March 25, 2013 12:09 pm

Centrica strikes US shale gas deal

Centrica has struck a 20-year deal to secure supplies from the US as it takes advantage of the boom in shale gas output from North America.

The deal by the owner of British Gas follows predictions from Sam Laidlaw, Centrica’s chief executive, last month that growth in shale gas production in the US over this decade could allow for the export of liquefied natural gas to the UK, “providing a competitive source of fuel for our customers”.

The deal with Cheniere Energy envisages first exports from its Sabine Pass project in Louisiana by 2018 under the terms of an initial 20-year contract. Under the terms of the arrangement Centrica will purchase 89bn cubic feet of gas a year from the Sabine gas liquefaction plant – the equivalent of annual gas demand for about 1.8m UK homes.

Speaking on Monday, Mr Laidlaw said: “In an increasingly global gas market, this landmark agreement represents a significant step forward in our strategy, enabling Centrica to strengthen its position along the gas value chain and helping to ensure the UK’s future energy security.”

The gas supplied under the deal, which remains subject to US regulatory approval, will be in part pegged to the Henry Hub natural gas price by which gas in North America is typically traded.

Under the terms of the agreement, Centrica will pay Cheniere a fixed fee of $3 per million British thermal units – the standard trading unit for natural gas – plus a commodity fee of 115 per cent of the prevailing Henry Hub price for the procurement and liquefaction of the gas.

Centrica becomes the latest of six customers signed up by Cheniere for LNG exports from Sabine Pass. Those already signed up are fellow FTSE 100 gas supplier BG Group, KOGAS of Korea, Gas Natural Fenosa of Spain Gail of India and Total of France – all of which intend to export more per year from the US than agreed in the deal with Centrica announced on Monday.

BG Group’s deal, first announced in October 2011, now covers 4.2m tonnes a year of LNG’s exports, compared with 1.75m tonnes a year provisionally set aside for Centrica.

Commenting on the Centrica deal, Charif Souki, Cheniere’s chief executive, said: “With this contract, exports from the United States will become an important part of the UK’s overall energy supply portfolio.”

The announcement comes amid fears that the UK faces a more imminent gas supply crisis following interruptions to its supply from the continent last week and limited storage capacity.

On Sunday John Hayes, energy minister, played down the threat of any imminent shortages, stating a combination of pipe delivery from the UK, Belgium, the Netherlands and Norway alongside LNG shipments had allowed for some replenishment of gas storage.

On Monday the minister welcomed Centrica’s deal to secure LNG exports from 2018. “Security of UK energy supply lies in diversity,” he said. “The UK already receives gas from a range of countries and we can now add the US to Norway, the Netherlands and Qatar as sources of supply.”

David Cameron, prime minister, added: “Future gas supplies from the US will help diversify our energy mix and provide British consumers with a new long-term, secure and affordable source of fuel.”

The deal compares with a three-year deal to supply 120bn cubic feet of LNG per year to Centrica agreed with Qatargas in February 2011. Another 10-year contract extension struck 18 months ago between Centrica and Statoil guaranteed the supply of nearly 180bn cubic feet a year of piped gas from Norwegian fields to the UK.

Frank Harris, analyst at energy consultancy Wood Mackenzie, said the deal could see gas delivered at under $9 per MBtu to the UK if low US prices persisted, well below that currently prevailing European and Asian wholesale prices.

He added other UK utilities could be tempted to strike flexible long-term LNG deals that would allow for export to more lucrative worldwide destinations if pricing conditions on the UK eased.

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