Along a narrow inlet off the Gulf of Mexico, 2.8 billion cubic feet of natural gas rolls daily through the Sabine Pass plant, where it is cooled into a liquid and loaded onto tankers bound for Asia and South America.
One may depart soon with the financial backing of Goldman Sachs GS 0.81% Group Inc., a first for the Wall Street firm and a sign that its appetite for risk, though diminished since the crisis, hasn’t disappeared.
Goldman is in talks with Sabine Pass’s owner, Cheniere Energy Inc., LNG -1.31% to buy a cargo of liquefied natural gas, known as LNG, according to people familiar with the matter. Should a deal be struck—which is not a certainty—it would give Goldman a sought-after toehold in the LNG market, which is growing quickly as U.S. natural gas production soars and many countries shift from coal power generation to natural gas.
American LNG exports quadrupled from 2016 to 2017 to 1.94 billion cubic feet a day, all of it coming from Sabine Pass, according to the U.S. Energy Information Administration. The U.S. is forecast to become the world’s second-largest exporter by 2022 as new projects start operating. Some analysts expect LNG trading to eventually resemble the crude oil market, one of the deepest in the world.
Goldman is under pressure to improve results in its commodities arm, which posted its worst year on record in 2017. The firm would look to quickly resell the gas to another party, some of the people said, which avoids the dangers associated with a weekslong ocean voyage but leaves Goldman bearing the risk if it can’t find a buyer or if prices swing. The average spot cargo leaving the U.S. is worth roughly $30 million at current prices, according to consultancy Wood Mackenzie.
Regulators have tried to push banks out of the commodities business, imposing heavy capital charges on such trades as part of the Dodd-Frank overhaul. Two years ago, the Federal Reserve urged Congress to revoke a special exemption that since 1999 has allowed Goldman and Morgan Stanley to engage in a wider range of commodities activities than other banks. It warned that legal liability stemming from an oil spill, for example, could be crippling enough to endanger the entire financial system.
Wall Street firms have pulled back in response, particularly in physical commodities, as opposed to the paper contracts that are traded alongside them. Morgan Stanley in 2015 sold its oil marketing and storage business, which included a fleet of tankers. Goldman sold its metals-warehousing unit, and in 2014, JPMorgan Chase & Co. sold most of its commodities business to Mercuria Energy Group.
But Goldman has deeper roots in commodities than other banks and has remained a big player in certain pockets. It is the eighth-largest marketer of natural gas in the U.S., according to data provider Natural Gas Intelligence, and still has a uranium business called Nufcor.
It has been angling for a way into the LNG market, which is just beginning to develop. For years, most of the world’s LNG was sold directly to big energy companies and utilities, which used it to generate electricity and heat.
But financial firms have been edging in. Four European trading houses— Glencore PLC, Vitol Group, Trafigura Pte Ltd. and Gunvor Group Ltd.—traded roughly $10 billion worth of LNG in 2017, accounting for 9% of global trade, according to Wood Mackenzie.
These financial middlemen buy gas from producers such as Cheniere and resell it at higher prices to utilities and others in developing countries in Asia and Africa, whose low credit ratings prevent them from inking long-term deals with suppliers. Vitol in January signed a 15-year deal with Cheniere that will supply it with 1 million tons a year to trade or resell in the spot market.
Seeking a foothold in the business, Goldman traders went looking for an LNG contract late last year, people familiar with the matter said. Talks with Cheniere are ongoing and may not ultimately result in a signed agreement, they added. Goldman could also look to buy from someone else.
Commodities trading holds a special place at Goldman. The division still operates as J. Aron, a coffee and metals trader that Goldman bought in 1981. Top executives including Chief Executive Lloyd Blankfein and Chief Financial Officer Martin Chavez got their starts at J. Aron.
Profits have declined across the industry and J. Aron posted its worst year on record in 2017, though this year has been better. Mr. Chavez said recently that Goldman “remains committed in every way to help our clients manage their commodity risk.”
Source: Wall Street Journal