Cheniere signals new LNG pricing structure with Apache deal

LONDON/NEW YORK (Reuters) - Cheniere Energy Inc said on Monday it would buy natural gas from Apache Corp’s Permian assets using a price mechanism linked to the liquefied natural gas (LNG) it ends up selling and not the typical U.S. gas benchmark.

The deal is the first sign Cheniere, by far the largest U.S. LNG seller, may move away from its signature LNG pricing mechanism in future offtake agreements with LNG buyers by decoupling from the Henry Hub price used for U.S. gas.

“Producers want this because it will give them better realizations than what they will see in the North American market,” Anatol Feygin, executive vice president and chief commercial officer at Cheniere, told reporters after an investor meeting in New York.

Gas use is growing rapidly around the world as countries seek to wean their industrial and power sectors off dirtier coal.

But in North America, Feygin said domestic demand is “unlikely to grow meaningfully,” while production - especially associated gas output from oil wells - keeps increasing.

To service its LNG sale agreements, Cheniere buys U.S. gas to use as feedstock for its two LNG plants in Texas and Louisiana. It then sells LNG to long-term buyers who pay about 115% of the Henry Hub price plus a liquefaction fee of around $3 per million British thermal units (mmBtu).

This formula protects Cheniere from fluctuating U.S. gas prices and covers its cost to transform gas into LNG through the liquefaction fee.

By striking the agreement with Apache to buy gas at an LNG-indexed price, however, Cheniere is giving itself flexibility to sell LNG using a different pricing structure, industry sources said.

It is another sign that U.S. LNG producers are expanding the ways they attract buyers in a global market that is growing fast but is far from being as liquid and transparent as the crude market.

“LNG export projects are being delayed because of the limited demand for (Henry Hub)-indexed LNG supply ... limited but not non-existent,” one industry source said. “If U.S. LNG projects can sell on other indices, then it will likely lead to an increase in U.S. LNG exports in the long term.”

NextDecade Corp , developer of the Rio Grande project in Texas, signed a deal with Royal Dutch Shell Plc that prices some LNG to Brent crude - a mechanism more commonly seen with veteran LNG sellers Qatar and Australia.

Tellurian Inc, another LNG developer, signed an offtake agreement with trading house Vitol, which is priced to the Asian Japan/Korea Marker (JKM) LNG benchmark.

Cheniere was the first U.S. company to bring its LNG export project into production in 2016 at Sabine Pass in Louisiana. On Monday, the company said it decided to build a sixth liquefaction train at Sabine.

Reporting by Sabina Zawadzki in London; additional reporting by Scott DiSavino in New York; editing by David Evans and Marguerita Choy