LNG Plant_ Ships

On May 12, The US Department of Energy (DOE) announced that it gave final approval for Cheniere Energy to export liquefied natural gas (LNG) from its $11.5 billion proposed plant in Corpus Christi, Texas. Cheniere will build two LNG trains at the site, with a total 13.5 million tons a year of capacity, a mega-LNG project rivaling many of Australia’s large projects that are currently coming on-stream.

With the approval, Cheniere is allowed to export from the plant the equivalent of 2.1 billion cubic feet (bcf) per day of natural gas for 20 years to countries that don’t have free trade agreements (FTA) with the US. Cheniere Energy, who also owns the Sabine Pass LNG terminal on the US Gulf Coast (later this year the first US-based LNG terminal to export LNG ), hopes to also export LNG from Corpus Christi by 2018.

Both gas projects, as well as four more that have recently received federal clearance and dozens of other LNG project proposals were developed amid rising LNG prices in the Asia-Pacific region in the aftermath of the Fukushima nuclear disaster in Japan in 2011. The disaster forced the closure of Japan’s 50 nuclear plants that were needed for electricity production. Once these plants were offline, LNG prices in Asia-Pacific more than doubled, reaching as high as just over $20 per million British thermal units (MMBtu).

As higher LNG prices strapped the world’s top two LNG importers, Japan and South Korea, for cash there was a dash from suppliers to lock in these higher profits. LNG bound for Asian destinations was trading for as much as four or five times the price of US benchmark Henry Hub gas, consequently gas deals struck for future supply from the US to be exported as LNG were set to make handsome profits.

However, what a difference a year can make. Since the beginning of last year, LNG prices in Asia have tumbled from just over $20 per MMBtu to just over $7 MMBtu. The pendulum has decidedly swung from a seller’s market to a buyer’s market.

Enter Woodside Petroleum, one of Australia’s largest oil producers. The company, hoping to diversify away from more expensive Australian LNG, to cheap US-based gas, started negotiations last year with Cheniere to receive gas from its proposed Corpus Christie plant. Now, in spite of lower oil and gas prices, the Australian energy giant has decided to finalize its commitment to US gas.

On Thursday, The Australian Financial Review said that Woodside sealed a deal to buy 20 years of LNG to be secured at Cheniere’s  soon-to-be built plant in Corpus Christie with no softening in the pricing despite the plunge in global crude oil prices since a preliminary agreement was struck in mid-2014 (Asian LNG prices are indexed to oil and oil products). The deal includes 12 LNG cargoes a year.

At first blush, one can be forgiven for questioning Woodside’s timing since Henry Hub gas prices have dropped by around $1.50/MMBtu since last year amid ample gas stocks in the US, while the price of Nymex-traded WTI crude, the US benchmark, has yet to find a floor, and is still off by around 40 percent from this time last year.

According to Woodside, there was no change in the key terms announced in 2014 for the 850,000 tons a year of Corpus Christi LNG it will buy. The company will pay 115 percent of the monthly Henry Hub gas price, plus an extra amount of $3.50 per MMBtu for the Corpus Christi gas.

The Australian Financial Review said with supply sources now in both Australia and the US, Woodside has hedged its bets. In addition, Woodside is buying LNG from Corpus Christi in what is known as free-on-board, so it will also have to cover costs for shipping to customers. So, unless gas prices recover markedly by late 2019, the date Woodside would take first gas from the Corpus Christi plant, profits will be minimal.

Perhaps, Woodside was thinking longer term than even 2019. Woodside CEO Peter Coleman said that the LNG volumes his company will take from the Corpus Christi project would “complement Woodside’s existing portfolio and provide a very strong base for Woodside to leverage new volumes from Browse, Kitimat and other sources of supply.” However, Woodside has also protected itself against too much downside risk after all. It has the a clause in the contract that allows it to not take the LNG at all if it gives enough notice and pays $3.50 per MMBTU for gas not purchased.

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