Zeus: LNG SPAs Advance Ahead of Regulatory Approvals

With greater emphasis on the value of North American natural gas to diversify international markets from Russian supplies, buyers and sellers of American LNG are more inclined to proceed to full sales and purchase agreements (SPAs) in advance of regulatory approvals.

“For early projects like Cheniere’s Sabine Pass Liquefaction and Freeport LNG, we saw SPAs or tolling agreements put in place only after the projects received non-FTA licenses,” said George Popps, LNG analyst at Zeus. “In the recent cases though, counterparties execute these agreements before licenses are issued.”

Dominion’s Cove Point and Sempra Energy’s Cameron LNG projects, for example, negotiated long-term agreements for their capacity before non-free-trade-agreement (FTA) authority was issued by the U.S. Department of Energy (DOE). Likewise, Cheniere Energy’s Corpus Christi liquefaction project has signed a customer while rumored to be near a second deal. Main Pass Energy Hub, an offshore project, reached a preliminary sales and purchase agreement in April 2013.

By law, authorization to export LNG to countries with which the U.S. has a free-trade agreement, such as Korea and Singapore, is almost automatic. However, most LNG is consumed by non-FTA countries, such as Japan, Taiwan, China and India. These licenses have taken months if not years to receive.

“Buyers and sellers are gaining confidence that the DOE will authorize projects and the Federal Energy Regulatory Commission will approve construction plans,” Popps said. “The dynamics has shifted from where we were 12 months ago when the market was less certain of regulator objectives.”