ChevronTexaco announced on December 13 that it had finalized a capacity use agreement with Cheniere Energy for some 700 MMcf/d of processing rights at its Sabine Pass terminal in Louisiana. The arrangement also includes an option allowing ChevronTexaco to increase this amount by 300 MMcf/d or to reduce it by 200 MMcf/d. Announcement of the deal was followed just two days later by a certificate from the Federal Energy Regulatory Commission allowing Cheniere to start construction work on the new facility by April. This comes one month after the FERC issued a final environmental impact statement on the terminal, which will have a sendout capacity of 2.6 Bcf/d (see LNGWM, Nov ’04). ChevronTexaco’s capacity move mirrors that of Total, who recently exercised an option for 1 Bcf/d at Sabine Pass.
Sabine Pass is due to begin commercial operations in late 2007 or early 2008. The capacity use agreement with Total specifies that the French firm must begin imports no later than April 1, 2009 while the equivalent start date for ChevronTexaco is July 1, 2009. In addition to these two tenants, Cheneire’s own trading affiliate, J&S Cheniere, has taken 200 MMcf/d at the facility under a preliminary agreement. Altogether, the three deals add up to between 1.7 and 2.2 Bcf/d depending on whether, and to what extent, ChevronTexaco exercises its volume option. The firm has until December 1, 2005 to make a final decision on these volumes. Both ChevronTexaco and Total have negotiated a terminal use tariff of 32 cents/MMBtu, with some adjustment for inflation. This rate is also applicable to ChevronTexaco’s capacity option.
ChevronTexaco joined Sabine Pass after it shelved its offshore Port Pelican venture due to skyrocketing costs. The project’s death knell apparently came when developers realized the graving dock they had identified in Texas to build the main structure would not be permitted in time to meet the project schedule. While alternative sites in Spain and Norway were evaluated, the cost involved in reinforcing the structure for towing across the Atlantic, as well as the transportation itself, would have added another $100 million to the cost of the project, which had already surpassed $1.6 billion. ChevronTexaco recently revealed another onshore initiative next to its Pascagoula refinery in Mississippi, but this import venture is still in the preliminary stages of development. The company is keen to line up capacity to support its West African marketing ambitions and the decision at Sabine Pass fits into these plans.
Cheniere’s stock holders got a bit of a shock less than a week before the final capacity deal was announced when the developer revealed that ChevronTexaco had terminated discussions to take a 20% equity stake in Sabine Pass. In the same press release, Cheniere also said it had successfully completed a stock offering that generated just over $286 million for the company. This was priced at $60 per share, close to the stock’s all time high of $65.88 (see graph above). After closing at $56.50 a share on December 8, the stock plunged to $49 on December 9 after Cheniere disclosed the break down in equity negotiations with ChevronTexaco. It then rebounded on December 14 to close at $61.80 a share on news that the capacity deal had been finalized.
It is unclear why the equity deal fell apart, and ChevronTexaco has said only that the two parties differed significantly in their commercial expectations. But one explanation could be the development approach Cheniere has adopted for the terminal. The firm plans to exercise direct control over Sabine Pass, as well as two other import ventures it is pursuing on the Gulf Coast. These include the recently-announced Creole Trail terminal, which is to be built at the mouth of the Calcasieu Channel in Louisiana’s Cameron Parish, and another ongoing project near Corpus Christi, Texas. This strategy contrasts with Freeport LNG, the company’s first terminal venture, where Cheniere was forced to divest equity to Michael S. Smith and where it has subsequently lost operational control to capacity holder ConocoPhillips. Its divestiture, however, raised cash and improved Cheniere’s financial position to the point where it can now exert operational control over its other ventures.
But it remains to be seen whether Cheniere has the financial clout to develop all three terminals simultaneously. This is an expensive proposition. The company recently appointed two banks to arrange the $741 million debt component for Sabine Pass, implying a final price tag of around $1 billion for this terminal alone. Cheniere has already negotiated a lump sum engineering and procurement contract on Sabine Pass with Bechtel, and industry sources say the two sides have now reached agreement on how to allocate the completion risk associated with getting the project built (see LNGWM, Sep ’04). This means that Cheniere has secured the price and schedule guarantees necessary to appease the banks and obtain project financing for the venture.
Meanwhile, Dow Chemical has decided to purchase a 15% stake in Freeport LNG from Michael S. Smith. The firm already has capacity rights to some 500 MMcf/d at the Quintana island terminal, which has a design capacity of 1.5 Bcf/d. The other 1 Bcf/d is reserved for ConocoPhillips, who has taken on responsibility for building and operating the plant. It is now trying to roll all of the various construction contracts into one lump sum EPC agreement with a consortium grouping Technip, HB Zachry and Aker Kvaerner. Japan’s Mitsubishi already has a contract to build Freeport’s two storage tanks while HB Zachry and Aker Kvaerner have been doing general construction and engineering work on a cost reimbursable basis. Technip was responsible for the project’s front end engineering and design.
Although ConocoPhillips has agreed to exclusively fund the first $440 million in capital costs associated with the Quintana island terminal, Michael S. Smith is on the hook to pay half of anything over this base amount. Projected costs have already risen above the threshold, although exactly how much higher is unclear. Freeport is considering expanding the terminal to 3 Bcf/d and recently resized its takeaway line to Stratton Ridge from 36 to 42 inches to accommodate this expansion phase. Now that Dow has taken an ownership stake in the terminal, the equity breakdown in the plant runs as follows: Michael S. Smith’s Freeport LNG Investments 45%, Cheniere Energy 30%, Dow’s Texas LNG Holdings 15% and Contango Oil & Gas 10%. While ConocoPhillips does not have an equity interest in the physical assets of the terminal, it has operational control through its 50% ownership of Freeport LNG-GP, the other half of which is held by Michael S. Smith.
This article appeared in Poten & Partners monthly publication LNG in World Markets – November 2004. Reference LNG and natural gas data is available at the LNGAS Data/News Website. Please click here to sample these services and order them.
