Vancouver — Saudi Aramco's preliminary deal to take a 25% stake in Sempra Energy's proposed Port Arthur LNG export project -- which would be the state-owned oil company's first direct investment in a US LNG facility -- gives a major lift to the Texas terminal's hopes of advancing.
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The announcement Wednesday (late Tuesday US West Coast time), which includes a long-term commitment for 5 million mt/year of offtake from the facility, comes amid fierce competition in North America for partners and commercial agreements. Canadian developers were meeting at an industry conference this week in Vancouver to pitch their projects to global investors.
The Saudis, in particular, are a major catch for Sempra. Multiple North American developers have been talking to Saudi Aramco for more than a year about supporting their LNG projects. Tellurian co-founder Charif Souki said following the Sempra announcement that the Driftwood LNG terminal developer was continuing discussions with Saudi Aramco and that he believed the Saudis would make further investment in the US. The Saudis have also been said to be interested in projects in Russia and elsewhere.
"Nothing to report yet, but Aramco' s strategy is not limited to one deal, as they have often expressed," Souki said in an e-mail to S&P Global Platts from France, where he was in the midst of a swing through Europe talking up his Louisiana project.
In a statement, Saudi Aramco said it sees significant opportunities in the global LNG market and "will continue to pursue strategic partnerships" that enable it to meet rising demand.
For San Diego-based Sempra, the heads of agreement with a subsidiary of Saudi Aramco, if finalized, would put the domestic electricity and natural gas provider further on its path of becoming a major global supplier of LNG. Last week, its Cameron LNG export terminal in Louisiana started up, and the facility is currently preparing to load its first cargo.
"The move would transition sovereign Saudi interest from theoretical to tangible, and is in line with Saudi Arabia's 'Vision 2030' initiative to diversify its economy and reduce its dependence on oil," Wells Fargo Securities analyst Michael Webber said in a note to clients.
Besides the 11 million mt/year Port Arthur project, Sempra has proposed adding liquefaction facilities at Baja California, Mexico. Its ultimate goal is to supply up to 45 million mt/year of LNG from the three terminals to Latin America, Asia, Europe and the Middle East. Additional phases could be added at the facilities.
A heads of agreement sketches out broad terms that the parties plan to negotiate toward reaching a firm deal. In LNG commercial talks, heads of agreement represent a more advanced stage in reaching a firm deal than memorandums of understanding, which typically call for the parties to cooperate and/or participate in negotiations.
Included in the initial agreement between Saudi Aramco and Sempra is the negotiation and finalization of a 25% equity investment by Saudi Aramco into phase one of the development of Port Arthur LNG. The offtake arrangement being negotiated would last 20 years and would represent almost half the capacity of phase one at Port Arthur LNG.
Wednesday's statement did not specify if Saudi Aramco plans to consume or trade the gas. CEO Amin Nasser has previously outlined the company's goals to become a top LNG trader.
In December 2018, Sempra reached a firm offtake deal with Polish Oil & Gas for 2 million mt/year of LNG from the Texas facility.
Sempra has said it would like to contract as close to 100% of the capacity as possible before making a positive final investment decision on Port Arthur LNG. The US Federal Energy Regulatory Commission gave certificate approval to Port Arthur LNG in April.
Saudi Aramco is targeting a 64% increase in gas output within the next 10 years, Nasser said in November, with plans to pour almost $160 billion of investment into the sector over the period. Saudi Aramco has said that in addition to tapping domestic sources, it will seek overseas investment opportunities in gas and LNG. Saudi Aramco has been in talks with Russia's Novatek to buy a stake in the Arctic LNG 2 project.
Saudi Aramco last November inked a framework agreement with the UAE's state-owned ADNOC to explore global opportunities in natural gas and LNG.
That effort gives other North American export developers hope that Saudi Aramco's LNG deal with Sempra may be the beginning, and not the end, of its interest in such projects.
"We in the US need to build a lot more liquefaction capacity to help evacuate all the associated gas from the Permian Basin, at least another 100 million tons, if we want to produce all the oil we expect to produce," Tellurian's Souki said. "Five million tons, this is a very good step, but we have a long way to go."
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