Oil prices challenge Cheniere’s LNG export plan
The collapse in oil prices has shaken up executives from oil and natural gas companies, large and small — among them, Charif Souki.
Not that Souki is in any imminent trouble. His company, Cheniere Energy, is on the verge of beginning the first exports of liquefied natural gas from the U.S. mainland, with customers locked up in Asia and Europe.
But the president, CEO and chairman of the Houston-based company knows that building his business further will be more difficult now that the price of oil has fallen by about half since last June, and oil and gas markets seem likely to remain volatile for some time.
The reason? The oil-price decline relative to U.S. gas prices has eliminated the price advantage of U.S. LNG projects, reversing wide differentials that prompted Asian buyers to seek out LNG linked to the U.S. Henry Hub price.
“We’re all going to have to adapt,” Souki said at an Atlantic Council event in Washington. “I think it’s pretty unsettling, as it is now. I really can’t imagine anything that gets worse, and I speak from experience.”
By experience, he means Cheniere’s brush with bankruptcy in 2008 when the company’s multibillion-dollar plans to import LNG into the U.S. ran afoul of the sudden surge in U.S. gas production from shale reserves. With his company on the brink of folding, Souki decided to retool his projects on the Louisiana and Texas coasts to export some of the growing volumes of U.S. gas.
Now, Cheniere is on the verge of becoming one of the world’s major exporters of LNG, likely to account for 10% of that market by the end of the decade, according to Souki.
The new challenge for Cheniere and other prospective U.S. LNG exporters is building market share without the price advantage they have enjoyed for the past several years.
In a recent report, Moody’s Investor Service said the drop in oil prices will not interrupt projects already under construction, like Cheniere’s Sabine Pass site in Louisiana. But lower oil prices will lead to the cancellation of most of the nearly 30 proposed projects in the U.S.
“At the current Henry Hub gas price of below $3 per million British thermal units and the Brent oil price in the range of $50 per barrel, U.S. LNG linked to U.S. gas prices would cost roughly $10 per MMBtu (Million British Thermal Units) to deliver to East Asia, slightly more than the almost $9 per MMBtu estimated for LNG under traditional oil-linked terms,” Moody’s said. “With spot LNG prices in East Asia currently about $10 per MMBtu and about $7 per MMBtu in Europe, U.S. gas-linked supplies would be near break-even levels in Asia and unprofitable in Europe.”
Souki acknowledged that the price advantage his company used to get its LNG-export business off the ground is disappearing.
“We were very successful with that formula,” he said. “But today, the arbitrage doesn’t look quite as obvious.”
So, how does Cheniere adjust to the changing market conditions?
Not surprisingly, Souki didn’t divulge specific plans. But he said he remains confident that new sales opportunities will emerge as the U.S. continues to produce more gas than it can consume and other nations look for reliable suppliers of gas.
“We’re stuck in an industry where we make investments for 40 years, and things change every five years,” he said. “It’s not a very comfortable situation. But if you do it right and you look at all the options, you can determine where the opportunities are and try to take advantage of them.”