Why Sempra Energy's Gas Exports Won't Help Ukraine

The decision to approve the Cameron LNG project is good news for Sempra Energy and construction contractor Chicago Bridge & Iron, but the natural gas won't reach the Ukraine market anytime soon, if at all.

Jun 24, 2014 at 10:21AM

The recent announcement that the Federal Energy Regulatory Commission (FERC) approved the Cameron LNG export project is big news for Sempra Energy (NYSE:SRE), but investors shouldn't get too excited just yet. The project is the second such LNG export facility to get approved, and the media suggests that the approval process was recently expedited to ship natural gas to Europe, and specifically Ukraine. The gas may never reach that country, though. In addition, the energy department recently changed the approval process to expedite decision-making procedures on LNG exports.

The Cameron LNG project is 50.2% owned by Sempra Energy with the remaining positions split between French and Japanese energy companies. The project involves the development of a three-train liquefaction facility in Hackberry, LA, that will provide export capability of 12 million tons per annum of LNG, or approximately 1.7 billion cubic feet per day (Bcfd). The project is similar to the Sabine Pass LNG export project by Cheniere Energy (NYSEMKT:LNG), which is significantly farther along in the construction process and has helped push that company's stock to new highs.

Project timeline
While the project may have gotten approval recently due to the issues with Russia supplying gas to the rest of Europe and especially Ukraine, the project timeline makes it impossible to solve the current crisis. The FERC approval allows Cameron LNG to go forward with construction of the $9 billion to $10 billion project that will take up to five years to reach full production. Chicago Bridge & Iron Company (NYSE:CBI) is leading the nearly $6 billion construction project via a joint venture with Chiyoda International. The joint venture has experience with the construction of 43 LNG trains worldwide that amount to over 40% of world LNG liquefaction capacity.

For those hoping for a quick resolution to the Ukraine gas supply issue, the Cameron project or any LNG export project isn't the short-term solution. The estimate is that the project won't even start initial production until early 2018, with full-scale production by 2019. The good news for Sempra is that the existing facility originally designed for LNG imports has plenty of land available to expand the project.

Screen Shot

Source: Sempra Energy

Locked-in customers
The economics of the contracts also make it unlikely that a large portion of the gas ends up in Ukraine. The contracts signed by Sempra require its 16.6% partners in the Cameron LNG project (Mitsubishi, Mitsui, and GDF SUEZ) to sign binding 20-year tolling agreements for the gas. Mitsubishi and Mitsui customers already include Tepco and Toho Gas in Asia. It's possible that the GDF SUEZ supply will end up in Europe and possibly Ukraine. 

In a similar manner, Cheniere Energy contracted the majority of its LNG export capability in long-term take-or-pay deals to mostly Asian buyers, including GAIL in India and Korean Gas.

Bottom line
The energy market is very fluid. Opening up the domestic natural gas production to export markets will provide at least an indirect benefit to Ukraine and Europe, even if the gas heads directly to Asian markets willing to sign 20-year contracts. In addition, more supply on the market helps to reduce the leverage that Russia has on the political landscape in Europe, as the governments there are currently reliant on energy supplies from that country. Ultimately, Sempra Energy benefits from a forecasted share of income it estimates at $400 million annually. Chicago Bridge & Iron, meanwhile, can move forward with work on the large-scale project.

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