Energy Transfer (ET 2.97%) has spent the better part of the past decade working to turn its Lake Charles facility from a natural gas import terminal to a liquefied natural gas (LNG) export facility. It has faced several setbacks along the way, including losing its joint venture partner, Shell. Because of competition and market conditions, it has also struggled to secure enough commercial customers to support the facility.
However, Lake Charles LNG is another step closer to becoming a reality after Chevron (CVX 0.84%) agreed to increase its volume commitment. That deal and other recent agreements put Energy Transfer within sight of finally making a final investment decision (FID) on this large-scale project.
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Adding to its allocation
Energy Transfer has signed an incremental sale and purchase agreement with Chevron for additional LNG supply from its proposed Lake Charles LNG export facility. The 20-year agreement increases Chevron’s total contracted volume by 1.0 million tonnes per annum (mtpa), boosting its total allotment to 3.0 mtpa. The oil giant signed its initial 2.0 mtpa deal with Energy Transfer last December.
The deal will enable Chevron to grow its global gas business. Chevron operates several LNG facilities around the world. It also buys gas from third-party terminals. This strategy provides the global energy giant with a diverse, reliable, and flexible network of supplies to help meet the world’s growing need for the cleaner-burning fuel.
Meanwhile, the agreement puts Energy Transfer another step closer to the full commercialization of the project. It recently inked a 1.0 mtpa deal with one of Japan’s leading energy companies, Kyusha Electric Company. In addition, MidOcean Energy has agreed to take 5.0 mtpa as part of its strategic partnership with Energy Transfer, where it will also take a 30% equity stake in Lake Charles LNG. Specifically, it would get 30% of the LNG production while funding 30% of the project’s cost. Energy Transfer has also previously signed contracts with several other shippers, including Shell, for some of its LNG capacity.
A needle-moving project
As currently designed, Lake Charles LNG would have nearly 16.5 mtpa of liquefaction capacity. Energy Transfer had signed contracts for 10.4 mtpa when it reported its first-quarter results in early May. It’s in discussions with other shippers regarding the remaining capacity. It aims to secure 15.0 mtpa in contracts to approve the project.
In addition, Energy Transfer wants to bring on more equity partners. It’s open to energy companies like MidOcean that will take LNG capacity as part of their investment, as well as infrastructure investors. It wants about 75% to 80% of the project funded by equity and infrastructure partners.
The master limited partnership (MLP) hopes it can make an FID on the project by the end of this year. Lake Charles LNG would be a needle-moving project for Energy Transfer. The midstream giant would generate stable fee-based cash flow backed by LNG contracts from its retained stake in the project. On top of that, the company expects the project to fuel significant natural gas volume growth. It should boost volumes on its existing pipeline systems and provide the MLP with opportunities to expand its pipeline capacity. The growing gas volumes would provide Energy Transfer with substantial incremental earnings across its pipeline operations.
Getting closer
Energy Transfer continues to make progress toward finally approving Lake Charles LNG. Chevron’s decision to take incremental capacity pushes it closer to its commercialization goal. Chevron’s increased commitment is also a vote of confidence that should make the project more appealing to potential equity investors.
Building Lake Charles LNG would be a big deal for Energy Transfer. It would provide the MLP with two meaningful sources of future incremental cash flow: its retained equity stake and volume growth across its gas pipeline system. That would give the MLP even more fuel to grow its high-yielding distribution in the future. Given this project’s potential, it’s a key catalyst for investors to monitor.
Matt DiLallo has positions in Chevron and Energy Transfer. The Motley Fool has positions in and recommends Chevron. The Motley Fool has a disclosure policy.
