Cheniere Energy said on Monday it would buy natural gas from Apache Corp’s Permian assets using a price mechanism linked to the liquefied natural gas (LNG) it ends up selling and not the typical U.S. natural gas benchmark.
The deal is the first sign Cheniere, by far the largest U.S. LNG seller, may move away from its signature LNG pricing mechanism in future offtake agreements with LNG buyers by decoupling from the Henry Hub price used for U.S. natural gas.
Cheniere buys U.S. natural gas to use as feedstock for its two LNG plants. It then sells LNG to long-term buyers who pay 115% of the Henry Hub price plus around a $3 liquefaction fee per million British thermal units (mmBTU).
This formula, used by long-term buyers from Cheniere’s two LNG terminals in Louisiana and Texas, protects Cheniere from fluctuating U.S. natural gas prices and covers its costs of transforming the gas into LNG through the liquefaction fee.
By striking the agreement with Apache to buy natural gas at an LNG-indexed price, however, Cheniere is giving itself the flexibility to sell LNG using a different pricing structure, industry sources said.
It is another sign that U.S. LNG producers are expanding the ways in which they attract buyers in a global market that is growing fast but is far from being as liquid and transparent as the crude oil market.
“LNG export projects are being delayed because of the limited demand for HH-indexed LNG supply — limited but not non-existent,” one industry source said. “If U.S. LNG projects can sell on other indices, then it will likely lead to an increase in U.S. LNG exports in the long term.”
NextDecade, a developer of the Rio Grande LNG project in Texas, signed a deal with Royal Dutch Shell which prices some of the LNG to Brent crude prices — a mechanism more commonly seen with veteran LNG sellers Qatar and Australia.
And Tellurian, another LNG terminal developer, signed an offtake agreement with trading house Vitol which is priced to the Asian JKM benchmark LNG price.
Cheniere was the first U.S. company to bring its LNG export project into production in 2016 with the Sabine Pass facilities and on Monday the company also announced a Final Investment Decision (FID) for the sixth train there.
Sempra Energy became the third company to operate a U.S. producing LNG terminal last week when it shipped its first cargo from Cameron LNG in Louisiana. Dominion Energy’s Cove Point plant and Cheniere’s Corpus Christi terminal began production last year.