Sempra, Saudi Aramco unable to finalize supply agreement tied to Port Arthur LNG

Sempra's efforts to finalize a long-term deal with Saudi Aramco to support the proposed Port Arthur LNG export terminal in Texas have fallen through, an executive said June 29 in what amounts to a setback following several delays in advancing the project.

During Sempra's annual investor day presentation to analysts, Justin Bird, the head of its LNG business, said Sempra and Aramco mutually agreed to let their 2019 preliminary agreement expire. The deal, as originally announced, called for Aramco to take a 25% stake in Port Arthur LNG and offtake 5 million mt/year of supply from the terminal.

Aramco has been adjusting its gas ambitions in the last two years amid the coronavirus pandemic and volatility in global gas markets. Bird cited the reevaluation by the state-owned oil company in the context of why the deal between Sempra and Aramco was not finalized.

He said the two companies maintain a relationship and Sempra is "looking forward to partnering with them in the future," though he offered no details on any planned talks about investing in Sempra's North American LNG infrastructure growth plans. And, during his own remarks in the presentation, Sempra CEO Jeffrey Martin said the company's Energia Costa Azul liquefaction project in Mexico, which is under construction, is its top infrastructure priority and that a proposed expansion at Cameron LNG in Louisiana has leapfrogged Port Arthur LNG in terms of priority.

"Clearly, it's moved back in terms of the timeline," Martin said of Port Arthur LNG.

The only firm supply deal tied to Port Arthur LNG announced to date is a 2 million mt/year sales and purchase agreement that Poland's PGNiG signed in December 2018. Bird said Sempra was willing to consider moving that agreement to the Cameron LNG expansion project, if doing so made sense, though the company has not yet discussed it with PGNiG.

In May, Sempra said it would likely further delay a final investment decision on the 11 million mt/year Port Arthur LNG project to 2022, as it continued to face commercial challenges.

Bird said Sempra was evaluating design changes to the project to reduce proposed carbon emissions, including carbon capture and storage, and was "actively pursuing" such opportunities with interested parties that he did not name. It was not clear how any design changes would impact the timing of taking FID on the export terminal. In slides accompanying the presentation, Sempra referred to a proposal by the company to build a 4.5 million mt/year carbon capture project -- with three injections and 89 million mt of storage capacity -- in Hackberry, Louisiana, where Cameron LNG is located.

Sempra has said repeatedly that it envisions building a 45 million mt/year LNG portfolio in North America.

At present, it operates Cameron LNG and is building the first phase of its Energia Costa Azul liquefaction project. Cameron LNG's proposed second phase has not yet been sanctioned.

Market efforts

After a two-year lull in firm commercial deals for most US developers of new liquefaction terminals, activity has started to pick up in recent months for some of them, as evidenced by Tellurian's medium-term supply deal with Gunvor in late May and a similar deal it signed with Vitol in early June.

For existing exporters, global gas and LNG forward prices are trending strong and relatively stable, pointing to a long runway for exporters to enjoy healthy netbacks on deliveries to Europe and Asia, buffeted by cheap feedgas costs due to low US Henry Hub prices. Feedgas deliveries to US LNG export terminals have recently been averaging more than 11 Bcf/d, implying a utilization of over 90%.

While those trends are positive, challenges remain, largely owed to the high cost of construction, the risk to lenders in terms of providing financing, and uncertainty in the markets amid the global energy transition to increased use of cleaner-burning fuels.

"The LNG market fundamentals over the long-term are great," Bird said. "We're seeing some short-term headwinds in the long-term contracted market."