A day after earnings, BG Group (BG.) announced it had entered into a long-term purchase agreement with Cheniere Energy Partners (CQP) for the purchase of 3.5 MTPA of LNG over a 20-year period from the Sabine Pass LNG terminal in Louisiana. BG is not involved with construction of the initial phase of the project, which calls for two trains with production capacity of 9 MTPA, and is still progressing with its own export project at Lake Charles. However, the agreement further supports the concept and should bolster Cheniere as it seeks financing for construction of the necessary facilities. According to Cheniere the purchase agreement calls for BG to pay a fixed sales charge for the full annual contract quantity and a contract sales price for the LNG. The sales price for the LNG will be set at 115% of Henry Hub prices plus a $2.25 premium.
Assuming $4/mmbtu gas prices and $3/mmbtu for transportation, the deal looks workable for BG considering current Asian LNG spot prices of about $17/mmbtu. However, Cheniere does not have long-term gas supplies locked in at the lower prices and we think it is unlikely that the firm will be able to do so. If gas prices move higher as we expect them to do by 2015 (expected first gas at Sabine Pass) then the economics may become challenged. While BG remains a long-term bull of global LNG demand, it is unlikely it would enter into the deal without either some flexibility or a belief in the long-term economics. As a result, we see the deal as one more step in the eventual export of LNG out of the U.S., though many more steps are yet to be taken.
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