INTERVIEW: Chesapeake looks to finalize LNG deal bridging gap between US gas, global LNG markets

US shale producer Chesapeake expects to finalize a sale and purchase agreement with global commodities trader Gunvor in just "weeks or months" amid talks with US LNG developers about purchasing up to 2 million mt/year of liquefaction capacity to source the supply, Chesapeake CEO Nick Dell'Osso said March 30.

"We have had quite a bit of inbound interest, and we're continuing to talk to several," Dell'Osso said in an interview.

If Chesapeake succeeds in securing offtake capacity and finalizing an SPA with Gunvor, it will represent the first case of a US gas producer fully bridging the divide between the US gas market and the global LNG markets, according to S&P Global analysts. The deal could also represent a new paradigm for US producers keen to take on greater global gas exposure and a new way of commercializing US LNG projects.

The heads of agreement that Chesapeake signed with Gunvor on March 6 marked an industry first in that the offtake agreement with a targeted start date in 2027 did not specify the liquefaction terminal where the LNG will be produced. Chesapeake, which does not hold any offtake capacity at a current US LNG terminal, said the facility chosen will most likely be a project that has not advanced to construction, "but it doesn't have to be," Dell'Osso said.

"It's going to be about cost of liquefaction; it's going to be about surety of execution of construction and bringing the facility online," he said. "Those are really the key factors."

Gunvor and Chesapeake saw announcing the preliminary deal when they did as giving them "a better ability to attract the right interest" from LNG projects, Dell'Osso said.

"A lot of pieces have to come together to make these deals work, and we felt that by being clear that this part of it had been accomplished, it would facilitate the next step," he said.

Many US LNG projects that have yet to reach a final investment decision could accommodate the Chesapeake-Gunvor deal, which could help some developers commercially sanction projects that have yet to get over the line after the wave of long-term contracting during the past year.

Price exposure

The volumes under the deal would be supplied free on board for a 15-year term, with the purchase price indexed to the Platts JKM spot LNG price for delivery into Northeast Asia. Platts is part of S&P Global Commodity Insights.

"Over the next several years, as much as 20% or 25% of US production will flow into international markets," Dell'Osso said. "Therefore, the price of those international markets will influence our market here domestically. We would like to be diversified into pricing that reflects that as well and have that exposure, so that we aren't disconnected from where that significant amount of production ultimately is priced.

"Having a tie directly into an international market is attractive to us, and JKM being the largest international market seemed like the first right step," he said.

One of the questions facing Chesapeake and Gunvor is what liquefaction fee a US LNG developer will charge, with some developers citing rising material and financing costs as putting upward pressure on fixed liquefaction fees required to support new projects.

"We'll just have to allow that to come out as we finalize a deal with somebody," Dell'Osso said.

Marketing supply

One selling point that Chesapeake sees in the deal is its status as one of the few US producers to certify 100% of its gas through third parties as lower in greenhouse gas emissions at a time when LNG buyers, particularly in Europe, are increasingly concerned about the climate footprint of US supplies.

"That makes us very attractive candidate for potential buyers of LNG," Dell'Osso said.

The strategic move has already led to Chesapeake signing a deal in August 2022 to supply 300 MMcf/d of certified gas the under-construction Golden Pass LNG terminal in Texas starting in 2024 with a 36-month term, with the gas priced at NYMEX Henry Hub less a fixed differential.

But Chesapeake realizes that taking on greater exposure to LNG prices through deals like the offtake agreement with Gunvor will mean balancing new risks that come with global gas market volatility.

"It is cyclical," Dell'Osso said. "We recognize that it will have periods of time where it is better to sell gas at an international price than it is domestically. We are not seeking arbitrage here – we are seeking diversification."

Chesapeake has considered the possibility of taking an equity stake in a US LNG project, something that the chief executive described as a "very separate decision" that could come later.

The company's past comments about wanting to secure offtake for its natural gas production have also suggested that it could look to secure free-on-board offtake contracts for around 550 MMcf/d to 750 MMcf/d, or about 4 million mt/year to 6 million mt/year of supply, based on its production volumes in 2022, meaning it could be in the market for additional LNG contracts beyond the Gunvor deal, according to S&P Global analysts.

"Eventually we will be, but these deals take a long time to come together" Dell'Osso said. "We have said we would like to have 15% to 20% of our production priced internationally. But it may take us several years to get there, so we're going to be patient about that."