy a little bit from everybody.”
The advantage of being a first mover won’t dissipate anytime soon.
“I think that from 2015 to 2018, we will be the only large buyer out there,” Grindal said. “I don’t think the other facilities will come on as fast as they say they will.”
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