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America's Big Gas Export Advantage

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North America may soon become a natural gas exporter, but this will require much more liquefaction capacity. That's why several companies are planning to build export terminals for liquid natural gas, or LNG, in the U.S.and Canada. Cheniere Energy (NYSEMKT: LNG  ) through its limited partnership Cheniere Energy Partners LP (NYSEMKT: CQP  ) is already constructing such a facility. But will these projects provide attractive returns for investors?

A new report now delves into the economics of LNG export facilities, and it turns out that these North American projects may offer better returns than others around the world. The reason? Existing infrastructure.

LNG export economics
The International Energy Agency, or IEA, presents a model for the economics of such plants in its 2014 World Energy Investment Outlook. According to the IEA's model, the key factors in determining the return on investment, or ROI, of a liquefaction project are:

  • the cost of the feedstock gas used to produce the LNG;
  • natural gas prices in the consuming region overseas;
  • the initial cost of the facility in terms of dollars per ton of annual LNG capacity.

Chart courtesy of International Energy Agency

The handy chart above shows some possible trade-offs among these variables. For example, with current U.S. feedstock gas prices at about $4 and European prices at about $10, an acceptable plant cost would be about $1,200 per ton of annual LNG production capacity. Thus, a liquefaction plant with a capacity of 10 million tons per annum, or MTPA, should cost no more than $12 billion to build.

So how do current projects stack up? According to the IEA, many of the world's current liquefaction projects involve building in remote areas with little or no existing infrastructure. These "greenfield projects" have capacity costs well into the $2,000 per ton area. But the projects in North America have plenty of existing infrastructure. That lowers initial construction costs and makes their potential returns more attractive.

Cheniere takes the lead
Cheniere's Sabine Pass project in Louisiana is the only new LNG export facility that has reached the construction phase so far. Cheniere is building four LNG production trains on the site, each with a capacity of 4.5 MTPA of LNG. The cost estimate of the project is $7.74 billion, making the cost of capacity just $430 per ton. The company expects to complete the first two trains late in 2015, and to finish constructing the other two about a year later.

Cheniere's proposed LNG export facility at Corpus Christi, TX isn't quite as economical. It has an expected capacity cost of $815 per ton (see table below), but given the IEA's model, that's still well below the acceptable cost threshold.

Cheniere is getting it done in terms of sales as well. On June 2, the company announced a new sale and purchase agreement, or SPA, with Gas Natural Fenosa for 1.5 MTPA from the second train of the proposed Corpus Christi plant. Gas Natural Fenosa will be buying LNG from the Sabine Pass plant too, and Cheniere has SPAs for approximately 5.3 MTPA in total. That's about a sixth of the combined capacity from both plants.

Sempra jumps in with both feet
Sempra Energy (NYSE: SRE  ) is on the bandwagon too. Not only does its Cameron LNG export project in Hackberry, LA adorn the cover of the company's 2013 annual report, but Sempra's Chairman and CEO, Debra L. Reed, calls the facility Sempra's most important project. Under a joint venture agreement with GDF Suez, Mitsubishi, and others, Sempra retains a 50.2% stake in Cameron. 

The Cameron project is another that uses existing LNG infrastructure to cut construction costs. After the $9 billion-10 billion upgrade, the facility will have three LNG production trains with a combined capacity of 12 MTPA, for a capacity cost of $833 per ton. The Department of Energy, or DOE, has approved the project and Sempra is awaiting approval from the Federal Energy Regulatory Commission, or FERC.

A Foolish look forward
The table below shows selected LNG export projects and the cost of capacity for each. 

Project  and Location
Cost ($billion)
Capacity (MTPA)
Cheniere Sabine Pass, LA 7.74 18.00 $430
Chevron and Apache Kitimat, BC (Canada) 4.50 10.00 $450
Dominion Resources Cove Point, MD 3.80 5.25 $724
Cheniere Corpus Christi, TX 11.00 13.50 $815
Sempra-50% Cameron, LA 10.00 12.00 $833
ConocoPhillips-50% Freeport, TX 11.00 13.20 $833

Data from Bechtel, Bloomberg, and project owner sources. 

These costs are all acceptably low given the IEA's model, mainly because the projects use existing infrastructure and often involve just converting existing facilities.

Cheniere is the canary in the coal mine, so watch for news from its Sabine Pass project to get a first look at how well (or poorly) the rest of these projects may fare. Beware of cost overruns, but keep in mind that there's a lot of leeway here. Watch for news of regulatory approvals or delays from DOE and FERC to see which way the wind's blowing.

These North American based projects have great economics compared to others around the world, so this is potentially a hot area for investment. 

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Scott Percival

Scott has been a trading instructor at Fidelity Investments and has traded for his own account since 1989. He currently contributes Foolish articles on the energy industry.

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