Evolving LNG Liquefaction Technology Application in 8mtpa Magnolia LNG Project Louisiana USA

Transcription

1 LIQUEFIED NATURAL GAS LIMITED (ASX: LNG) Evolving LNG Liquefaction Technology Application in 8mtpa Magnolia LNG Project Louisiana USA

2 20 Sep 2012 LIQUEFIED NATURAL GAS LIMITED (LNG) DEVELOPMENT OF MAGNOLIA LNG PROJECT Recommendation: Buy 12 Month Share Price Target A$1.50 Longer Term Value Over A$4.00 CAPITAL STRUCTURE: Net Asset Valuation: n/a ASX Code: LNG Share price: $ Month High: $ Month Low: $ Month Volume: 136m Market Cap: 104m Listed Shares: 310.8m Unlisted Options: 0.86m Unlisted Perf rts: 0.75m Cash (Oct 13): $9m Debt: $0.0m TOP SHAREHOLDERS China Huanqui CEC 17.1% HSBC custody 8.2% Citicorp Nominees Pty Ltd 4.1% Top % DIRECTORS: Mr Richard Beresford Chairman Mr Maurice Brand MD / Joint CEO Madam Yao Guihua Exec. Director / Joint CEO Mr Paul Bridgwood Director/CTO Mr Norman Marshall Director / CFO Ms Leeanne Bond Non Exec. Director Mr Zhang Gaowu Non Exec Director PRICE CHART: KEY POINTS» First application of LNG Ltd s OSMR technology in new US Magnolia 8mtpa LNG Project» Proprietary OSMR technology gives 50% lower capital and 30% lower operating costs» Offtake, gas supply and equity funding structure arrangements well underway» U$660m project equity underwritten by Stonepeak Partners LP» 4mtpa project is potentially >A$700m(A$2.43/sh) and >A$ 4.71 for 8mtpa net to LNG Ltd» Fisherman s Landing Gladstone Qld site awaiting gas supply developments The global market for LNG is currently over 260mtpa and is expanding rapidly at almost 6%pa. Gas in liquefied form offers an economical and mobile method of delivering low emission methane gas to energy-hungry markets in Asia, Europe and Sth America from vast gas reserves in the Middle East, North Africa, Indonesia and Australia. The shale gas revolution in the US has now also provided substantial additional gas availability in that country and has changed the US from an importer of LNG to a potential major exporter and adding to market. Gas is an attractive fuel and will continue to increase its share of global total energy demand and international seaborne trade. The export LNG industry to date has been dominated by giant energy producers such as SHELL, BG Group, BHP, Woodside and by Middle East states with Qatar alone having over 30% of the market. In addition, many gas and power utilities are also entering into new LNG projects to ensure increased production and security of supply. The OMSR technology patented by LNG Ltd offers a significantly lower capital and operating cost avenue into LNG production and can now allow new smaller entrants to stand beside the big players in this major growing market. This technology could become a global winner. LNG Ltd has established the new 8mtpa Magnolia LNG project at the Lake Charles estuary about 100km west of Lafayette, Louisiana USA. The Project's unit capital costs are almost 50% below its immediate peer, the 18-27mtpa Sabine Pass River plant currently under construction/conversion about 100km to the west and developed by US$10bn market cap Cheniere Energy Ltd ( NYS:LNG). Magnolia LNG will be run under a tolling arrangement that brings project annual income in excess of US$180m per 2mtpa LNG train. LNG Ltd has arrangements in place for the intial phase 4mtpa trains of the proposed 8mtpa operation and income of over US$360mpa. Rapid expansion to 8 mtpa at marginal cost is also likely. Source: ASX Analyst: Barry Dawes bdawes@psec.com.au This research report is commissioned research for which Focus Research has received a fee from Liquefied Natural Gas Limited. Please see disclaimers for additional information. The Project has fully equity funding of US$660m underwritten by Stonepeak Infrastructure for ~50% interest. Scandinavian-based Gunvor Group will provide gas supply and LNG offtake arrangements through blue chip clients. Construction is expected to take 36 months after financial investment decision(fid 2015) and will cost around US$2.2bn for the first 4mtpa and about US$1.3bn for the second 4mtpa capacity. The NPV for LNG Ltd's 50% net share for two trains is in excess of US$650m whilst that for four trains is over US$1.2bn. LNG Ltd would also receive a US$60m 3% Developer s Fee at FID along with technology licence fees of up to US$50m payable over FID and commissioning. Focus gives a value of A$2.69/sh for a 4mtpa project and A$4.71 for 8mtpa at US$/A$ The true value of LNG Ltd's project should now become apparent after Stonepeak s underwriting of the equity commitment and as additional offtake partners are confirmed. JUNE 2014E 2015E 2016E 2017E 2018E 2019E EPS PER x n.a n.a Focus Research Investment Notes 2

3 CONTENTS KEY POINTS... 2 LNG Ltd In Profile... 4 Magnolia 8mtpa LNG Plant... 4 Fisherman s Landing 3mtpa LNG Project... 4 Technology... 4 Financial History... 4 Investment Review... 5 Focus Research Valuation Assessment... 7 NPV and IRR Analysis of the Magnolia Project... 7 Magnolia Project Stage One... 9 Magnolia Project Stage Two Magnolia LNG Project Stage One 4mtpa Cashflow and Earnings Analysis Magnolia LNG Project Stage Two Combined 8mtpa Cashflow and Earnings Analysis Business Plan & Strategy Magnolia Project Capital costs estimates for the Magnolia Project Regulatory regime and FERC Partners in the Magnolia Project Equity Partners Input and Offtake Partners Offtake Partners Fisherman s Landing Project The OSMR Technology Global Development and Licensing Peer Comparison Sabine Pass LNG Project Capital cost comparison with Magnolia Regulatory Issues Federal Energy Regulatory Commission ("FERC") Sabine Pass Participants The Global Energy Market The Market for LNG Risk Analysis Twenty largest shareholders Substantial shareholders Board of Directors Mr Richard Jonathan Beresford Chairman Mr Fletcher Maurice Brand Managing Director and Joint CEO Madam Yao Guihua - Executive Director and Joint CEO Mr Paul Bridgwood Director and Chief Executive Officer Mr Norman Marshall Director and Chief Financial Officer Ms Leeanne Kay Bond Non-Executive Director Mr Zhang Gaowu Non-Executive Director LNG Historical Financial Info Disclaimers Focus Research Investment Notes 3

4 LNG Ltd In Profile LNG Ltd was listed in 2004 to develop its new OSMR technologies that would enable lower capital and operating cost liquefaction of methane gas into LNG and also provide lower cost LNG storage tanks. In doing so, the newly applied technologies could unlock value in stranded gas fields by allowing mid-size LNG projects to be developed at much lower cost. LNG Ltd progressed its technology sufficiently well to enter into a Heads of Agreement Gas Supply with Arrow Energy to develop a 3mtpa LNG Project at Fisherman s Landing at Gladstone Qld using Arrow s CSG reserves as the gas feed. However, Arrow Energy was taken over by SHELL/PetroChina in 2010 prior to conclusion of Project contractual arrangements with Arrow so an alternative development JV was entered into with Huanqiu Contracting and Engineering Corporation (HQC), a 100% subsidiary of China National Petroleum Corporation (CNPC). Changes to NSW gas development policies have limited access to a previously proposed long term gas supply so the project is currently on hold. LNG Ltd's current major project is now the Louisiana-based Magnolia LNG plant. Magnolia 8mtpa LNG Plant The recent massive increases in gas reserves from shale and tight gas in the US provide substantial volumes of gas for export markets. The Magnolia LNG Project is located opposite an existing LNG plant near Lake Charles on Calcasieu shipping channel that runs out to the Gulf of Mexico. The plan is currently for a two train 4mtpa plant with a second stage to 8mtpa. Magnolia already has a Term Sheet Tolling Arrangement through Gunvor and a Heads of Agreement with Gas Natural Fenosa SG (GNF) to enter into a Tolling Agreement and commitments for US$660m in equity and debt funding is in hand through Stonepeak. Construction should begin in FY2015 and commissioning should be in FY2018. The plant will be a tolling operation with US gas from existing pipelines and export LNG sales. Fisherman s Landing 3mtpa LNG Project This project commenced in 2007 and A$70m was spent on development including permits and Gladstone Harbour dredging studies and approvals. In August 2011 LNG Ltd was granted Pipeline Licence 161 to construct a 21km pipeline from the Callide Infrastructure Corridor to the site. The project is still live but has been written off in LNG s accounts. Technology The OSMR (Optimised Single Mixed Refrigerant) technology involves 3 proven features of:- Ammonia Auxiliary Refrigeration Combined Heat and Power Technology Aero-Derivative Gas Turbines and Compressors These features allow lower capital and operating costs, shorter construction times, improved fuel and energy efficiencies and lower environmental footprints. The technologies are progressively being fully covered by patents with some already obtained in Europe, Australia and China with patents pending in most likely markets for LNG Ltd and its partners. Financial History JUNE YEAR 2009A 2010A 2011A 2012A 2013A DEC H 2013E Assets A$m Cash A$m Shareholder Equity A$m Shares on issue m Earnings A$m Focus Research Investment Notes 4

5 INVESTMENT REVIEW LNG Ltd is a small company with a potentially powerful position in the global seaborne LNG market which is currently in a major long term expansion. Global seaborne LNG is currently over 260mtpa and is forecast to rise over 50% to almost 400mtpa by LNG Ltd has a project that would make up to ~2% of this trade. The company s OSMR LNG technology has allowed an innovative lower cost development to be established at the Magnolia LNG Project in Louisiana and involves some world standard energy companies as offtake partners and with some important midlevel marketing and finance groups as project partners. LNG Ltd has developed the Magnolia Project over the past 12 months and has agreements for project equity, has input and offtake arrangements and is progressing FERC approvals for plant construction and operation. Magnolia LNG already has approval to export up to 4 mtpa to countries with a Free Trade Agreement(`FTA ) with the US and has recently applied to increase that approval to 8 mtpa. In addition, to provide great flexibility to supply to global markets, Magnolia also applied for up to 8mta to Non Free Trade Agreement countries which opens up markets in Japan and Europe. The project is ready to begin construction in first half 2015 with a 36 month build schedule to give first LNG shipments in first half The investment group Stonepeak Infrastructure Partners, comprising a former infrastructure team from the market leading Blackstone Private Equity Group, will earn an interest of approximately 50% of the project through its underwriting of the estimated US$660m equity component required from financial close. It will also assist In securing the approximately US$1,540m in long term debt financing required to complete the first two trains of the project. The basis of Magnolia LNG will be a tolling contract whereby the global trading group Gunvor will source and supply the gas and arrange sale and delivery of LNG to markets in Sth America, Europe and Asia. Magnolia LNG will be paid a tolling fee. The tolling arrangement brings a fixed income of US$3.7bn per train over 20 years which translates into around US$185mpa at approximately 2mtpa. With the current plan now two trains, this tolling fee will become about US$380mpa. As the tolling arrangement also provides for operation and maintenance costs the tolling fee is essentially an EBITDA from which LNG Ltd would deduct its share of the D&A and interest. Market interest in US LNG exports is high such that about 20 projects have been proposed and the Sabine Pass Export LNG Project alone has offtake agreements covering over 20mtpa. LNG Ltd considers it highly likely that Magnolia LNG will achieve additional offtake interest to ensure the third and fourth trains will be included to make it an 8mtpa operation. Tolling income is therfore likely to be in excess of US$750mpa. The team at LNG has had over 25 years experience in LNG and power station project development and delivery in Australia, Indonesia and India. The Magnolia Project follows the same process of obtaining start-to-finish contracts for supply and construction/finance/offtake as earlier projects. The team has successfully pioneered innovative LNG plants and gas-fired power stations in Australia, SE Asia and India. LNG pricing into Asian markets is currently oil price linked and has a basis of the Gj (or ~one million BTUs = 1.055Gj) price equal to about 14% of the Japanese Crude Import Cocktail (`JCC ) oil price (roughly a US$2-3/bbl quality discount to Brent) in US$/bbl giving around US$15/Gj delivered. This price supports new projects (particularly Australian and PNG) LNG plant capital, operating and shipping (+ return on capital) cost of ~US$7/Gj leaving input gas costing up to US$8/Gj. In contrast, the Henry Hub gas price in the US is substantially lower at under US$4/Gj so would allow export to US Free FTA countries at about US$7/Gj on a FOB basis. Markets for Magnolia LNG could be for Japan, Korea and Europe but more convenient markets are likely to be in South America where most countries have well below average gas consumption in their energy portfolios but strong gas consumption growth. 5 Focus Research Investment Notes 5

6 The market for LNG is dominated by Qatar in the Middle East Gulf region as the major supplier and Japan and Sth Korea as the major buyers. Japan and Sth Korea would have obviously been concerned over the political and technical risks of supply through the Straits of Hormuz so had taken supply from Indonesia (where LNG exports are currently in sharp decline) and also encouraged new supply from Australia and from PNG. The capital costs associated with the new LNG projects are vast and reflect the issues of remote locations and expensive labour costs for skilled operators. Oil prices have largely recovered from the GFC and so the LNG price has also been strong. The recent price volatility of WTIC against Brent oil prices has affected these ratios but a data series of LNG in US$/Gj against the JCC price shows a range of 12-18% and might have a lower level than this graphic of LNG vs WTIC less US$3/bbl. Source: Indexmundi Asian buyers have been prepared to pay a construction and energy security premium for LNG due to the versatility of the fuel in distribution and in power generation and to cover potential risks to supply through the Straits of Hormuz from Qatar and others. Whilst US gas may prove to be cheaper, the oil price-linked security premium is likely to stay for some time. Asian LNG purchasers also recognise that US gas exports may yet still be subject to future concerns over competing domestic demand. European gas prices are also much higher than the US domestic prices so they too would provide a price buffer that would allow profitable LNG shipments to Europe. Source: Cheniere Energy Inc 6 Focus Research Investment Notes 6

7 FOCUS RESEARCH VALUATION ASSESSMENT LNG Ltd has a project that is well situated in place and time and has large corporations as development partners. The agreed tolling arrangement with Gunvor gives US$2.10/mmBTUs (~US$1.99/Gj) with fixed operating and maintenance (O&M) fees to produce net operating income (essentially EBITDA) to the Magnolia Project of around US$185mpa for each of the first two 2mtpa trains. Two trains at 4.0mtpa would give over US$380mpa and four trains would give over US$750m. NPAT estimates give normalized earnings of around US$60mpa (A$63mpa - A$0.20cps) for 4mtpa and US$150mpa ( A$158mpa A$0.50cps) for 8mtpa net to LNG before licensing fees. The project NPV 6 at current prices in real terms is around US$400m for the first train at 2.0mtpa increasing to >US$1,100m at 4mtpa with completion of the second train. Four trains would generate an NPV 6 of over US$2,400m at completion. The Cheniere Energy Sabine Pass project already has as many as 5 trains of 4.5mpta (22.5mtpa) with blue chip LNG customers and potential of 27mtpa so the Magnolia Project is highly likely to find additional customers to take another 4mtpa LNG to give the 8mtpa. NPV analysis on the basis of a fixed tolling rate and CPI linked costs produces the following table for a range of discount rates. Current low riskless interest rates indicate a 6% real rate is appropriate. NPV AND IRR ANALYSIS OF THE MAGNOLIA PROJECT NPV US$M real discount rate One Train 1.7mtpa One Train 2.0mtpa Two Trains 4.0Mtpa Three Trains 6.0mpta Four Trains 8.0mtpa 4% ,654 2,622 3,419 6% ,145 1,846 2,410 8% ,299 1,763 10% ,200 IRR% The arrangement with Stonepeak to provide around 50% of the equity immediately values the Magnolia Project at US$1145m at FID. LNG s 50% share would therefore be US$572m and this figure implies an acquisition basis real discount rate for the Magnolia Project of under 6% and an IRR of 19.5%. The IRR for LNG Ltd should be higher than this and lower for Stonepeak. Stonepeak will also pay LNG a developer s fee of 3% of the total capital cost (US$66m) which will be brought into LNG Ltd s accounts as earnings at FID, probably in FY2015. Magnolia LNG will also pay LNG Ltd a technology licence fee of US$25m per 4mtpa with 50% payable at FID and 50% upon commissioning. At 8mtpa this will be US$50m to LNG Ltd. LNG Ltd should be able to retain close to 50% of the Magnolia LNG project to 4mpta and may be able to increase ownership in the subsequent trains. Cashflows from the first two trains should support the subsequent construction of third and fourth trains which is projected to cost only around another US$650m each. LNG Ltd will have the value of the OSMR technology where licensing fees have now been agreed and also the value of the Gladstone Fisherman s Landing LNG Project. These are quantifiable at about US$50m by 2018 in the short term but could be very much larger in the future should LNG Ltd, or other parties, develop a new project on similar or better terms than Magnolia LNG. LNG Ltd should also benefit should the Fisherman s Landing Project at Gladstone receive a rejuvenation through a confirmed supply of gas. 7 Focus Research Investment Notes 7

8 With the confirmation of the Stonepeak equity underwriting of US$660m on 24 October 2013, the Focus Research risk adjusted valuation at this stage for the Magnolia LNG Project with two trains for 4mtpa indicates the current fair value of LNG Ltd is between A$0.60 and A$0.75/share. Value crystallisation would be further achieved upon Confirmation of a Term Sheet for debt funding Confirmation of Offtake Contract with GNF Confirmation of Tolling Contracts with Gunvor Additional gas trains agreements concluded Appointment of EPC Contractor Approval for Magnolia to export to non FTA countries Final Investment Decision (FID) and Financial Close Receipt of US66m development fee on FID Receipt of technology licensing fees Commissioning of Magnolia LNG Plant in 2018 The valuation process is complex and will become more transparent and firm as the above additional milestone steps suggest. Assessing Magnolia Stage One needs to take into account the existing position of LNG Ltd as a technology owner and project developer. This position is confirmed and enhanced by the Stonepeak conditional Equity Underwriting of US$660m. The base value for LNG Ltd is now A$ /share and a path to its share of Project NPV and of the Developer fees and Technology licensing royalties gives around A$2.60 as a 4-5 year target for Magnolia LNG at 4mtpa. In reviewing the Magnolia LNG Project cashflows it is clear that LNG Ltd should earn around A$0.20 per year at 4mtpa and A$0.50 with the expanded production base. 8 Focus Research Investment Notes 8

9 MAGNOLIA PROJECT STAGE ONE Valuation process toward an adjusted value of over A$2.60/ share LNG Ltd share:- Project Value share (%) Net to LNG LNG Share US$/share A$/share Cumulative NPV 6 US$525m Value US$m Project Developer 2% % $0.08 $0.08 $0.08 Gunvor Agreement 4% % $0.16 $0.17 $0.25 Gas Natural Offtake 2% % $0.16 $0.17 $0.42 Stonepeak Agreement 9% % $0.32 $0.34 $0.76 Gunvor Contract 9% % $0.16 $0.17 $0.93 Gas Natural Contract 9% % $0.16 $0.17 $1.10 Financing details 4% % $0.08 $0.08 $1.18 Developer Fee (disc a/tax) 0% % $0.13 $0.14 $1.32 Technology Fee (disc a/tax) 0% % $0.08 $0.09 $1.41 FERC Approval 9% % $0.16 $0.17 $1.58 Financial Close 26% % $0.49 $0.51 $2.09 Plant Commissioning 26% % $0.19 $0.51 $2.60 Technology (disc a/tax) 0% % $0.08 $0.09 $2.69 Total 100% $2.47 $2.69 The cumulative additions to value from each project component step are a guide to the understanding of the value of LNG Ltd. Naturally all these are subjective but the value accruing to LNG Ltd through Magnolia LNG Project milestones to date is clear, especially with the key equity funding from Stonepeak effectively valuing the Magnolia Project at US$1145m at Financial Close and Stonepeak acquiring 50%. Financial Close should add as much value as Plant Commissioning. LNG Ltd currently has value through having 100% the Magnolia LNG Project which today is estimated to be worth about 10-15% of the potential NPV. The confirmation of the Stonepeak equity should now result in a major uplift to the valuation of LNG Ltd in the near term to around A$0.75 per share. Subsequent milestones in the development of the Magnolia LNG Project should provide further value adding drivers such as the confirmation of contracts with Gunvor and Gas Natrual Frenosa and additional offtake partners for Stage One to join Gas Natural Frenosa. 9 Focus Research Investment Notes 9

10 MAGNOLIA PROJECT STAGE TWO The Magnolia LNG Project is currently a 4mtpa project but it is likely to very soon become considered as an 8mtpa project. The strongest indications will be the interest shown in additional offtake arrangements from major LNG buyers from Asia, Latin America or Europe. Valuation process toward an additional adjusted value of over A$2.00/ share LNG Ltd share:- Project Value share (%) Net to LNG LNG Share US$/share A$/share Cumulative NPV 6 US$525m Value US$m Magnolia Stage One [100%] % $2.39 $2.52 $2.52 LNG Ltd. s Developer fees % $0.16 $0.17 $2.69 Gunvor Agreement II 10% % $0.16 $0.17 $0.17 Offtake Partner II 10% % $0.16 $0.17 $0.34 Financing details 10% % $0.16 $0.17 $0.51 Technology Fee (disc a/tax) 0% % $0.08 $0.09 $0.60 Financial Close II 35% % $0.64 $0.68 $1.27 Plant Commissioning 35% % $0.64 $0.68 $1.94 Technology Fee (disc a/tax) 0% % $0.08 $0.09 $2.02 Total Stage Two 100% $1.91 $2.02 Total Combined Project $4.30 $4.54 $4.54 Total Project +Developer Fees 1490 $4.46 $4.71 $4.71 The success at Sabine Pass to get around 20mpta LNG offtake is very encouraging and should assist Magnolia with getting a further 4mtpa. The two Sabine Pass listed entities, Cheniere Energy Inc and Cheniere Energy Partners L.P., are currently capitalised at 5.7 and 7.9x respectively after-interest pretax cashflows in respect of 18mtpa in LNG Ltd on the same basis would be capitalised within the range of US$625m- US$870m (A$2.11- A$2.94) compared to the current US$99m. Additional values for LNG Ltd No value is currently placed on the Gladstone LNG Project, the OSMR technology, nor any new project. The Fisherman s Landing Gladstone Project is currently on hold but a value crystallizing action is possible at any time. A second LNG project might also eventuate in North America. Should LNG Ltd establish a second North American Project the market place should look at this company very closely and consider the implications of many new and much lower cost OSMR LNG plants in established gas supply regions. The possibilities of additional plants are also likely to have a significant impact on the valuation of the technology and it is possible that a licence fee income stream over time could be worth more than LNG Ltd s interest in Magnolia LNG itself. A major rerating would be compelling for a new global technology in a major growth industry. 10 Focus Research Investment Notes 10

11 Magnolia LNG Project Stage One 4mtpa Cashflow and Earnings Analysis LNG Ltd Shares on issue 311 Magnolia Project Two train Total June Year US$/A$ CPI 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% Tolling Pricing Tolling Fees US$/mmbtu LNG production Mtpa Revenues US$m Tolling Fees ,400 Total ,400 Operating costs Magnolia EBITDA ,400 LNG share 50% ,700 Depreciation Amortisation Total ,089 EBIT ,611 Interest Pretax ,170 Tax NPAT US$m ,395 EPS US$ EPS A$ Cash generation ,184 CGPS US$ CGPS A$ Magnolia LNG Project Stage Two Combined 8mtpa Cashflow and Earnings Analysis LNG Ltd Shares on issue 311 Magnolia Project Two train Total June Year US$/A$ Tolling Pricing Tolling Fees US$/mmbtu LNG production Mtpa Revenues Tolling Fees ,245 Total ,245 EBITDA ,245 LNG share 50% ,123 Depreciation ,462 Amortisation Total ,011 EBIT ,112 Interest Pretax ,853 Tax NPAT ,141 EPS US$ EPS A$ Cash generation ,152 CGPS US$ CGPS A$ Focus Research Investment Notes 11

12 BUSINESS PLAN & STRATEGY Owners and developers of new technologies in capital intensive industries usually encounter great difficulty in finding champions to promote application of such an innovation. In LNG Ltd s case, its revolutionary OSMR technology gives as much as 50% capital cost and 30% operating cost advantage over conventional technology plants so that project IRRs and NPVs are very attractive against conventional peers. Accordingly, LNG Ltd has a business plan that is to seek to develop its own projects using prominent project partners to accept risks beyond its own limited balance sheet. The management at LNG Ltd has had over 25 year s experience in small scale LNG plants and the development of energy projects including gas fired power stations in Indonesia and India. The projects have been up to US$400m and have been with key partners such as El Paso Gas. The projects have typically been Project Management opportunities where the team has ensured beginning to end contracts for access of energy input, all environmental and bureaucratic approvals, project construction (including liquidated damages provisions for delays and cost overruns), offtake agreements, project and other debt facilities and confirmation of equity. This business plan combined with the technology should ensure high IRRs (>20%) for projects, modest equity requirements and attractive technical and financial features for project partners. Success at Magnolia LNG with this technology configuration is likely to lead to participation in additional LNG projects being offered. The options include not only participation but also opportunities to licence all or part of the technology to third parties. LNGL will receive a licence fee from Magnolia LNG of US$25m per 4mtpa train with 50% payable at Financial Close and 50% at Commercial Operations Date. The fee payable per train will be US$12.5 million and at 8mtpa would be a total of US$50m. As noted above, should the OSMR technology be seen to be successful at Magnolia then it could become a significant new technology in a major growth area and would be very competitive against existing technologies. Royalties can be extremely valuable assets and can achieve high NPVs at low discount rates. It is not inconceivable that the royalty and any possible carried equity in other projects could be worth more to LNG Ltd than the Magnolia LNG project itself. 12 Focus Research Investment Notes 12

13 MAGNOLIA PROJECT Key Points» Well located on Calcasieu Shipping Channel to the Gulf of Mexico» Linked to Kinder Morgan Louisiana Pipeline with access rights under negotiation» Initial 4mpta (2x2mtpa) has capital cost of US$2,200m» Expansion to 8mtpa (4x2Mtpa) to cost additional US$1300m» Gas supply and offtake arrangements in place for first 4mtpa» Tolling arrangements to apply to conversion of gas into LNG» FERC regulations being met and DOE already approval given for export of 4mtpa» US$660m in equity already underwritten and US$1540m in project debt sought» FID and construction commencement expected in mid-2015 The Magnolia Project has a four year option over 108 acres site near the city of Charles Lake in Louisiana on the Calcasieu Shipping Channel about 50km inland from the Gulf of Mexico. The site has excellent existing infrastructure and is on an inlet opposite to an existing LNG regasifying plant. The site is well served by the underutilised Kinder Morgan pipeline with 2.7 bcf/d capacity that links into six major pipelines therfore providing multiple options for gas supply. Each of the Magnolia LNG 2mtpa LNG trains requires around bcf/d The Magnolia Project will be based on LNG Ltd s proprietary OSMR technology that will allow construction at about 50% of the cost of comparative capacity and will have unit operating costs about 30% below competing projects. The Project would consist of two 2.0mtpa (1.7mtpa firm and guaranteed and 0.3mtpa interruptible capacity) trains that use the OSMR technology of compressors and liquefaction units and two LNG storage tanks. Gas would be delivered into the plant by the Kinder Morgan pipeline which already passes on the site and sent out as LNG to shipping tankers. Capacity would cater for ten to twelve 50-65,000t LNG tankers per month. 13 Focus Research Investment Notes 13

14 Nameplate capacity is planned at 2x2.0mtpa per train and site space is available, subject to all approvals, for two additional trains. No additional LNG tanks are required for trains 3 and 4. The capital cost of the Project is estimated at around US$2200m for the first two trains including development of the site and construction of the two 160,000m 3 storage tanks. The LNG compression and liquefaction modules would be constructed offsite and delivered and set up on site. The Second Stage of third and fourth trains (4x2.0mtpa = 8mtpa LNG) would utilize Stage One storage and shipping facilities and require only around US$650m(2013) each for construction, delivery and set up of a LNG train. CAPITAL COSTS ESTIMATES FOR THE MAGNOLIA PROJECT US$m Train 1 Train 2 Train 3 Train 4 LNG Plant LNG Tank Jetty Total Capitalised Interest Total Cap cost/mtpa Cum cap cost/mtpa Mtpa LNG Source: LNG Ltd and Focus Research estimates The Magnolia Project has been able to make progress through a combination of the project development expertise and the new technology within LNG Ltd that has been attractive to quality supply and offtake partners and to medium scale equity and debt financing groups. In addition, the number of new LNG plants being built around the world and the direct comparison of the Sabine Pass plant nearby in Louisiana has given financiers and operators a large sample of current capital and construction costs. The OSMR technology gives clear comparative reductions in capital costs and also in operating costs. The Cheniere Energy Sabine Pass Operation also gives a high level of disclosure on input and offtake partners and also on FERC and other government regulatory requirements so that Magnolia LNG becomes a much easier project to understand and to also compare and contrast. Incoming partners therefore can have clear path to risk analysis and reasonably confident participation. REGULATORY REGIME AND FERC The Magnolia LNG Project has five Federal regulatory agencies to satisfy for its approvals. The Department of Energy gives the key approval to export gas to approved countries who have a Free Trade Agreement (FTA) with the US. The Magnolia LNG Project achieved this approval in February 2013 for up to 4 mtpa. The DOE also handle applications for Non FTA The US has given FTA status to Korea and many Sth American and European countries but China, Japan and India do not yet fit within this status. Federal Energy Regulatory Commission (FERC) has widespread control over gas production, transport and usage facilities. Magnolia LNG is in the FERC process stage that is referred to as Pre Filing and expects that by March 2014, that FERC will approve Magnolia to be fully filed. The filing process will take another 12 to 15 months and when granted, Magnolia will be issued with a Notice to Proceed and will be able to progress to financial close. The FERC process covers all the environmental, operational and safety issues for the project. The US Department of Transport needs to be satisifed shipping issues are covered. 14 Focus Research Investment Notes 14

15 The Maritime Administration (part of Dept of Transport) needs to be satisfied over water quality standards and coastal uses The US Coast Guard needs to be satisfied about ship movements and dredging regime for the port and berths. PARTNERS IN THE MAGNOLIA PROJECT As noted, the Magnolia Project has, because of LNG Ltd s project development expertise and the new OSMR technology, been attractive to quality supply and offtake partners and to medium scale equity and debt financing groups. The transparency of the Sabine Pass Project has also been helpful. Equity Partners LNG Ltd has sought equity partners to provide 100% of the project equity required at financial close. Stonepeak has agreed to underwrite the estimated US$660m in project equity required at financial close and to assist in gaining project debt funding. By providing this US$660m the Stonepeak Infrastructure Partners LP will earn an equity interest of around 50% in the project. Stonepeak Partners invests in `North American infrastructure assets with stable cash flows, inflation linkage, and high barriers to entry and manages in excess of $1.65 billion of investment capital. Stonepeak was the infrastructure investment division of the major private equity group Blackstone of New York and is run by two Australians previously members of the Macquarie Bank infrastructure team. The team had raised over US$2bn of equity funding for North American infrastructure investmenst prior to forming Stonepeak. Input and Offtake Partners The foundation partner with gas supply and offtake is Gunvor Group, global energy trading company who will be responsible for acquiring the input gas and finding offtake partners. Gunvor Group is one of the world s largest independent commodity trading companies by turnover providing integrated trading products and logistics services for participants in the worldwide oil and energy markets. Established in Scandinavia in 2000 it has grown to have over 1,600 employees generating turnover of almost US$100bn through experienced staff and leading edge IT systems in its trading platforms. The company has a strong presence in Russia and achieves around one third of its trading volumes there. It has also expanded its operations into Asia, the Middle East and the Americas with a core aspect of its growth strategy being investments in energy infrastructure complementary to the company s trading function. It has also acquired stakes in coal mining operations, has purchased refinery assets and made further investments in pipeline, storage and terminals. Gunvor has also added global coal and freight, emissions and renewables, natural gas and LNG, and other commodities to its established activities in the trading, transport and storage of crude and oil products. Gunvor recently established a position in Panama (a US FTA country) where it will have an interest in a local land based LNG receiving terminal. The company trades over 130m tonnes pa, including around 2.5 million barrels of oil per day, with turnover approaching US$100bn and earnings of over US$400m. The company is very well supported in trade finance with over US$15bn in credit facilities from major banks and banking syndicates. 15 Focus Research Investment Notes 15

16 Offtake Partners Gas Natural Fenosa is a Spanish state-owned energy utility with interests throughout the Mediterranean and with a strong presence in South America. The company sees very strong growth prospects for gas distribution in Panama, Colombia, Mexico, Argentina and Brazil through reticulation and gas-fired power generation. GNF has a market capitalization of over $18 billion. It is a leading multinational in this gas and electricity sector with activities in over 25 countries and more than 20 million customers and annual distribution of 30 billion m3 of gas. GNF s subsidiary Gas Natural SDG S.A has indicated an interest through a Heads of Agreement for a Tolling Agreement to take up to 1.7mtpa LNG from the Magnolia Project. GNF will also take 3.5mtpa LNG in the First Train from the Sabine Pass LNG plant which will be 50% of that Project s First Train output. 16 Focus Research Investment Notes 16

17 FISHERMAN S LANDING PROJECT KEY POINTS» Well located at Gladstone Harbour» Major pipelines within 20 km delivering gas to other Gladstone LNG projects» Project has a pipeline licence to connect to Fisherman s Landing» Offtake agreements can be arranged for 3mtpa LNG» Gas supply arrangements awaiting clarification» Tolling arrangements would guarantee fee of about US$3.00/Gj The Fisherman s Landing site located in the Gladstone Harbour already has substantial infrastructure, including Jetty #5, in place. The shipping channel requires only minimal harbour deepening and its south side Gladstone Harbour location gives much lower infrastructure costs than the other Gladstone Harbour projects which are all over on Curtis Island on the northside of the harbour. The site is only 20km from the Callide hub which includes the Jemena 627km Queensland Gas Pipeline from Wallumbilla to Gladstone and Rockhampton. Jemena is the result of the aggregation of power stations, pipelines and services from several major companies (Alinta, United Energy, Agility, Duke AGL etc) into a A$9bn utilities ( power, gas and water) asset company with 2500 employees and >2000km of pipelines and is wholly owned by Singapore Power. The Project is based on the OSMR technology and two 1.5mtpa LNG trains The LNG Ltd s OSMR technology is an evolutionary development of three non-lng but standard proven technologies into a highly cost-effective process. These simple standard technologies provide lower capital and operating costs and better fuel efficiencies. The project footprint is small and compression/liquefaction units are modular. Capital costs include LNG liquefaction plant and on site storage tanks. The pipeline (from the Callide gas hub) and infrastructure, including dredging, are only a minor part of the project. Operating costs, excluding gas used in the LNG plant under the tolling model, and maintenance (O&M) costs (~US$0.60/Gj) would cover a 24/7 staff of about 30 persons. LNG plant design incorporates compression and liquefaction components that can be imported from construction facilities offshore. On site construction activities will be limited to site layout infrastructure and a 180,000 m3 LNG storage tank. The estimated Capital cost, supported by previous detailed engineering by SKEC ( in 2009/10) and in 2013 by the Company s major shareholder in HQC is US$1.1 billion with guaranteed 1.5mtpa from the first train, with a nameplate capacity of 1.9mtpa. Fisherman s Landing can be recommenced within a short timeline once a secure source of gas can be established 17 Focus Research Investment Notes 17

18 THE OSMR TECHNOLOGY Most LNG plants have been constructed to convert methane gas via pipeline from gas reservoirs and to compress and liquefy the gas into LNG. Typical LNG plants treat condensate-rich gas feeds that require removal facilities for condensate and also for gases such as helium and CO2 as well as for sediment and water. The scale of these projects is usually large and often with potential for expansion. The projects generally require the large scale to spread capital costs and typically the projects capital costs include large components covering robust storage facilities and new ports in remote locations. To have the natural gas condensed into a liquid at close to atmospheric pressure by cooling it to approximately 162 C has required heavy duty compression and liquefaction facilities and most LNG plants have typically relied upon the 3CMR (or APCI) process for over 80% of all LNG production. Energy companies have also sought lower cost and more efficient production routes with Conoco-Phillips developing its Optimised Cascade process, SHELL its DMR process and Linde with its technology for Norway s Statoil. The OSMR (Optimised Single Mixed Refrigerant) technology has taken a different approach and is a major departure from standard practices. This major innovation takes three standard processes not used in the LNG industry to compress and liquefy the methane in a highly cost-effective process. The components are:- Ammonia Auxiliary Refrigeration faster and lower freezing point circulating fluid Aero-Derivative Gas turbine compressors fast and low cost compressors Combined Heat and Power Unit waste heat recovery conversion to plant power These simple standard technologies provide lower capital and operating costs and better fuel efficiencies. The project footprint is small and compression/liquefaction units are modular. The ammonia refrigeration plant precools the liquefaction refrigerant to increase plant throughput and hence LNG production capacity by 20% and also cools the inlet air to improve gas turbine power output by 15%. OSMR uses aero engine-derivative gas turbine compressors that have better fuel efficiency compared to industrial turbines and also provide higher reliability and availability. OSMR also incorporates a waste heat recovery unit from the gas turbine exhausts for combined heat and power generation to drive the steam turbines in the ammonia refrigeration plant and reduce gas fuel consumption in the liquefaction process and to also generate power for the other components in the plant. The major results are more efficient cooling using gas turbines and ammonia refrigerant that results in 30% greater energy efficiency. This is shown in the consumption of methane in the LNG production process where OSMR uses 30% less than the 3CMR process. 18 Focus Research Investment Notes 18

19 Comparative data on refrigeration turbines shows OSMR to have lower unit power requirements and also lower gas as fuel consumption of input fuel (~6.5% vs ~9%). Comparative data APCI 3C3/MR COP-CASCADE OSMR Train Size (mtpa) Refrigeration Power Gas Turbine (x Nos) 85 MW Frame 7 32 MW LM2500 (x6) 32 MW LM2500 (x2) Steam turbine (x Nos) (x2) MW/mpta Plant Power Generators Gas Turbine Driven Gas Turbine Driven Steam Turbine Driven Installed 70MW 30 MW 8MW Running 30MW 25 MW 6 MW MW/mtpa running Capex (US$/mpta) Gas consumption % input Source LNG; Focus Research The net result are 50% lower capital cost per annual tonne of capacity 30% improved energy efficiency 25% shorter construction time 30% lower CO 2 emissions 30% reduction in per tonne LNG operating costs. The modular character of the cooling, compression and liquefaction units also allows offsite construction and very rapid on site installation. 19 Focus Research Investment Notes 19

20 Global Development and Licensing LNG Ltd s OSMR technology is an evolutionary development of three non-lng but standard technologies into a highly effective processing route. The offsite construction of these modular units allows for a much smaller onsite workforce and reduced project risk. Recent cost blow outs in major resources projects are often caused by delays in one component that in turn extends site overheads and pushes up capital costs. LNG Ltd will receive technology licensing fees from Magnolia LNG being a US$25m fee covering the two train Stage One at 4mtpa with 50% paid at FID and 505 on commissioning. A further US$25m will apply to Stage Two for the additional 4mtpa. Should LNG Ltd be successful in participating in additional LNG projects it would receive additional royalties and/or carried interests. The benefits of the lower capital and operating costs of the OSMR process should capture the eye of gas owners and LNG producers such that the value of the royalty stream could be greater than LNG Ltd's interest in the Magnolia LNG Project itself. 20 Focus Research Investment Notes 20

21 PEER COMPARISON SABINE PASS LNG PROJECT Key Points» Located on Sabine Pass River, 7 km from Gulf of Mexico» Linked to Creole Trail Pipeline and Louisiana/Texas gas network» Initial 2 train 9mtpa will cost around US$6bn» Expansion to 18 then 27mtpa planned» 20 year take or pay fixed price arrangements in place» Offtake partners include BG Group, Kogas, Gas Natural, GAIL and Total Sabine Pass Operations were established in 2008 as the world s largest LNG import and regasification facility and located in Cameron Parish on the Sabine River Navigation Channel which divides Louisiana from Texas. The facility could treat and send out 4BCFpd (~6mtpa LNG) from receivals of up to 400 LNG vessels per year and has storage of 16BCF. The operation was built and owned by the Cheniere Energy Inc (NYSE:LNG) group and also had its own integrated pipeline system (150km Creole Trail Pipeline) into the vast Texas- Louisiana gas pipeline network. The facility was established to re-gasify imported LNG at a time when expectations were for shortages of gas to the US markets. US natural gas regulation under Federal Energy Regulatory Commission (FERC) control of pipelines and storage is strict and the Sabine Pass facility required special clearance to receive imported foreign LNG and re export it. The substantial expansion of US natural gas reserves through the recognition and commerciality of shale gas has removed all concerns of shortages of gas and has allowed limited export of gas as LNG. This change in market reality encouraged Cheniere to change the character of the facility to a bi-directional operation that could also liquefy US domestic gas for export. DOE and FERC approvals to commence the liquefaction project were obtained by early 2013 and construction is underway on Trains 1 to 4. The Sabine Pass site has been planned to accommodate up to six LNG trains each capable of processing approximately 3 Bcf/d of natural gas. The nominal capacity of each liquefaction train would be approximately 4.5 million mtpa giving potential capacity of 27mtpa utilizing up to 18BCFD. The existing infrastructure from the receiving terminal will make the extension to liquefaction easier through the utilization of the five storage tanks and two berths at the Sabine Pass terminal. The 853-acre Sabine Pass site has access to unconventional gas plays in Louisiana and Texas through its interconnections with multiple interstate and intrastate pipeline systems including the Creole Trail Pipeline. Marine access via the river and manmade canals is less than 7km through to the Gulf of Mexico sea lanes. Construction of Trains 1 and 2 began in August 2012 and that of 3 and 4 in May Operation of Trains 1 and 2 is scheduled for and 3 and 4 for Most of Train 5 already committed. Marketing arrangements are also being sought for the remaining two trains giving a total of around 20mtpa LNG. 21 Focus Research Investment Notes 21

22 The large capital requirements required the Sabine Pass operations to be established in a listed subsidiary Cheniere Energy Partners (NYSE:CQP) with Cheniere Energy holding a net 57.9% and Blackrock holding 29%. The structure is set out in this slide. In this tax effective structure Cheniere Energy Inc is the General Partner and Cheniere Energy Partners LP is the Limited Partner. Sabine Pass LNG, as with the Magnolia Project, has entered into five fixed price 20 year LNG take or pay contracts will receive capacity charge payments from the LNG buyers. Buyers include BG Group, Gas Natural Fenosa, KOGAS, GAIL and Total, each of which has entered into an SPA with Sabine Pass Liquefaction and agreed to pay us approximately $723 million, $454 million, $548 million, $548 million and $314 million annually, respectively. The contracts have an equivalent pricing to a tolling arrangement of US$ /mmbtu and a gas price of 115% of Henry Hub. 22 Focus Research Investment Notes 22

23 The quality of the offtake partners is high. Sabine Pass Offtake Agreements Construction time per 4.5mtpa train is estimated at 36-40months compared with 36 months for Magnolia's 2mtpa trains. Capital cost comparisons show the high cost of developing new offshore projects in Australia with field development, pipelines and large scale front end components for gross gas preparation (large scale removal of water, condensate, CO 2, sediment and other gases) compared to those accessing existing gas supplies and where front end gas preparation needs much smaller impurity removal facilities. Some data showing capital costs of new LNG projects compared to Cheniere Energy s Corpus Christi 15mtpa LNG Project. 23 Focus Research Investment Notes 23

24 CAPITAL COST COMPARISON WITH MAGNOLIA The large scale of the Sabine Pass LNG terminal will give capital costs exceeding US$15bn for the first 18mtpa and this is very competitive against Australian offshore LNG projects but Magnolia is only 50% of Sabine Pass. PROJECT CAPEX (US$M) SABINE PASS LNG MAGNOLIA LNG Sunk costs (est) 4, First Train 4.5mtpa 3, mtpa 1,330 Capcost/mtpa Second Train 4.5mtpa 3, mtpa 880 Capcost/mtpa Third Train 4.5mtpa 2, mtpa 600 Capcost/mtpa Fourth Train 4.5mtpa 2, mtpa 600 Capcost/mtpa Totals 18.0mtpa 15, mtpa 3,400 Average incl sunk costs US$m/mtpa Index REGULATORY ISSUES Federal Energy Regulatory Commission ("FERC") The design, construction and operation of the Sabine Pass liquefaction facilities and the export of LNG are highly regulated activities under FERC and DOE. Authorization is needed to site, construct and operate gas liquefaction facilities. Sabine Pass filed a gas liquefaction application with the FERC in January 2011 received final approval orders in April and July 2012 and subsequently written approval to commence site preparation work for Train 1 through Train 4. The FERC approval required Sabine Pass Liquefaction to obtain certain additional FERC approvals as construction progresses. To date Sabine Pass Liquefaction has been able to obtain these approvals as needed. As noted, construction has commenced with start dates of 2016 for Trains 1 and 2 and 2017 for Trains 3 and 4. FERC approval for Trains 5 and 6 has yet to be received. FERC and the U.S. Department of Transportation require monitoring of the operation and maintenance of the facilities. DOE Export Licence Sabine Pass has received export authorizations for LNG. The first covers authorization of the export of up to the equivalent of 16 mtpa (approximately 803 BCF) of domestically produced LNG by vessel from the Sabine Pass LNG terminal to countries with which the United States has a Free Trade Agreement providing for national treatment for trade in natural gas ("FTA") for a 30-year term. The second order authorizes the export of up to the equivalent of a further 16 mtpa (803 BCFPA) to non-fta countries for a 20-year term, beginning in Exports of natural gas to countries with which the United States has an FTA are "deemed to be consistent with the public interest" and authorization to export LNG to FTA countries is granted by the DOE without "modification or delay". Sabine Pass Liquefaction received approval to export to FTA countries in September FTA countries which import LNG now or will do so by 2016 include: Chile, Mexico, Singapore, South Korea and the Dominican Republic. Exports of natural gas to countries with which the United States does not have an FTA are considered by DOE in the context of a comment period whereby interveners are provided the opportunity to assert that such authorization would not be consistent with the public interest. Sabine Pass Liquefaction received final approval to export to non-fta countries in August Focus Research Investment Notes 24

25 SABINE PASS PROCEDURE TIMETABLE PROVIDES A TEMPLATE FOR THE MAGNOLIA PROJECT TARGET DATE TRAINS TRAINS TRAINS MILESTONE 1 & 2 3 & 4 5 & 6 DOE export authorization Received Received T5: Received FTA Pending Non-FTA FERC authorization - FERC Order Received Received 2H14 - Certificate to commence construction Received Received Issue Notice to Proceed Completed Completed 1H15 EPC contract Completed Completed 2H14 Financing 1H15 - Equity Completed Completed - Debt commitments Received Received - Certificate to commence construction Received Received Issue Notice to Proceed Completed Completed 1H15 Commence operations 2015/ / Completed Completed T5: Completed 7.7 mtpa 8.3 mtpa T6: 2H13 Definitive commercial agreements mtpa mtpa mtpa - BG Gulf Coast LNG, LLC Gas Natural Fenosa KOGAS GAIL (India) Ltd Total Gas & Power N.A Centrica plc 1.8 Total Cum Total SABINE PASS PARTICIPANTS CHENIERE ENERGY INC (NYSE:LNG) CHENIERE ENERGY PARTNERS (NYSE:CQP) Shares on issue (m) Shares on issue (m) Share price (US$) Share price (US$) Market Cap (US$bn) 9.46 Market Cap (US$bn) 7.23 Est Distribution (US$mpa)* # 1665 Est Distribution (US$mpa)* # 2595 Est Net Distribution (US$mpa)* 1665 Est Net Distribution (US$mpa)* 910 Est Distribution /unit*# 6.89 Est Distribution /unit *# 4.00 Est P EBDA R x 5.7 Est P EBDA R x 7.9 *Cheniere Energy 15 October 2013 # EBDA (net of interest) CHENIERE ENERGY INC (NYSE:LNG) SHARE PRICE HISTORY Cheniere Energy, Inc. (`Cheniere ) is a Houston-based energy company that owns a 58% interest in Cheneire Energy Partners LP which operates the Sabine Pass LNG terminal on the Sabine River which defines the Texas-Louisiana border. It also has a 100% interest in Cheneire Marketing LLC which markets LNG from Sabine Pass and is also entitled to 2mpa of Sabine Pass LNG output anda 100% interest in Corpus Christi Liquefaction LLC which has a project to develop three train liquefaction facilities with aggregate design production 25 Focus Research Investment Notes 25

26 capacity of up to 15 mtpa of LNG and located near Corpus Christi, Texas, also on the Sabine River. The Sabine Pass LNG liquefaction project is planned as a 6 train operation with capacity of up to 27mtpa LNG. The Sabine Pass LNG Terminal was developed as the world s largest LNG receiving depot to reliquefy incoming LNG for distribution into the US gas pipeline system and commenced operation in In a tax effective series of transactions, Cheneire set up Cheneire Energy Partners LP as a subsidiary holding an direct 55.9% a further 2% indirect interest. The share price is close to all time highs. CHENIERE ENERGY PARTNERS LP (NYSE:CQP) SHARE PRICE HISTORY Cheniere Energy Partners wholly owns the Sabine Pass LNG reliquefication terminal and the new 18mtpa Sabine Pass LNG plant currently under construction. It also owns the 94 mile long 42 inch Creole Trail Pipeline. Cheniere Energy Inc owns a net 58% and Blackrock owns 29% with thje public holding 13.1%. The share price is at all time high. 26 Focus Research Investment Notes 26

27 THE GLOBAL ENERGY MARKET Growth in energy demand in the emerging countries (as described as Non-OECD) has been growing strongly at more than 4.5%pa for over a decade and in 2007 passed OECD which in contrast has had negligible growth over this same time. High prices, energy efficencies and weak economies within OECD have all contributed to the low growth but the raw demand in Non-OECD has overcome all this and now global energy demand is accelerating above the levels of the past few years. Whilst gas is a preferred energy source to displace coal and oil so that OECD growth has been positive,it is still the Non-OECD countries that are driving demand for natural gas. Gas consumption is likely to maintain a high growth rate for some time. Global Gas Consumption millions of tonnes OECD Non OECD Source: BP data Paradigm forecasts Of particular interest is the very low portfolio share gas holds at present in China and India in total energy consumption by fuel type. 4% and 10% respectively are well below the weighted world average of about 22% so imports to these countries are expected to be growing strongly for many years yet. 27 Focus Research Investment Notes 27

28 THE MARKET FOR LNG Seaborne LNG demand is growing rapidly as the global interest in gas exceeds local domestic production and additional gas is sought from major reserves elsewhere. The liquefaction of gas reduces volume by 99% and allows long distance transportation, primarily by sea and where pipeline is inapplicable. As noted, the low levels of gas in the energy portfolios of China and India alone are likely to provide essentially unlimited markets for gas but Japan, Korea and Taiwan (JKT) are also major importers. ASIAN LNG IMPORTS (2000 TO 2025) Source: BG Group interpretation of Wood Mackenzie data (Nov 2012) Supplied: Dr Tony Barker BG Group July 2013 Europe is also becoming a large importer as it copes with declining North Sea gas production and increasing reliance on Russian gas. In addition, Sth America is also becoming an important market with growth in energy deprived Chile and in expanding Mexico, Argentina and Brazil. Current seaborne trade is around 260mtpa but BG Group sees this almost doubling by 2025 and requiring substantial new export capacity. LNG today amounts to almost 10% of total gas consumption. BG Group in this July 2013 presentation highlighted a supply gap of about 75mtpa in 2020 rising to 150tpa in EMERGING LNG SUPPLY GAP Sources:Supply: BG Group interpretation of Wood Mackenzie data (2013 Q1) *Trade: various research house views: Wood Mackenzie, PFC Energy, IHS CERA, Poten & Partners, PIRA, FACTS Globbal Energy, Gas Strategies. The convenience of LNG has made it a global commodity and many countries are now involved. 28 Focus Research Investment Notes 28

29 Sth America is one of the fastest growing LNG import regions with Mexico, Chile and Argentina showing sharply higher imports in recent years. Year Mexico Other Sth America Total (mtonnes) Source: BP data Sth America is therefore likely to be a major market for US LNG exports. Total energy consumption in 2012 was 853mt oil equivalent (6.8% of global energy consumption) and was equal to 39% of US total energy consumption. The figures in 2000 were 609mt and 26%. Gas consumption increased from 20% of energy consumption in 2000 to 26% in Latin America, unlike most major energy consumers has very little coal use so oil and gas are more highly represented. Argentina and Mexico have above average gas share and Trinidad has it is alumium industry that absorbs a high figure and share of gas. Source: BP data Most other Latin America countries have low shares of gas and so represent good growth markets. The big markets are in Chile and Brazil which are low on gas capacity and low on gas share. Source: BP data 29 Focus Research Investment Notes 29