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Saudi Aramco's planned LNG deal with Sempra would rank among largest ever

Saudi Aramco's decision to pursue a big supply deal with Sempra Energy's proposed Port Arthur LNG project could advance the state-controlled oil giant's ambition to become a leading player in the world's growing LNG market and also boost the prospects for the Texas export project getting commercially sanctioned.

A nonbinding heads of agreement announced May 22 between subsidiaries of Sempra and Saudi Aramco, the common name for Saudi Arabian Oil Co., anticipated the negotiation and finalization of a 20-year deal for 5 million tonnes per annum of supply from the Port Arthur LNG terminal and a 25% equity investment in the project's first phase.

The deal could further a shift in energy flows between the U.S. and Saudi Arabia as the U.S. rises as an oil and gas producer and could illustrate how American shale gas is transforming global energy markets. If finalized, the deal would be one of the largest LNG deals ever and the largest signed since 2013, according to research and consulting firm Wood Mackenzie.

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An illustration depicts Sempra's proposed Port Arthur LNG terminal in Texas.

Source: Sempra Energy

"This is a signal of Aramco's intent to become a global gas player and develop a broad LNG portfolio," Wood Mackenzie Research Director Giles Farrer said in a statement.

The Saudi Aramco deal would bring the total contracted volumes at Port Arthur to 7 mtpa, "a level that should be sufficient to secure debt finance," said Wood Mackenzie, which expects accelerated debt raising to facilitate a final investment decision for the project. The announcement by Saudi Aramco and Sempra did not provide financial details.

Sempra has said it hopes to reach a final investment decision by early 2020.

Port Arthur LNG was authorized by the Federal Energy Regulatory Commission in April. The export terminal has a targeted export capacity of 11 mtpa from two liquefaction trains, but Sempra said it could be expanded to up to eight liquefaction trains with a total capacity of 45 mtpa.

Saudi Aramco reportedly has been eyeing a potential investment in U.S. LNG for months. In January, Saudi Aramco President and CEO Amin Nasser said the state-controlled oil giant is willing to spend billions of dollars to acquire natural gas assets in the U.S., and in a May 22 statement, he pointed to the Sempra deal as a victory.

"The agreement with Sempra LNG is a major step forward in Saudi Aramco's long term strategy to become a leading global LNG player," Nasser said.

The CEO anticipated global demand growth for LNG of about 4% per year. "We see significant opportunities in this market and we will continue to pursue strategic partnerships which enable us to meet rising global demand for LNG."

Saudi Aramco already owns a massive oil refinery in Port Arthur, Texas, through subsidiary Motiva Enterprises LLC.

Sempra executives also welcomed the deal. "We are pleased to partner with affiliates of Saudi Aramco, the largest oil and gas company in the world, to advance the development of Sempra LNG's natural gas liquefaction facility in Texas and enable the export of American natural gas to global markets," Sempra Chairman and CEO Jeffrey Martin said in a statement.

The developer had already signed a 2-mtpa deal with Polish Oil and Gas Co. in December 2018.

The announcement of the latest deal did not specify whether Saudi Arabia plans to use the gas domestically or trade it. Wood Mackenzie expects Saudi Arabia to use the volume to help establish a global gas portfolio but also acknowledged industry observers' expectation that the kingdom will eventually import LNG for power generation.

The observers have said that by importing LNG, Saudi Arabia could free up hundreds of thousands of barrels of crude per day for exports the country now burns to generate electricity, which could help efforts to publicly list Saudi Aramco.

Saudi Arabia may see LNG as "a more acceptable forward-looking fuel that probably has a longer time horizon" than crude oil production, said Jason Feer, head of business intelligence at oil broker and ship broker Poten & Partners, in a January interview.

Beyond advancing Saudi Arabia's aims of diversifying its economy and energy supplies, LNG experts have also pointed to geopolitical influence as a reason for the kingdom's interest in U.S. LNG. Saudi Arabia could see the investment as a way to strengthen ties with America. The Trump administration has pushed for greater exports of U.S. LNG.

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Saudi Arabia's interest could also be fueled by the kingdom's diplomatic rivalry with Qatar, a top global LNG exporter. Qatar Petroleum is the majority owner of the Golden Pass LNG terminal in Texas and commercially sanctioned the project in February with partner Exxon Mobil Corp. The Golden Pass site is near Port Arthur LNG.

Sempra's first LNG export terminal in the U.S., the Cameron LNG facility in Louisiana, recently began gas liquefaction on the first production unit and is expected to start shipping cargoes to world markets soon.