LONDON (Reuters) - Centrica (CNA.L) on Monday signed its first liquefied natural gas (LNG) import deal with U.S. firm Cheniere Energy (LNG.A) for 20-years’ worth of shipments starting in late 2018 as prices at home surge due to scant supplies.
The deal, enough to fuel 1.8 million homes, is the first ever long-term LNG supply deal for Britain and a breakthrough for U.S. gas in Europe.
Prime Minister David Cameron welcomed the deal for diversifying the UK’s energy mix away from dependency on a small group of existing gas suppliers and for giving Britain its first taste of cheap U.S. shale gas.
Britain currently depends on Qatar for much of its LNG but high prices in Asia have seen supplies earmarked for the domestic market diverted to Japan and South Korea, depleting strategic stockpiles and sending prices to record highs.
Reuters reported earlier in March that Britain’s biggest household energy supplier was in talks with U.S. companies to secure the country’s first long-term LNG import deal in a bid to guarantee supplies and tame price spikes.
Qatar and other established exporters refuse to commit long-term supply on anything but prices linked to relatively expensive crude oil, while Centrica has sought 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.
“Future gas supplies from the U.S. will help diversify our energy mix and provide British consumers with a new long-term, secure and affordable source of fuel,” Prime Minister Cameron said in a statement on Monday.
Centrica said it would purchase about 1.75 million metric tonnes per annum (mmtpa) of annual liquefied natural gas volumes for export from the Sabine Pass plant in Louisiana. This is equivalent of the annual gas demand of around 1.8 million British homes, Centrica said.
The contract is for an initial 20 year period, with the option for a 10 year extension. The target date for first commercial delivery is September 2018.
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 on average three times higher than in the United States at $10 per million British thermal units (mmBtu), although last week’s UK price spikes saw that premium widen dramatically.
Britain already receives gas from a range of countries including Norway, the Netherlands and Qatar. But it depends increasingly on LNG from Qatar to plug its growing energy supply deficit.
That could come under pressure in future years as the lack of binding supply agreements means Asian demand is likely to continue to divert Qatari cargoes east, leaving Britain short.
Under the terms of the deal, Centrica will retain destination rights for the U.S. cargoes, meaning it could divert them to other markets during times of low UK demand or high prices elsewhere.
“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,” Centrica CEO Sam Laidlaw said in a statement.
Reporting by Oleg Vukmanovic and Lorraine Turner; editing by Kate Holton and Keiron Henderson