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Cheniere Wins U.S. Approval for Natural-Gas Export Terminal

17 Apr 2012

Cheniere Energy Inc. (LNG) won federal approval to build the largest U.S. natural-gas export terminal as drillers who extract the fuel from shale formations struggle to find domestic buyers to absorb a glut.

The Federal Energy Regulatory Commission approved an order yesterday that will let Cheniere build a $10 billion plant adjacent to its Sabine Pass gas-import terminal in Cameron Parish, Louisiana, about 170 miles (274 kilometers) west of Baton Rouge. The Houston-based company said its 91 percent owned Cheniere Energy Partners LP hired eight financial institutions to borrow $4 billion to help fund the construction.



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Charif Souki, CEO of Cheniere Energy Inc. Photographer: Sonja Y. Foster/Bloomberg
A surge in U.S. shale-gas production has led owners of liquefied natural gas import terminals to propose exports, increasing competition to supply Asia. Ventures in Australia and Qatar sell LNG to Asian buyers at prices linked to crude oil, while Cheniere’s supplies will be tied to U.S. natural gas futures, which have tumbled to a 10-year low.

“Cheniere has been a first mover and a fast mover,” John Hirjee, an analyst at Deutsche Bank AG, said by phone today from Melbourne. “This will potentially help others who are looking to export LNG from the U.S. to use Cheniere as a template.”

The stock has more than doubled in New York trading in a year, even as Standard & Poor’s said Cheniere was close to defaulting for a lack of demand for its gas-importing services.

Lowest in a Decade

U.S. gas futures rose 1.8 percent yesterday to $2.016 per million British thermal units, after touching $1.959 on April 13, the lowest since January 2002. The fuel has lost 87 percent of its value since reaching a record $15.78 in 2005.

“Today’s order finds that the project can be constructed and operated safely and with minimal environmental impacts,” the federal agency known as FERC said in a statement yesterday.

Environmental groups including the San Francisco-based Sierra Club opposed the project, saying converting natural gas to liquid form emits carbon dioxide, which is linked to climate change. Some critics of the plan had also said exporting the gas would drive up costs for domestic users.

Cheniere plans to super-chill the gas and ship it to Asia and Europe, where the fuel sells at a premium to U.S. prices, Charif Souki, chairman and chief executive officer, said in a March 15 interview.

Customers Lined Up

Souki has lined up customers for much of the terminal’s planned export capacity. The clients are London-based BG Group Plc (BG/), Barcelona-based Gas Natural Fenosa, GAIL India Ltd. (GAIL) and Korea Gas Corp. (036460)

Korea Gas, the world’s biggest LNG importer, agreed in January to buy 3.5 million metric tons of the fuel annually from Cheniere. The contract may help the utility buy the fuel at prices about 30 percent cheaper than supplies from Asia, the state-owned South Korean company said in an e-mail today.

South Korea, Japan and Spain are the world’s largest gas buyers, according to the U.S. Energy Department. Japanese utilities were paying $20.87 per million Btus for Yemeni gas in January, more than 10 times current U.S. prices.

International gas prices have soared because of rising consumption by power generators and chemical plants, and to plug the energy gap stemming from the Fukushima nuclear meltdown in Japan last year. Overseas prices haven’t been pressured by the U.S. glut because North American supplies are mostly inaccessible to the rest of the world.

The U.S. Energy Department granted Cheniere a permit last year to export to countries that aren’t free-trade partners with the U.S., a group that includes Japan and Spain. The terminal is scheduled to begin operations in 2015 or 2016.

Funding Arrangements

Bank of Tokyo-Mitsubishi UFJ Ltd, Credit Agricole SA, Credit Suisse Group AG, HSBC Holdings Plc, JPMorgan Chase & Co., Morgan Stanley, Royal Bank of Canada and SG Americas Securities will arrange the $4 billion in borrowings announced yesterday, Cheniere Energy Partners said.

Cheniere on March 14 announced a stock offering, the fourth in less than a year, and it is negotiating a $2 billion pledge from Blackstone Group LP (BX) to cover costs of the export terminal.

The Sabine Pass export facility was backed by Louisiana lawmakers including Senator Mary Landrieu, a Democrat, and by General Electric Co. (GE), which will make equipment for the plant.

Cheniere is planning another export facility near Corpus Christi, Texas, which may begin operating by 2017 or 2018, CEO Souki said.

North American LNG

Aside from Cheniere’s Sabine Pass project, other pending export venture include Freeport LNG Development’s proposal for a plant at Freeport, Texas. Seven companies, including Freeport, are seeking U.S. Energy Department’s permission to export to non-free-trade agreement nations.

Apache Corp., the second-largest U.S. independent oil and natural-gas producer by market value, said last month it’s moving toward a decision to go ahead with its Kitimat LNG project in Canada this year.

“The dawn of North American LNG has arrived,” Neil Beveridge, a Hong Kong-based analyst at Sanford C. Bernstein & Co. said in a research note today. “We expect Sabine Pass to be the first of several LNG projects to be approved in North America, which will become a major new LNG exporting region.”