Exclusive: UK's Centrica in talks to buy U.S. natural gas

LONDON/NEW YORK Fri Mar 8, 2013 8:20am EST

A gas cooker is seen in Boroughbridge, northern England in this November 13, 2012 file photograph. REUTERS/Nigel Roddis/Files

A gas cooker is seen in Boroughbridge, northern England in this November 13, 2012 file photograph.

Credit: Reuters/Nigel Roddis/Files

LONDON/NEW YORK (Reuters) - Centrica (CNA.L) is in talks with U.S. companies to secure Britain's first long-term liquefied natural gas (LNG) import deal, sources told Reuters, as prices at home surge and Middle East supply falters.

The UK's biggest household energy supplier has approached U.S. firms including Cheniere Energy (LNG.A) and Freeport LNG, sources close to the discussions said, as Britain's own gas supply also dwindles.

An agreement would mark the first ever long-term LNG supply deal with guaranteed deliveries for Britain and a breakthrough for U.S. gas in Europe.

"Talks are at a very early stage but Centrica is discussing this with several U.S. LNG players, including Cheniere, Freeport and others," a source with knowledge of the talks said on condition of anonymity.

Centrica has also reached out to the LNG shipping market to gauge vessel availability, a shipping source with knowledge of the talks said.

Centrica, Cheniere and Freeport all declined to comment.

Booming natural gas production from U.S. shale deposits has unlocked a plentiful source of cheap gas that domestic producers want to liquefy for export.

Gas prices in the UK are three times higher than in the U.S. at $10 per million British thermal units (mmBtu).

Domestic production in Britain, meanwhile, is dwindling and the country is becoming increasingly reliant on piped imports from Norway and sporadic LNG shipments from Qatar, making prices volatile when supplies drop or cold weather hits.

UK gas prices reached 5-year highs this week after disruptions from Norway, the North Sea and reduced LNG deliveries from Qatar left the country severely undersupplied.

High prices also mean Centrica faces a backlash from consumer groups and political parties.

Few of the 16 current applications to liquefy U.S. gas and export it on tankers are likely to win approval, experts have said, given fears that exports could lead to higher U.S. domestic prices.

But Centrica is holding talks with the front-runners, the sources said, including Cheniere, whose Sabine Pass plant under construction in Louisiana is set to start exporting in 2015.

Sabine Pass is the only project so far with full U.S. government approval to export, while Freeport LNG is next in line for consideration. It aims to begin exports by the end of 2017.

Britain depends increasingly on LNG from Qatar to plug its growing energy supply deficit, but a lack of binding supply agreements means that Asian demand is likely to continue to divert Qatari cargoes east, leaving Britain short.

Qatar and other exporters refuse to commit long-term supply on anything but prices linked to relatively expensive crude oil, while Centrica seeks market prices.

It was forced to settle for a three-year LNG supply agreement with Qatar in 2011 after talks to secure a 20-year contract fell through.

Despite the deal, Qatari volumes of LNG to Britain plunged by 68 percent in January from a year earlier, according to shipping consultancy Waterborne.

They have fallen to 7 percent of the UK's overall supply this year from 17 percent in 2011 and 27 percent in 2010, Deutsche Bank said this week.

EXPLORING OPTIONS

Centrica alluded to tapping U.S. imports during its investor day last week.

It said separately that it was likely to invest further in North America, possibly in shale gas, diversifying its production away from the North Sea where ventures tend to be costly.

"They specifically mentioned ‘exploring options for North American exports to the UK', and that they saw opportunities to ‘increase our presence in LNG contracting'," said Investec analyst Harold Hutchinson, who attended the meeting.

U.S. President Barack Obama raised the possibility of a free trade agreement with Europe last month, possibly creating an easier path to shipping LNG to Europe.

The U.S. exporters aim to offer supplies linked to cheap U.S. domestic gas prices, throwing a lifeline to importers in Asia and Europe hurt by rising costs.

Cheniere in its latest corporate presentation estimated that U.S. gas at a market price of $4/mmBtu could be liquefied, shipped to Europe and sold for less than $9 at a profit.

UK gas prices recently hit $17/mmBtu and are currently $10.50/mmBtu.

"What really matters is whether Henry Hub-based gas can compete with Russia and the alternatives in Europe," said Nikos Tsafos, analyst at PFC Energy consultants in Washington, referring to the benchmark U.S. price.

"It's a bet, but it can work. And Europe desperately needs to do more to secure its long-term supply."

The UK's BG Group (BG.L) and BP (BP.L) have already signed up LNG supplies from Cheniere and Freeport, respectively, but those are expected to be delivered mostly to Asia or South America, not Britain.

(Reporting by Oleg Vukmanovic; editing by Jason Neely)

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