CHENIERE ENERGY A Tale of Experts, Bouncers and the Long Game

13 October 2014


As at Monday,13 October 2014

There is no such thing as an “Expert” in the Energy Game

The most basic economic tenet is that all businesses have to adapt to changes in conditions in order to survive. Those that don’t adapt rarely if ever survive. As little as ten years ago the market consensus of energy experts was that the United States would have to continue to import massive quantities of Liquefied Natural Gas (LNG) in order to keep its power plants and manufacturing industries running.

With this in mind Cheniere Energy, a small company operating in the field of offshore oil exploration, shifted focus strategically and began to construct a large LNG import facility at Sabine Pass on the border of Texas and Louisiana. Construction of the import facilities was completed in 2008, just in time to witness the huge explosion in extraction of shale gas in the United States. The experts were wrong: if anything the United States would have no need for LNG imports. In fact they would have a surplus of cheap gas available for export to the world. In 2008 the future for Cheniere appeared bleak. Its nice shiny import facility appeared totally redundant.

If life bowls you a bouncer there is no point in ducking

In the face of adversity Cheniere quickly adapted. Logically if the United States had so much shale gas then the economic requirement for an LNG plant would still exist except it would be for export and not import.

Adapt to Survive and Play “The Long Game”

Cheniere therefore began modifying its Sabine Pass facility to handle the processing and export of LNG and – throwing all caution to the wind – announced plans to construct an additional facility at Corpus Christie. Based upon data released in its last quarterly return of trading results (July 2014) the Sabine Pass facility could commence exports as early as the fall of 2015.

Despite not yet turning a profit from its LNG operations, Cheniere will be the first American company to commence exports of LNG. With close to 90% of the capacity of the first four trains of its Sabine Pass plant already contracted out under 20 year contracts, its long term future appears to be guaranteed.

cheniere-energy-partners-l-p-logo

Have Cheniere Got it Right?With American natural gas prices at below $4 per mmBtu Cheniere may be ideally placed to exploit both Europe and Asia’s growing demands for LNG. Cheniere expects the European market to import 28 million tons of LNG by 2015, growing to close to 100 million tons by the year 2030. At the same time Asian markets are expected to import 200 million tons of LNG by 2015 rising to as much as 380 million tons by 2030. With Asian markets paying over $15 per mmBtu the economic argument for processing and exporting LNG from the United States seems clear. There is another potential upside for Cheniere in that the demand from China for LNG is very likely to explode. Currently the large markets for LNG are in Europe, Japan, Korea, and Taiwan. In 2013 the biggest importer in Asian Markets was Japan who imported over 88 million tons of LNG. In the same period China imported nearly 20 million tons, but is in the process of building new LNG import facilities. Consequently by 2025 China may well be the largest importer of LNG in Asia. The potential upside to Cheniere is HUGE, If North American natural gas prices remained at $4 per mmBtu and LNG Prices were to rise to $20 per mmBtu, Cheniere would generate $11.7 billion in profits per year from its Sabine Pass plant. Even if North American natural gas prices rose to $6 per mmBtu and LNG prices in Asia fell to $10 per mmBtu, Cheniere would still make over $900 million per year from its Sabine Pass plant.

Cheniere-Sabine-Pass-LNG-terminal

It almost sounds like a license to print money.Whichever way the market plays demand for natural gas is likely to continue to surge. The existing markets of Japan, Spain, France, Italy, Korea and Taiwan will continue to consume large quantities of LNG. China – looking for ways to deal with pollution – is likely to turn to LNG in a big way to satisfy its growing need for fuel. If you play the long game, then Cheniere may have got it right.

The Moral of the Story? 

Cheniere may have done what any good company does and just adapted to the change in economic conditions. However it is the first American company to recognise the potential to export cheap North American Gas as LNG. Others are following (including Exxon Mobil, Sempra Energy and Dominion Resources) but Cheniere is ahead of the competition.

 

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