Analysis: US-Argentina LNG may not cover costs

OREANDA-NEWS. August 17, 2016. LNG cargoes from Sabine Pass going to Argentina face challenging economics on a purely point-to-point basis, according to an Argus analysis of data released by the US government and Argentine state energy firm Enarsa.

The US Department of Energy (DOE) yesterday reported that Cheniere Energy, which owns the Sabine Pass facility in Louisiana, received a free-on-board price of \\$4.51/mmBtu for each of the six cargoes it sold in June. Cheniere subsidiary Sabine Pass Liquefaction was listed as the supplier and exporter of all the cargoes.

These are likely Shell's offtake because the cargoes are priced under the contractual arrangements between Shell and Cheniere and were loaded onto ships controlled by Shell. The Anglo-Dutch company in June would have paid Cheniere a liquefaction fee of \\$2.25/mmBtu plus 115pc of the \\$1.963/mmBtu final settlement price of the Nymex Henry Hub June contract, for a total of \\$4.51/mmBtu

Three of those cargoes went to Argentina, where Enarsa publishes the delivered price of LNG. It has reported that delivered price of the first of those cargoes, which arrived on 20 June at the Bahia Blanca terminal, was \\$4.18/mmBtu.

The difference of 33?/mmBtu is equivalent to a loss of around \\$1mn for the cargo. Including the cost of shipping, it would be a loss of as much as \\$3.25mn. The estimated cost for a spot voyage from the US Gulf coast to Argentina is about 70?/mmBtu.

Although Shell was the offtaker, trading house Trafigura delivered the LNG to Argentina, according to Enarsa. It is not clear which company may have taken the potential loss. Both companies also have large LNG portfolios with multiple suppliers and buyers, so the trade of the Cheniere cargo could be to optimize revenue, and therefore was not necessarily at a loss.

Another Sabine Pass cargo departed for Argentina on 13 June at an FOB price of \\$4.51/mmBtu. That shipment was delivered by Shell to Bahia Blanca on 2 July at a landed price of \\$4.92/mmBtu. Adding the \\$2.2mn voyage cost would mean that delivery had an estimated loss of about \\$430,000.

A partial cargo that left Sabine Pass on 10 July at an FOB price of \\$4.51/mmBtu was delivered by Shell to Argentina's Escobar terminal for \\$5.36/mmBtu. The Escobar terminal can only receive partial cargoes because of shallow water, so it pays more for cargoes.

However, it is difficult to know the exact details behind the trade because Shell has its own ships so it likely pays less for transportation.

The analysis shows the possibility that customers of US LNG liquefaction capacity would be willing to sustain losses on lifting cargoes, rather than incurring significantly larger losses by exercising their right to not take cargoes. LNG traders expect offtakers to treat some aspects, such as the take-or-pay liquefaction fee or shipping, as sunk costs and try to recoup the variable costs.

Shell has 20-year contracts to buy up to 5.5mn t/yr of LNG, equivalent to 760mn cf/d (21.5mn m?/d) of gas, after the first four liquefaction trains at Sabine Pass start long-term contractual deliveries.

Under the first contract, Shell will pay a liquefaction fee of \\$2.25/mmBtu for up to 3.5mn t/yr when train 1 starts long-term deliveries in November, whether Shell takes any LNG or not. If Shell takes LNG, it will pay an additional fee of 115pc of the final Nymex Henry Hub settlement price for a month in which a cargo is scheduled.

But under a so-called pre-commercial agreement, since May Cheniere has been able to force Shell to essentially comply with the same terms.

If Cheniere during the pre-commercial phase offers Shell a cargo at least 60 days in advance of the delivery window, then Shell must pay a liquefaction fee of \\$2.25/mmBtu even if it declines to take the cargo, or roughly a fee of \\$7mn-\\$8.5mn for each cargo, based on the size of the vessel. If Shell takes the cargo, it would also pay 115pc of the Nymex Henry Hub monthly settlement price for the month in which the cargo is delivered.