Cheniere Energy Inc – Sink or Swim?
Cheniere Energy Inc is an American based energy company, that has recently made strong strides into the global Liquefied Natural Gas (LNG) market. The company has goals of becoming a top 5 player in the market, validated by their tight grip on the North American LNG market, ambitious expansion of operations, and their ever increasing supply and purchase agreements (SPA’s) with global energy titans.
What is Liquefied Natural Gas?
Cheniere operates by purchasing natural gas from the US and Canadian natural gas market, and converting it to liquid through a rigorous refrigeration process. Liquefying natural gas is quickly becoming the norm for any import or export of natural gas, as natural gasses liquid counterpart is 600 times more compact, making transportation of natural gas in liquid form exponentially more efficient. In addition to being more compact LNG is non-flammable and non-toxic and is mercury free by the end of the refrigeration process making it a desirable alternative to coal and oil for those corporations, and countries with a green thumb. Once in liquid form, Cheniere sells the majority of its product to energy corporations, global oil companies, and investment grade commodity traders through its SPAs offering the services of liquefaction as well as global transportation to regasification centers all over the world. The remaining LNG is sold to the free market.
Since the early 2010’s Cheniere has been gearing up to server the ever growing global LNG market. 2019 is a big year for Cheniere as many of its infrastructural projects near completion and become operational. Cheniere owns and operates two of the three LNG production and transportation facilities within the US. The Sabine Pass Liquefaction project (SPL) is located on the US gulf coast in Louisiana and is equipped with deep water ports for LNG vessels and tankers, as well as pipelines that pump LNG throughout the US. The Sabine Pass project which has recently finished construction on its fifth liquefaction unit, called trains, has received the necessary permits to construct a sixth. At its peak the Sabine Pass project will produce an estimate 27 million tonnes per annum (mtpa) currently valued at approximately $247.5 billion USD. In addition to the Sabine Pass project, Cheniere has constructed a second facility in Texas called the Corpus Christi Facility (CCL). As of 2019 the CCL has two operational trains and funding has been secured to construct at third, this new facility will increase Cheniere’s LNG output by an estimated 50%. While these numbers look very promising, it’s important to remember the fifteen-billion dollar price tag that came with the Sabine Pass project alone.
Macro Trends in Liquefied Natural Gas
Analysing the global market the future of Cheniere is both very exciting, and dangerous. Last year Cheniere entered into multiple supply and purchase agreements with global titans, specifically top tier Chinese oil and gas companies such as PetroChina International, as well as China’s National Petroleum Corporation. China has been in conflict with itself in the recent past as its been struggling with its dependency on coal. While coal will never be replaced in China, there is a growing demand for alternatives, as well as a growing concern over the air quality in major Chinese cities. In November of 2018 the Chinese State Council implemented a five year plan requiring major cities such as Beijing and Shanghai, to meet a “good” or “excellent” air quality standard. The new Chinese trend away from coal has begun to snowball. From 2017-2018 China increased LNG imports 43% to become the second largest importer of LNG, and has planned to quadruple its intake by 2030. Additionally China has invested in over fifteen re-gasification centers that will become operational between 2020-2023. Chinese companies have recognized the paradigm shift away from coal, and are each desperate to get a piece of the growing LNG market.
China, both a risk and a catalyst
While China’s shift away from coal in favour of unconventional energy alternatives is the Chenieres main catalyst, the China-US trade war is its biggest threat. The China-US trade war still rages on, and has taken a significant toll on the oil and gas sector. In 2018 only one vessel from the US was able to trade with China, compared to the sixteen vessels in 2017, resulting in the LNG market having a compounded growth rate of only 6%, far lower than what it is capable of. The Trump administration is nothing less than hostile and unpredictable, however recently both parties have eased off sanctions and tariffs and have expressed willingness to renegotiate.
Sink or Swim
Cheniere has put itself in a position to become a dangerous competitor in the international Liquefied Natural Gas market, however with bold ambitions come bold risks. Chenieres ability to continue to garner relations with powerful, global, buyers has been its main competitive advantage, and is going to be key to achieving the cash flows necessary to pay down its debt from the construction of two major liquefaction and transportation facilities. While China wants LNG and the US wants to sell LNG the Trump-China trade debacle could prove to be a make or break catalyst for Cheniere, 2019-2020 will see if Cheniere sinks, or swims.