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How Sempra decided to go all in on natural gas — $10 billion worth

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For miles, you drive past the reeds and marshes of the Louisiana Gulf Coast on a February morning under a cloudy, bruised-colored sky.

Then, after going over a ridge, it appears.

The first thing you see are three storage tanks 200 feet high and within moments the entire project rolls out like a carpet — a giant rectangle of piping, concrete and metal 2 miles long and half-mile wide, hugging the Calcasieu River.

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It’s the $10 billion Cameron LNG facility, nearly five years in the making. It’s not only a mammoth project but also a significant part of San Diego-based Sempra Energy’s ambitions to become, in the words often repeated by the company’s leadership team, the premier energy infrastructure company in North America.

The development of LNG — short for “liquefied natural gas” — is a result of dramatic changes in the fortunes of energy producers in the United States that practically nobody predicted.

Just a few years ago, the nation was importing natural gas.

But today, so much is being produced in places such as Texas and Pennsylvania that the U.S. is rapidly becoming one of the world’s top exporters of the stuff by liquefying the gas, putting it on cargo ships and sending it to customers in countries hungry to use gas to heat their homes, generate electricity and wean their way off coal.

There are two factors driving companies into the LNG export game, said Andy Smith, senior analyst for Edward Jones: “The need for (LNG) and profits. There are other countries that have an energy shortage or lack of natural gas to produce power. They need it. We have it. You can make money doing it and that’s the impetus for all these projects.”

Sempra is just one of many companies racing to build facilities and get them up and running before the best spots and most desired customers are taken.

“Economists forecast what the global demand for LNG will be each year and the actual growth outpaces what the (earlier) projections were,” said Lisa Glatch, strategic initiatives officer for Sempra and chairman of the board of directors for Cameron LNG. “So the first movers like us, who are able to feed those world markets sooner rather than later, are in the best position.”

Not everyone is cheering, though.

While natural gas burns twice as clean as coal, it is still a fossil fuel and many environmentalists want to see it reduced or eliminated, not expanded to other countries via LNG exports.

LNG projects are “continuing to keep us, not only in America but around the rest of the world, addicted to fossil fuels,” said Dan Jacobson, state director of Environment California.

What is LNG?

As the name suggests, natural gas is converted from its gaseous state into liquid form in what’s called the “liquefaction” process.

Through a technology that is more than 50 years old, natural gas is cooled to minus-260 degrees Fahrenheit. When natural gas is liquefied, it looks like mineral water and it shrinks more than 600 times in volume. LNG experts use an analogy that the same amount of natural gas that would fill a beach ball can, after being liquefied, fit into a golf ball.

The LNG goes into large storage tanks and then can be loaded directly onto what are called “membrane cargo tanks” on double-hull ships that can the send the LNG to import facilities around the world. Once at its destination, the LNG is warmed and regasified so it can be used just like existing natural gas.

For years, the LNG export market has been dominated by Australia and the Middle Eastern nation of Qatar.

But about 10 years ago, what’s called the shale revolution upended the oil and gas industry in the U.S.

Due to hydraulic fracturing and horizontal drilling techniques in places such as the Marcellus and Utica shale formations in the East, and the Permian Basin in West Texas and southeastern New Mexico, domestic production has taken off.

Between 2005 and 2017, natural gas production increased by 54.5 percent, according to the U.S. Energy Information Administration, which has predicted production growing faster than consumption beyond 2020.

The organization estimates the U.S. has enough natural gas to last about 90 years.

With all that gas floating around, it’s not surprising companies are jumping at opportunities to export natural gas, especially since there seems to be plenty of likely customers.

Japan has long been a major importer of LNG and with the country’s decision to turn away from nuclear power after the 2011 Fukushima disaster, the demand for natural gas has accelerated.

South Korea is another popular destination, with China’s burgeoning economy quickly moving up the ranks.

Europe is also a big consumer and many countries rely on Russia for gas supplies. U.S. companies are eager to move into the EU market, and countries like Poland and Ukraine are keen to lessen their dependence on Gazprom, the natural gas company that is majority-owned by the Russian government of Vladimir Putin.

Cameron jumps in

Farhad Ahrabi, the CEO of Cameron LNG, sounded almost like a proud papa.

“In the next few weeks, we’ll be seeing the first ships arriving here at the jetties to load up the cargoes and really connect this community … to the four corners of the world,” he told a small group of reporters taking a tour of the sprawling construction site earlier this month.

Phase 1 of Cameron, which constitutes about 60 percent of the project, is just about completed, with units starting up as the facility’s commissioning process begins.

LNG processing units are called “trains” and while no firm date has been set, Train 1 is expected to load cargo onto incoming ships within months, if not weeks. Trains 2 and 3 are slated to be up and running by the end of the year.

There were some construction delays, though. Cameron is running about one year behind schedule. The team of contractors blamed most of the slowdowns on weather in the often-rainy Gulf Coast.

“It’s a huge bit of civil engineering, construction, logistics (and) procurement effort to put something like this together,” said Ahrabi, who has nearly 30 years’ experience with projects in places ranging from Canada, Tunisia, Egypt and Brazil.

About 1 million linear feet of pipe was installed in the facility. That’s enough to go from San Diego to Santa Barbara or 189 miles. Builders also used 55,000 tons of steel and about a quarter million cubic yards of concrete.

The site was constructed at a higher elevation than the surrounding area to protect it from storm surges and Category 5 hurricanes.

“This area is basically zero to 2 feet above sea level,” said Jamie Gray, Cameron’s project director. “We raised the whole site to 12 feet and that’s to mitigate a 500-year storm surge event.” All the equipment is 15 feet above sea level.

Cameron first opened in 2009 as a facility accepting LNG imports to its three behemoth storage tanks. But when the natural gas landscape in the U.S. changed, Sempra pivoted, enlisting partners in Japan and France to join the company in the $10 billion effort to make the site a liquefaction and export facility, which will employ about 280 when finished.

Sempra owns 50.2 percent of Cameron LNG. Tokyo-based Mitsui and Total, the multinational oil and gas giant based near Paris, each own 16.6 percent. Mitsubishi (through a related company jointly established with one of the largest shipping companies in the world) owns 16.6 percent.

The owners are looking to add two more trains and constructing one more storage tank but no timeframe has been set.

But wait, there’s more

Sempra is looking to build two other facilities — one in Texas and another in Mexico.

About 40 miles from Cameron, Sempra plans to construct an LNG liquefaction and export facility in Port Arthur, Texas — also on the Gulf Coast — with the capacity to export about as much LNG as Trains 1 through 3 at Cameron.

A final investment decision on Port Arthur is slated for late 2019 or early 2020.

But the chances for a green light appear good.

In 2017, South Korea’s state-owned natural gas supplier agreed to establish a framework with Sempra on the Port Arthur facility.

Two months ago, Poland’s national oil and gas company signed a 20-year agreement to take 2 million tons of LNG per year — about 20 percent of Port Arthur’s export capacity.

Last month, the Federal Energy Regulatory Commission completed the final step in Port Arthur’s environmental review process before the commission can proceed to issue approval of the project.

Through Sempra’s subsidiary in Mexico, IEnova, the company hopes to add export and liquefaction capabilities to an already existing import facility called Energía Costa Azul near Ensenada.

The project near Ensenada is particularly attractive.

Most export facilities in the U.S. are based — or getting built — on the Gulf Coast. That means to reach LNG markets in Asia, tanker ships have to go through the Panama Canal.

But an export terminal on the Baja Peninsula would go straight across the Pacific. Not only would the ships skip paying the tolls at the Panama Canal but the trip would be cut in half.

“The facility we have just south of San Diego is a real competitive advantage,” said Jeff Martin, Sempra’s CEO, “because instead of taking 24 or 25 days from the Gulf (of Mexico) to get to Asia, you can get there in 12 or 13 days off the West Coast.”

A final investment decision to expand Energía Costa Azul is targeted for late 2019.

The Great Race

Sempra is far from alone.

By one estimate, 36 LNG export terminal projects are open or on deck in the U.S.

In 2016, Cheniere Energy became the first U.S. company to export LNG to foreign markets with its Sabine Pass facility on the border of Louisiana and Texas. It’s been a big success, with the Houston-based company reporting a tripling of revenue in 2017.

Two other export facilities followed — one on the coast of Maryland in April 2018 called Cove Point operated by Dominion Energy and another in Corpus Christi, Texas, also by Cheniere, that opened three months ago.

Other projects are right on Cameron’s heels to become the fourth site to open — including Freeport LNG, 67 miles south of Houston, and Kinder Morgan’s Gulf LNG in Mississippi.

Kinder Morgan’s Elba Island LNG facility near Savannah, Georgia, is scheduled to become fully operational by the end of the year.

The day before Cameron officials met with the media, ExxonMobil and Qatar Petroleum announced they were going ahead with a partnership to build a $10 billion LNG export project of their own, called Golden Pass, on the Texas Gulf Coast.

Companies are racing to line up customers and secure contracts with them.

“The companies that get their approvals and get their contracts in place are going to be at a huge advantage,” Smith of Edward Jones said, “because if you don’t have those two things, construction is going to be delayed and other companies are going to beat you to the punch.”

So how does Sempra stack up against the competition?

The delays at Cameron “might be an indication they have more hiccups than some of those other facilities,” said Charlie Cone, an LNG analyst for energy data provider Genscape. “But in my mind, the people at Sempra are experts in the gas transmission market. They can pull that gas from the pipelines into the terminal itself … I don’t think they are going to have a problem competing with some of these more seasoned global oil and gas veterans.”

LNG’s critics

U.S. exports of LNG have quadrupled in the last two years and, according to Reuters, are expected to reach 10.3 billion cubic feet per day by the end of 2020. One billion cubic feet of gas is enough to fuel about 5 million U.S. homes for a day.

Jacobson of Environment California said the increasing number of LNG shipments is “really discouraging because the science keeps getting stronger and louder that says we need to be reducing our dependence upon fossil fuels and shifting as quickly as we can to renewable energy.”

The Paris Climate Summit called on nations to make efforts to limit the rise of global temperatures by no more than 2 degrees Celsius (3.6 degrees Fahrenheit).

At the same time Sempra officials tout LNG exports from their corporate headquarters in San Diego, California lawmakers have mandated deriving all of the state’s electricity from zero-emission energy sources by 2045.

The Green New Deal resolution, introduced last week, is the talk of Capitol Hill.

Supporters of natural gas say that since economies in India, China and developing countries are often geared to coal, a transition to cleaner-burning gas will amount to a decided net benefit to the environment.

“We have a leadership opportunity, not only to become greener here in America, but to make sure that we take natural gas of abundance and use it to displace high (greenhouse gas emissions) content coal in very, very big markets in the world,” Martin said.

But critics say LNG cannot be separated from the way natural gas is sourced. That includes methane that can leak from pipelines, well sites and other infrastructure. Natural gas is mostly made up of methane, which is about 30 times more potent than CO2 when released into the atmosphere.

A study by researchers with the Environmental Defense Fund and published in the journal Science last year said methane emissions from the U.S. oil and gas industry were 60 percent higher than the Environmental Protection Agency estimated.

“There are many reports that have said when you compare soup to nuts, the damage done from natural gas is not that far off from the damage done from other fossil fuels,” Environment California’s Jacobson said. “Briefly told, it’s still dirty and it’s still dangerous in terms of air pollution and it still has significant consequences in terms of climate change.”

A trade group for manufacturing companies opposes LNG from a different angle — that too many overseas shipments will lead to less supply, resulting in higher prices for natural gas in the U.S.

The Industrial Energy Consumers of America has complained that since many foreign companies buying LNG are government-owned, U.S. consumers are at a competitive disadvantage and manufacturers consuming larger amounts of gas will face “a significant threat.”

Sempra’s Glatch disagreed.

“All the analysis that we’ve seen would suggest there would be ample export for some period of time to come,” she said.

‘Picks and shovels’ … and risks

Sempra’s strategy is ambitious. The company expects to become not just a player in the LNG market but a global leader.

CEO Martin said the company is a natural fit since Sempra’s subsidiaries include Southern California Gas and San Diego Gas & Electric, utilities with decades of experience in the natural gas industry.

Sempra’s IEnova subsidiary is the No. 1 energy company in Mexico, a country looking to upgrade its access to gas by building pipelines and other infrastructure. Only 7 percent of households in Mexico have access to natural gas.

“I think our competitive advantage is that we’ve been in the business of serving natural gas customers for over 150 years” through SDG&E and SoCalGas, Martin said. “We’ve got a strong balance sheet, a good brand position, a track record of serving customers.”

Martin said Sempra sees itself as the pipeline between producers of natural gas and clients around the globe who want LNG.

Martin said Sempra is not in the business of finding the natural gas. Rather, “we’re the picks and shovels … It’s the infrastructure that enables people that find the energy to process it so we can take it to consumers. Our goal is to be the intermediary that is actually connecting markets.”

Last year, Sempra made another bold move — acquiring 80 percent of Oncor, the largest utility in Texas for $9.45 billion.

What about the risks of spending billions on LNG, especially on the heels of financing the Oncor deal?

Yes, the price of natural gas in the U.S. has remained low, consistently staying below $6 per million British thermal units for a decade. On Feb. 4, the Henry Hub price the benchmark for gas futures in the U.S. and many global markets was $2.57.

But the energy landscape can change quickly. What happens if prices return to the $12.69 level in June 2008, before the shale boom?

Martin said the company has helped insulate itself by not committing to projects until long-term contracts from clients taking LNG have been sewn up first — such as the 20-year deal with Poland at Port Arthur.

“Then you’ve locked in a guaranteed cash flow stream that supports your financing,” he said. “That money will basically not be invested until you’ve made sure that you’ve risk-adjusted those investments.”

Sempra officials anticipate big returns, estimating the company’s share of earnings from the three trains at Cameron at between $365 million and $425 million a year.

In a conference call with energy analysts during a quarterly earnings report in 2017, now chief operating officer Joe Householder said projected cash distributions after debt service for Cameron to Sempra are expected to be more than $11 billion during the project’s 20-year contract period. “We’re going to get a mountain of cash,” he said.

Martin said analysts have projected the world market for natural gas consumption will more than double in the next 15 years or so.

But on the other hand, the U.S. Energy Information Administration last month anticipated export capacity increasing “before leveling off after 2030, when additional suppliers enter the global LNG market and U.S. LNG is no longer as competitive.”

Genscape’s Cone said the largest risk for the LNG export market in general “really boils to one word and that is oversupply.”

In an oversupply situation, there would be more global LNG production than global demand for it, resulting in too many competitors chasing too few customers.

“In this scenario, global LNG prices would drop, and storage would fill up around the world, causing terminals to shut-in and sell their gas back to the grid instead of exporting it,” Cone said.

Will Sempra’s gamble pay off?

“I wouldn’t call it a gamble,” said Andrew Bradford, CEO BTU Analytics, an energy consulting firm that studies the LNG market closely. “Businesses take calculated risks. And the calculated risk (Sempra is) pursuing is (predicated on) growing economies in India, China and Southeast Asia, growing demand for electricity and gas and a growing opportunity for LNG to sell into those markets.

“You have billions of people still wanting to live in some semblance of the way that we live here in North America and other (developed) countries. And if people want that, they are going to consume more energy. Some of that is going to be renewables and some of that is going to hydrocarbons.”

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rob.nikolewski@sduniontribune.com

(619) 293-1251 Twitter: @robnikolewski