Liquefied Natural Gas from US Headed to China (CQP, LNG, APA)

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Not more than two or three years ago, energy companies believed that the US would begin importing large quantities of liquefied natural gas, or LNG. Re-gasification plants were either expanded or built to accommodate the anticipated LNG shipments. The largest of these plants, called Sabine Pass, is located in the Gulf of Mexico and is owned and operated by Cheniere Energy Partners LP (AMEX: CQP).

Cheniere Energy Partners is a subsidiary of Cheniere Energy Inc. (AMEX: LNG), the company that originally built the Sabine Pass receiving terminal and others in the Gulf of Mexico. Last month, Cheniere Partners received permission from the US Department of Energy to export LNG produced in North America from its Sabine Pass terminal. The company had already received permission to re-export imported LNG that it couldn’t sell.

The reason Cheniere Partners can’t sell imported LNG is because the US is awash with natural gas from the shale gas wells of Texas, Arkansas, Pennsylvania, and elsewhere. In late 2008, it appeared that both Cheniere Partners and Cheniere Energy might be headed for failure due both to the financial crisis and the booming supply of domestically-produced natural gas.

To turn the business around, the companies decided to build¬† liquefaction facilities, called ‘trains’, at Sabine Pass. Today Cheniere Partners announced that it has signed a memorandum of understanding with a Chinese company, ENN Energy Trading Co., willing to contract for 1.5 million metric tons annually of LNG produced at Sabine Pass. ENN Energy and Sabine Pass will now begin to negotiate definitive agreements that are expected to lead to a 20-year contract.

Cheniere Partners also signed a memorandum of agreement with Morgan Stanley Capital Group Inc. earlier this week that would allow Morgan Stanley to import or export up to 1.7 million metric tons annually from Sabine Pass.

Cheniere’s plan for the Sabine Pass liquefaction facility includes up to four LNG trains each with a capacity to liquefy up to 700 million cubic feet/day of natural gas, or about 3.5 million metric tons annually. The company believes that exports of US LNG could begin in 2015.

So far Cheniere faces competition from just one other North American LNG facility. A small liquefaction plant owned by ConocoPhillips Corp. (NYSE: COP), Marathon Oil Corp. (NYSE: MRO), and the Alaska Natural Gas Corp. has been operating in Alaska for more than 40 years and ships 98 billion cubic feet/year of LNG to Japan.

US oil company Apache Corp. (NYSE: APA) owns 51% of the Kitimat LNG plant in British Columbia that is expected to begin operation in 2014 and targets Asia as a destination for its shipments of liquefied gas from northwestern Canada. The Kitimat train is a lot closer to Asia than Sabine Pass, and has signed a memorandum of agreement with Korea Gas Corp. to take up to 40% of Kitimat’s annual production of about 3.5-5 million metric tons annually.

Shares in Cheniere Partners have moved up only marginally this morning, but Cheniere Energy shares are up about 4.5% on the announcement of the memorandum of understanding with ENN Energy Trading.

Paul Ausick