Lake Charles Cameron LNG Terminal: Model for Success or Recipe for Disaster?

When it is finally completed, Sempra’s Cameron LNG Terminal will be ideally situated near Henry Hub and the Gulf Coast along the Calcasieu Ship Channel, about 15 miles south of Lake Charles. Local accounts of Sempra’s efforts to ramp up infrastructure to match their ambitious building program seem to indicate that, aside from a couple of malcontents who steadfastly refuse to allow pipeline right-of-ways through their properties, things are going well. New laws recently enacted in Louisiana will likely make the pipeline connections a foregone conclusion, with the port of Lake Charles’ ability to seize properties in the name of “economic development” significantly enhanced in the wake of the 2006 election season.

Questions about the safety and security of this nascent terminal also seem to be rapidly fading or rather, simply brushed aside by the regulatory players and local business interests. Louisiana, Lake Charles and the federal government all seem to think the terminal is a good idea; properly designed, safe and secure. Therefore, barring a last-minute surprise, Sempra’s Cameron facility will very likely be part of the Gulf Coast equation which could bring up to 15 BCF/day of LNG into the domestic markets from any number of proposed and permitted terminals dotting the coastline. Handicapping how Sempra’s new venture will fit into that model is another thing altogether.

A recent US Energy Information Administration (EIA) projection calls for natural gas to be the second biggest fuel source for electrical generation by 2025. This could take the form of up to 25% of US electricity demand. The US currently consumes more natural gas than it produces and this trend is expected to continue. Canada is a major supplier of natural gas to the United States, but as these Canadian fields begin to mature and Canadian domestic demand increases, natural gas supplies will have to be replaced from somewhere. The largest increase in these other sources is expected to arrive in the form of liquefied natural gas (LNG), at any one of the myriad of proposed facilities in North America.

About 45 North American LNG projects are on the books; in the proposal, approval and / or construction phases. Not all of these facilities will be built, but enough of them are expected to come on line in the next five to ten years that the current supply and demand models for domestic consumption will be greatly impacted. Hence, the capacity to handle the (supposed) coming LNG boom will be in place in the near future.

There are other variables which are much less settled, and raise questions as to whether these terminals will be the financial successes that their builders hope for. Only recently, questions abound as to whether there is sufficient liquefaction capacity overseas and if the facilities needed to handle this task are being built quick enough to satisfy the expected domestic markets. In the end, commercial realities will dictate the building schedules.

If as many as 12 LNG terminals come to fruition in the US Gulf, up to 15 BCF/day could be introduced to the supply equation. This gas will compete with the existing production of 60 to 70 BCF/day, add to it, and eventually, replace some of the expected decline in domestic production. The combined effect of the new LNG on pricing in the domestic markets could very well depress prices significantly over the long term.

Probably no one is more aware of all of the uncertainties than Sempra LNG themselves. Already involved in the building of two LNG terminals in North America, they have delayed the start of construction at another regasification facility in Port Arthur, TX until they can secure the commitments for that terminal’s expected capacity. Late in October, Art Larson, Public Relations Manager for Sempra energy told MarEx, “Construction of Port Arthur LNG will commence when some commercial arrangements are finalized.” As for their Cameron facility, discussions about the remaining, unfulfilled capacity for that terminal are ongoing.

According to Sempra press releases, more than 50% of the Cameron capacity is now committed. But Larson also said, “Both Sonatrach and Tractebel are in negotiations.” An extract from Sempra’s September 30th 10-Q declaration stated, “Delays in the development of LNG liquefaction capacity and the resultant delays in concluding supply agreements could affect the timing of the Port Arthur development and the company's regasification terminal expansion plans, and could result in the company's temporarily operating completed facilities at less than the contracted amounts.” Finally, Sempra Energy’s overall good 3Q earnings report was tempered by the loss of $13 million in their LNG unit for the same period. One industry executive that agreed to speak to MarEx, but declined to be named in this article, said, “Without a doubt, Sempra has taken market risk by continuing its building program.”

Just down the river in Lake Charles, a Cheniere executive told MarEx in early October that “it would be premature to announce a groundbreaking date” for their own permitted facility until commitments for their capacity were finalized. In contrast, the well-established Trunkline LNG facility, also located on the Calcasieu River, is reported to be fully contracted for the next 20 years. And, while some experts are saying that building for regasification facilities shouldn’t start until the all the contracts are in place, Sempra has clearly bucked the trend at their ongoing project in Lake Charles.

At these fixed cost terminals, a large percentage of capacity needs to be contracted in order to ensure profitable operations. Those that can arrange for adequate commitments for their capacity can expect 13 to 15% return on equity for their troubles. Those who would commit to a fee in exchange for the option of having a market for gas also know that as the supply of gas goes up, the demand also has to do the same. But that demand may only be increasing annually, according to EIA estimates, by as little as 1% increments.

The economic models which have produced so many announcements of LNG projects have changed radically over the last three years. Sempra, and others, banked on certain market conditions which may no longer hold true. The virtual tripling of natural gas prices over the past decade not only changed mindsets in terms of what kind of power generation facilities would be built, but also what kind of energy would be used to power them. And, the answer is no longer always LNG.

The glut of new LNG terminals may not develop, especially here on the Gulf Coast. Caution is the new course of action for those contemplating a startup operation. Earlier this year, the existing five US LNG terminals were operating at just 50% of capacity and the likelihood that the necessary contracts can be secured on the open market to sustain the current rush to build is anything but certain. Sempra Energy will probably get their Cameron Terminal. Whether or not it will be fully utilized in this market is another matter. In just 18 months, Sempra LNG could be on line and delivering natural gas to customers. At 50% capacity, however, and if they can’t contract out their remaining capacity, their bottom line won’t be nearly as sweet as their neighbors at Trunkline LNG, where just a few miles up the river, they are fully contracted for the next twenty years. It’s why the brakes have been firmly applied at other terminals, and it’s also why success at Lake Charles is anything but a done deal.

The promise of a financial windfall derived from Sempra’s Cameron LNG Terminal to the people and port of Lake Charles may or may not become a reality. If it doesn’t, the rush to permit and build a marine facility with a questionable dock design and unanswered security questions will, over time, prove to be a bad decision. On the other hand, stranger things have happened in the energy markets. Just ask anyone who had to fill the gas tank of their Hummer this summer.

Joseph Keefe is the Managing Editor of THE MARITIME EXECUTIVE. He can be reached with comments, questions and input at [email protected]. The five part series encompassing the Sempra Lake Charles Terminal will be sent in a special “Boxed” Edition of the MarEx e-newsletter, next week.