LNG terminal developer Cheniere Energy, which is currently charging 32cts/MMBtu for long-term capacity leases at its proposed terminals on the Gulf Coast, believes it can get much more money by marketing regasified LNG in the US, Cheniere Chairman and CEO Charif Souki said Monday.

"The current market for long-term LNG in the US is about 83-87 % of the Henry Hub price, so you can do the math," Souki said during a presentation to Bank of America in Boca Raton, Florida, which the company made available on its Web site. "It's a lot better than 32 cents per MMBtu. If we can't generate more than 32 cents, then we don't need to be in this business."

The Houston-based publicly traded company recently announced it had formed a marketing and trading arm that would try to cash in on the emerging LNG spot market by buying up to 200 cargos per year from 2008 to 2010 at its proposed Sabine Pass terminal, which is under construction in Cameron Parish, Louisiana. On Oct 20, Cheniere announced it had formed an alliance with Morgan Stanley to acquire and market the supplies, presumably to take advantage of the investment banker's large cash reserves to compete in a business dominated by wealthy majors.

Cheniere's four proposed terminals in the US, two of which are being built, would have a total capacity of 11.4 Bcf/d by the end of the decade, Souki said. To try to take full advantage in marketing its own regasified through spot and swing opportunities, Cheniere has subscribed 3.0 Bcf/d of its total capacity to that division and is holding an additional 3.0 Bcf/d for that group, Souki said.

"We want to see how the market develops before we get involved in leasing out more long-term capacity," said Souki, whose company initially focused on leasing capacity at its terminals projects.

"Is Cheniere building too much capacity?" Souki asked. "It depends on the availability of supply and the competition for regasification."

The world' liquefaction capacity is projected to reach 41 Bcf/d in 2010 from 2004's total of 17 Bcf/d, he said. There are already firm commitments to build 35 Bcf/d in liquefaction capacity by 2009, he added. LNG produced in the Atlantic Basin would mostly be shipped to the US and Europe, while LNG produced in the Pacific Basin would primarily be shipped to Asia, he said. The growing amount of production in the Middle East will help develop a global LNG swing market because the area is positioned between Atlantic and Pacific markets, he said.

"The balance in swing capacity in the Middle East can go either way," Souki said.

Despite a large growing demand for LNG in the developing countries of China and India, most of the growth in the coming years will be in the US, Souki said.

"Where is all this LNG going to go?" he said. "We've heard a lot of things about China and India and other markets, and how we are going to cope with those other markets. It's easy to forget what dominant players we (in the US) are in the energy business."

Because LNG already accounts for 60% of the natural gas consumed in the Asian Pacific, the annual demand growth for the fuel in the region will only be 6-7 Bcf/d through 2010, for a total LNG consumption of 23-25 Bcf/d at that time, Souki said. Europe will depend on pipeline gas to provide baseline supply and on LNG to provide swing supplies during peak periods, so that continent's demand for LNG will only reach 6-8 Bcf/d by 2010, compared to Europe's 2004 demand of 4 Bcf/d.

That would mean that 16-19 Bcf/d of the projected 2010 supply would be available for North America, Souki said.

But because of high demand in Europe during the winter season that would presumably lead to swing and spot LNG cargos being snapped up in that continent, the available supplies to North America in 2010 would likely be about 10 Bcf/d during winter and 20 Bcf/d in the summer, he said.

Existing terminals that would serve the US in 2010, and those that have already been permitted, including two in Canada and one in Mexico, would on average have a total regasification capacity of 16-18 Bcf/d, Souki said, is equivalent to the maximum predicted available supply for North America at the time.

Whether that capacity would be too much for North America would greatly depend on utilization rates, Souki said.

"All these (proposed regasification) facilities can't be operating at 100% all the time," he said.

Asian terminals on average operate at 35-50% of capacity, while European terminals on average operate at 60% of capacity, Souki said.

"My best guess is that US terminals will operate at 75% of capacity," he said, meaning that 12-14 Bcf/d of LNG supplies would likely come into North America by 2010, compared with North America's consumption of 2.0 Bcf/d in 2004.

That amount of LNG would not be enough to keep the price of gas in the US below $6/MMBtu, Souki predicted, which in turn would mean that future LNG projects would be easily financed. LNG prices around the world will increasingly be linked to the New York Mercantile Exchange prices for natural gas, something many LNG producers are already demanding, he said.

This projected environment led Cheniere to form its trading and marketing division to try to capitalize on the portion of the revenues that would be made by selling regasified LNG indexed to NYMEX prices, he said.

Cheniere has already sold 1.7-2.0 Bcf/d of regasification capacity at Sabine Pass (depending on whether Chevron exercises an option to increase its capacity), which will lead to a revenue stream from $220-mil to $250-mil/yr, and the company will receive an additional $15-mil/yr from the Freeport LNG terminal in Freeport, Texas, in which Cheniere has a minority interest. The company hopes to double the amount of capacity it leases for an annual revenue stream of $500-mil, Souki said.

In addition, Cheniere expects annual revenues of $120-mil to $150-mil from regulated pipelines linking its terminals to the pipeline grid.

Cheniere projects to earn $375-mil/yr, from its marketing and trading arm, Souki said. The company, which had $900-mil in cash as of Sep 1, plans to invest $2-bil to build its proposed terminals and another $800-mil to $1-bil for a proposed 155 miles of pipelines.

Souki warned that high LNG prices linked to NYMEX may not necessarily be a good thing for the emerging industry in other parts of the world, especially Asia. "Liquefaction promoters have a problem," he said. "They're shell-shocked. They're looking at $12/MMBtu gas prices and asking what it means for the rest of our (development) program. They're asking, 'Can India and China decide they can't afford it (LNG) and therefore go to coal?' The political process to do this in other countries is a lot easier than the US."