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Analysis: Cheniere's secret? Stick to tested strategy even as LNG industry pushes new business models

Highlights

CEO says US Henry Hub-linked pricing here to stay

Competitors at LNG2019 conference talk up alternatives

Shanghai — Cheniere Energy is eager to keep its leading position among major US LNG exporters. It's not going to change its strategy to achieve that.

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Even as the field of competitors has grown increasingly crowded in the three years since it launched its first facility and new business models have taken hold, Cheniere is sticking to its tested formula, CEO Jack Fusco said during an interview Thursday with S&P Global Platts on the sidelines of the LNG2019 conference in China.

The comments come amid a debate about whether the second wave of US liquefaction developers should go in a new direction to fund construction, as Tellurian has done on the project financing side and NextDecade has done on the price indexation side. Cheniere built Sabine Pass in Louisiana and is building out its export terminal near Corpus Christi, Texas, on the back of 20-year take-or-pay sale and purchase agreements mostly indexed to US Henry Hub.

"Everybody's entitled to their own opinion. We just see it differently," Fusco said. "I don't think I need to do anything relative to our pricing structure. It's successful."

The unlocking of vast reserves of cheap US natural gas during the shale revolution of the early part of this decade encouraged Asian buyers to secure LNG capacity from US Gulf Coast facilities that planned to retrofit import terminals to handle exports instead.

In February 2016, Cheniere became the first major US exporter of LNG when Sabine Pass in Louisiana shipped its initial cargo. Much has changed in the market since then. There are now three major export terminals operating and three more preparing to start up later this year. About a dozen second-wave developers have active projects pending before US regulators.

During a panel discussion Thursday at the conference, NextDecade CEO Matt Schatzman said many of the customers the Rio Grande LNG terminal developer is hearing from are not willing to have more than 20% of their global portfolio of long-term LNG offtake contracts indexed to US Henry Hub.

"In some cases, customers have expressed no interest in buying LNG with contr acts linked to Henry Hub," Schatzman said. He challenged the energy leaders in attendance to consider the merits of NextDecade's menu of pricing options. The company's first foundation customer, Shell, signed a 2 million mt/year offtake contract announced Tuesday that calls for 75% to be linked to Brent crude, with the remainder linked to US gas indexes, including benchmark Henry Hub.

But Fusco said that, since most of the global industry is oil-indexed, "it helps having oil rising that our pricing model adds stability so they can plan in the future with a stable pricing point." For the time being, Cheniere is focused on reaching a final investment decision on a sixth train at Sabine Pass. It had previously expected that as early as the first half of 2019. In the interview, Fusco said he expects it to happen no later than the second half of this year, as the company looks to finalize its financing for the train.

"I know that's moving well," he said.

CHINA DEALS

What the company is really focused on, Fusco said, is commercializing its mid-scale expansion at its Texas terminal site. With what else? Long-term contracts linked to Henry Hub.

"I don't like to announce any commercially negotiated contracts until the ink's on the paper," Fusco said. "Unlike a lot of other brethren here this week, we want to make sure the deal's done, and then we'll let you know. But I feel very good about our prospects."

Cheniere is said to be in talks with China's state-run Sinopec about a long-term LNG supply agreement, with the parties awaiting further instructions from government authorities as negotiations between Washington and Beijing continue toward trying to end the tit-for-tat tariffs each has imposed on the other.

Asked about Sinopec, Fusco acknowledged that it would help to have the trade tensions resolved. Regardless, he said, "it's not going to hurt us or change our focus from China. Never."

BANK FINANCING

One thing that there appears to be agreement on is what the traditional banking community expects. It remains largely unwilling to finance new US liquefaction capacity without developers having sufficient commercial deals in place.

While two North American projects recently advanced to positive final investment decisions without long-term contracts in place, those terminals are being backed by deep-pocketed industry majors. Most facilities that will be stick-built, conversions or use modular liquefaction units that are constructed off-site will still need to rely on such contracts to satisfy lenders.

"My favorite model is the one where I take the least amount of risk and get the highest rate of return," Roberto Simon, a managing director at French investment bank Societe Generale, said during a presentation at the conference.

-- Harry Weber, Harry.Weber@spglobal.com

-- Edited by James Leech, newsdesk@spglobal.com