Houston — Cheniere Energy CEO Jack Fusco offered a counterargument Thursday to market watchers who say long-term contracts may no longer be essential to finance new liquefaction terminals and that Beijing tariffs on US LNG are a threat to delivering cargoes to China.
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Don't believe the headlines, he said.
During a panel discussion at a Rice University energy forum, Fusco provided a confident growth outlook despite market uncertainties and escalating US trade tensions with China. He said Cheniere expects to begin producing LNG "shortly" from the fifth liquefaction unit at its Sabine Pass export terminal in Louisiana and from the first at its Corpus Christi, Texas, facility. He even hinted a decision on a sixth train at Sabine Pass may be close.
"Through all the rhetoric and the headlines, which I am amazed by, we're still sending tankers to China," Fusco said. "You say, why is that? They signed a 25-year contract."
He added, "The Chinese, they are going to lift all day, our clients at CNPC. They signed up for 25 years. They have an all-in cost that's less than $8/MMBtu. JKM is trading at $12. They are making a $4 spread. Throw on 10% on $7, or 70 cents to the government, it goes in one pocket and out of another pocket. They're still making over a $3 margin. They are going to lift all day."
China imposed a 10% tariff on imports of US LNG starting September 24, following the US' imposition of additional tariffs on Chinese goods.
The certainty provided by the contract is the key to Cheniere's calculus. Fusco said US developers such as Cheniere must have long-term offtake agreements to satisfy bankers, investors and the broader market that they will be able to pay off their obligations and turn a profit.
LNG Canada made a positive final investment decision October 2 on its British Columbia export project without firm offtake deals in place, and Qatar Petroleum said this week it would be able to make FID on its domestic expansion plans without binding LNG sales agreements in place.
But Fusco seemed to dismiss the idea percolating in the market recently that long-term deals aren't necessarily the engine that makes the system run today.
"I have shareholders," Fusco said. "I have to meet my financial targets or I won't have a job. I can't trade LNG for missiles, like the Russians and the Indians. I can't do that. It's not something I want to do either. We have a business to run."
Fusco didn't address market concerns about being able to sign additional long-term agreements with Chinese counterparties because of the tariffs. As of Thursday, the last cargo from Sabine Pass to be delivered to China arrived September 6, before the new LNG tariffs took effect, according to Platts cFlow ship tracking data.
Cheniere's message to its customers is essentially that they get what they sign for.
"The first thing you need to realize is there is no liquidity in this market," Fusco said. "I load the tanker at Sabine. I put it on the ship. I send it through the Panama Canal, and 30 days later it shows up at a regas terminal. Thirty days. A lot can happen in 30 days. This is not spot trading. This is marketing."
Sitting at a table with Carlos Wheelock, who leads LNG-related matters in the Americas for Switzerland-based global commodity trader Vitol, Fusco said, "This is logistics. It is logistics optimization. This has nothing to do with trading. Sorry, Carlos."
He added, "If you want to sign a long-term contract for 25 years, then I have something to work with. So, you want quantity? The bigger the quantity, the lower the price. You want term? The longer the term, the lower the price." On September 17, Cheniere announced that it had signed a 15-year offtake deal with Vitol.
Meanwhile, Cheniere intends to keep chugging along.
At Sabine Pass, Train 5 is in commissioning.
"We should be making our first LNG there shortly on that train," Fusco said. "Corpus 1 is also ahead of schedule and we will be making LNG there shortly. Neck and neck to see which one will produce first."
The exporter had previously said both trains would start up by the end of this year.
Cheniere has been permitted for a sixth train at Sabine Pass and has been trying to secure sufficient commercial agreements to advance that unit to construction. Fusco, while explaining the size of the Sabine Pass site compared to the site of a typical combined-cycle natural gas plant, suggested there may be progress on Train 6.
"Our Sabine Pass facility, with five liquefaction trains, soon to be six, by the way, covers over 1,000 aces of property," he said.
A company spokesman declined to elaborate on Fusco's comments.
-- Harry Weber, Harry.Weber@spglobal.com
-- Edited by Gail Roberts, firstname.lastname@example.org