April 7, 2010 / 7:51 PM / 10 years ago

REFILE-Low gas price challenge for JPMorgan-Cheniere deal

* Deal gives JP Morgan firm foothold in LNG market

* Low U.S. gas prices make lucrative deals hard short term

* Reexport from Sabine Pass terminal an option (Refiling to fix date in dateline)

By Edward McAllister

NEW YORK, April 7 (Reuters) - JP Morgan Chase & Co’s (JPM.N) deal with Cheniere Energy (LNG.A) to import liquefied natural gas may be lucrative in the long term, but current weak U.S. gas demand could limit initial profits.

Under the two-year deal signed last week, which marks JP Morgan’s entry into the LNG market, the two parties will jointly buy cargoes of the gas from overseas and share the profits from selling them into the U.S. market.

JP Morgan, already a big player in the downstream U.S. gas market, will gain a firm foothold in the LNG market through access to Cheniere’s Sabine Pass import terminal in Louisiana, which it could use as a hedging tool.

Working with Cheniere’s more experienced LNG marketing team will also offer trading opportunities that JP Morgan may not have had access to previously.

For its part, Cheniere will be able to buy more cargoes of LNG with the backing of JP Morgan’s bigger balance sheet and receive cash from JP Morgan for use of Sabine Pass.

The deal is part of a wider move by banks into the growing LNG market. Morgan Stanley (MS.N), Citi Group (C.N) and Barclays Capital (BARC.L) are all, to varying degrees, already involved in trading LNG.

While the JP Morgan-Cheniere deal could reap benefits in the longer term, finding lucrative deals will be difficult short term as weak U.S. gas prices make it hard to generate profits from sending gas there.

“Without dedicated supply, imports are not going to be easy to come by since current netback values to the U.S. Gulf represent some of the lowest in the world,” Waterborne LNG analysts said in a note.

JP Morgan declined to comment.

U.S. gas futures have fallen steadily from near $6 per million British thermal units at the beginning of the year to around $4 on Wednesday as ample supply and weak demand weigh, eroding the U.S. market’s attractiveness to LNG buyers.

In recent weeks, tenders for spot cargoes of LNG in the Atlantic Basin have been sold at a premium to U.S. benchmark gas prices, and buyers have largely avoided sending spot cargoes to the U.S. Gulf coast.

CHENIERE LIFELINE

Despite a dearth of potential deals, the agreement has been received positively for Cheniere on the promise of cash injections from JP Morgan and the possibility of the company having greater purchasing power in the LNG market.

“It looks like a good deal for Cheniere,” one trader said.

As a U.S. LNG importer, Cheniere has struggled the make profits in recent years, after building the biggest LNG import terminal in the United States on the bet that LNG tankers would flock to the United States.

Large increases in U.S. domestic supply, from the growth of unconventional gas plays like shale, has meant that U.S. LNG imports have not increased as was anticipated three or four years ago, and Cheniere’s Sabine Pass terminal has received only sporadic deliveries.

Cheniere’s shares, which plummeted from above $40 in late 2007 to under $1 in late 2008, have risen from just above $3 to near $5 in the week since the deal was announced.

REEXPORT OPTION

One option for Cheniere and JP Morgan is to import LNG to Sabine Pass when prices are low, store it at the terminal and reexport to higher-paying markets in winter.

Adapting to the new U.S. demand scenario, Freeport LNG in Texas and Cheniere’s Sabine Pass have built — and used — special facilities to allow for reexport.

Sabine Pass itself has nearly 17 bcf of LNG storage, the equivalent of about 6 cargoes.

“The terminal does provide a potentially lucrative storage play, which could provide a platform on which to import LNG despite seemingly unattractive margins,” Waterborne said.

Reexport deals have been struck in recent months, though traders are unsure if much money can be made as recession-driven falls in gas demand have closed the arbitrage between various LNG markets in the Atlantic Basin and in Asia.

In previous years, high prices in Asia have sucked many cargoes away from the Atlantic, but over the past year the flow has slowed significantly as prices in Asia fell.

While the LNG market is set to remain oversupplied in the near term, producers say it will tighten in a few years as demand rebounds and supply remains steady, potentially opening the door for more reexport opportunities. (Editing by Walter Bagley)

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