The US might be turning its back on coal in power generation, but there's little sign that liquefied natural gas imports are ready to help gas-fired capacity take its place. In the near term, some LNG importers are struggling, as shippers opt to direct cargoes towards the more profitable markets of Europe and Asia. According to one market observer, BG Group's capacity at Southern Union's Lake Charles LNG terminal has not accepted a shipment since September 2007.

Cheniere Energy's Sabine Pass terminal, the first entirely new facility to be built in the US in over 25 years, opened on 21 April with US Secretary of Energy Samuel Bodman in attendance. Its debut cargo was roughly $60-70 million in Nigerian LNG, which is required to cool down the project to its normal operating temperature. But there are no follow-up cargoes scheduled to arrive at the terminal any time soon.

Since September 2007, the price of natural gas at the Henry Hub pricing point has risen from just under $5.50 per million BTU to almost $12.50. This level is slightly below natural gas' 2005 peak, of roughly $14, but should offer compelling opportunities for LNG importers. But in the first four months of 2008, LNG imports dropped from 283 billion cubic feet to 115 billion cubic feet on the same period the previous year, according to the US Energy Information Administration.

Gateway drag

Cheniere Energy runs a website called lnggateway.com, where it outlines the mechanics and pricing of futures trades based on a premium at Henry Hub over UK's National Balancing Point, the nearest Europe has to a pricing benchmark. The website is designed to bolster Cheniere's claims that the US, in particular the Gulf Coast, is an attractive place to land uncommitted LNG cargoes.

Cheniere has attempted, through a number of refinancings and capital raisings, to support a proprietary LNG marketing venture and create more value than it might have as a terminal developer and operator. The ability of US consumers to pay a premium for LNG is central to these efforts. But the spreads at lnggateway.com are all negative.

The difficulty, for importers focused on the US, is that Europe and Asia are offering much better prices for gas. The older LNG contracts in Korea and Japan are indexed to the price of crude oil, now at record highs, and demand is strong in Western Europe, which has slightly lower domestic reserves and has been more wary of adding coal and nuclear capacity to offset gas-fired use.

Cheniere's hope is that by the summer months, when demand drops in Europe for gas, the US, with its plentiful storage capacity, will again become a favoured destination for cargoes. The developers of gas storage projects with access to the Gulf Coast, some of which have struggled to close financing in the face of lender and rating agency scepticism about their rationale, harbour similar hopes. But lnggateway.com's futures for the summer months of 2008 and 2008, while they show slimmer negative spreads than winter months, are still resolutely negative.

The stubborn refusal of spot gas prices to validate Cheniere's business model does validate the unwillingness of project finance lenders to take on merchant LNG risk. Even if US prices eventually fall into line with those in Europe, the drop-off in imports have proved to lenders the volatility in volumes associated in running a US import terminal.

Gulf seizes the opportunity

The only terminal projects that stand a chance of moving forward either have an oil major owner or users that include oil majors and national oil companies. While these tenants will not promise to use their capacity most, or indeed much, of the time, signing terminal use agreements provides an option, if an expensive one, to ship LNG to the US.

So, even as its neighbours lie empty, Gulf LNG closed financing and started construction on a 1.3 billion cubic feet per day terminal in Pascagoula, Mississippi. The developer of the project, the Crest Group, succeeded in snagging 20-year terminal use agreements for the project's capacity with Angola LNG (60%) and Eni (40%). It then brought in El Paso to provide 50% of the project's equity, with Angola's national oil company, Sonangol, providing a further 20% and Crest the remainder.

More than one of the deal's participants noted that the project and its $900 million financing would not have happened without Sonangol's desire to own a footprint in the US, the most liquid in the world, whatever its current discount to Europe. Gas producers, and terminal developers, call this desire optionality, though it can look perilously close to vanity.

The terminal use agreement was structured so that large and well-rated oil majors accounted for 87% of the guarantees of the capacity revenues. Sonangol is the host of the Angola LNG liquefaction project (it has, along with Chevron, a 36.4% stake, with Total and BP each owning another 13.6%), but for the sake of making sure the receiving project can be financed cheaply, Sonangol takes a commercial back seat here. El Paso, an experienced midstream operator, took the lead in dealing with lenders.

The construction-plus-10-years financing, which closed on 7 February, consisted of a $870 million term loan and $30 million working capital facility, and was priced at 150bp for construction, falling to 125bp during operations. Despite a solid contractual structure, which included an Aker Kvaerner turnkey construction contract, RBS brought in Fortis, Standard Chartered, Bank of Nova Scotia, and WestLB as mandated lead arrangers before selling the debt down to a further 19 banks.

Cheniere – spiral or spared?

Supporting such generous underwriting economics was a necessary part of closing the financing during February, a period of turbulence in credit markets. Cheniere, however, has fared much worse. Less than two weeks after Gulf's closing it announced it was pursuing alternatives for the Sabine Pass project, up to and including a sale. It mandated Credit Suisse to handle the sale, and in mid-April borrowed $82.3 million from it at an interest rate of 16.458%. Moody's downgraded the high-yield bond refinancing of the Sabine Pass debt from Ba3 to B2 on 20 May.

The high-priced loan is the latest, possibly final, attempt by Cheniere to extract cash from the Sabine Pass project short of a sale. It has, since the project's first $822 million construction financing with SG and HSBC, ever-more-highly leveraged the asset in pursuit of becoming a full-service LNG importer. The first project loan closed in February 2005, and in August that year Cheniere closed a $600 million seven-year B loan with Credit Suisse. That loan was priced at 275bp over Libor.

In early 2006 Cheniere closed a $1.5 billion restatement and expansion of the project debt, which allowed it to monetise the TUA that it signed during the first bank financing, but did not receive credit for, but did not retire the B loan. It eventually refinanced both with a Credit Suisse-led high-yield issue of just over $2 billion. Then, in March 2007, Cheniere made $98 million from the sale of limited partnership units in a partnership it formed to hold the Sabine Pass project. The underwriters were Merrill Lynch and Credit Suisse.

Bankers familiar with Cheniere's bank financings are tempted to say, for obvious reasons, that if Cheniere had stuck within the guidelines they laid down it would not be seeking buyers for the project. Credit Suisse, as a provider of high-priced capital to growth energy companies on the way up and down, has so far stuck to a script that will be familiar from its work during Calpine's rise and fall.

Cheniere is now trying to reduce the amount of cash that it has tied up in its marketing operations, including reducing staff numbers, winding down marketing positions and trying to extricate itself from the five-year ship charters it has signed. It has also, in effect, assigned the capacity at Sabine Pass that it controls to another gas marketing company, which it has not identified.

Given Cheniere's lack of control over the Sabine Pass capacity, as well as its multiple financings, buyers have reportedly struggled to assign a value to Cheniere's 90% interest in the terminal. Cheniere's unrestricted access to cash, which stood at $141 million at the end of March, was down just over 50% on the end of 2007. Another national oil company with an eye on the American market would be the most likely buyer for Sabine Pass.

Northern exposure

The best candidate, however, now has its sights set further north. While Gulf Coast developers tend to highlight their excellent access to gas pipelines that serve the Northeast, terminals closer to the demand centres of this region have been extremely attractive to shippers. Gazprom, for instance, has settled upon Quebec as the location for its first serious foray into the US.

It has signed a letter of intent to use 100% of the capacity of, and take an equity stake in, the Rabaska LNG terminal in Quebec. The developers are Gaz Metro, Quebec's gas distributor, Enbridge, which distributes gas in Eastern Ontario, and Gaz de France. US consumers are unlikely to benefit from the 500 million cubic-feet-per-day project, however.

Gazprom plans to supply the plant using gas from its Shtokman field, which is still some way off from becoming reality. For the last several years, Gazprom has tempted buyers before with gas from Shtokman, a challenging field in deep and cold waters, but has to date expended much greater time and effort in maintaining its dominance of European gas markets, and thus its neighbours' energy security, than pursuing ventures in the US.

The choice of the Quebec site, as well as its small capacity in comparison with the Gulf Coast terminals, is a reminder that Eastern Canada has been more fertile ground for developers that the Atlantic Coast of the US. The only financing for a new project on the Eastern coast of North America was the $756 million Canaport LNG financing, which Banco Santander, BBVA, BMO, La Caixa and Royal Bank of Scotland closed for Repsol and Irving Oil in November 2006.

It's easy to blame unfriendly permitting regimes for the difficulty that developers face in financing projects. TransCanada and Shell are appealing New York State's denial of a permit for their Broadwater LNG floating terminal in Long Island Sound, even though they already have an approval from the Federal Energy Regulatory Commission.

The two candidates for the Democratic nomination, Hillary Clinton and Barack Obama, floated the idea of taking away the FERC's power to approve terminals. They were hunting for votes in Oregon, where three terminal projects are under consideration, though Clinton, who was a force behind the Broadwater refusal, would be aware that local authorities still have a say in whether projects go forward.

But the FERC's map of proposed North American receiving terminals has barely changed in the last year, after a period of frenetic activity (for more on the map, see Project Finance's June 2005 issue). The US' promise of optionality has not been enough to overcome local opposition and a poor commercial rationale.