Saudi Arabia has placed a huge bet on American natural gas.
In a sign of shifting energy fortunes, Saudi Aramco announced a mega preliminary agreement on Wednesday to buy 5 million tons of liquefied natural gas per year from a Port Arthur, Texas export project that’s under development.
If completed, the purchase from San Diego-based Sempra Energy (SRE) would be one of the largest LNG deals ever signed, according to consulting firm Wood Mackenzie.
Aramco, Saudi Arabia’s crown jewel, would also inject a cash infusion into the Port Arthur development in exchange for a 25% stake.
“This is a major statement about the Saudis entering the LNG market and about how price competitive the outlook is for US gas,” said Ira Joseph, head of gas and power at S&P Global Platts.
Although the agreement calls for Saudi Arabia to purchase LNG from the United States, Joseph said it’s unlikely the fuel would end up being used to meet the kingdom’s vast electricity needs. More likely, Aramco will try to sign up buyers in South America and Europe for the LNG.
“We expect Saudi Aramco will use this volume to establish a global portfolio as it seeks to become a global gas player,” Giles Farrer, Wood Mackenzie’s research director, wrote in a report.
Saudi investment offsets trade war headaches
Aramco is the world’s largest oil company and owns America’s largest refinery, which is also located in Port Arthur. But Aramco is just beginning to build its LNG footprint.
“We see significant opportunities in this market and we will continue to pursue strategic partnerships which enable us to meet rising global demand for LNG,” Amin Nasser, Aramco’s CEO, said in a statement.
The shale revolution has made the United States the world’s largest producer of natural gas, a title it’s held since 2009 after surpassing Russia.
There’s so much natural gas that much of it is being turned into LNG, a super-cooled form of the fuel that it can be transported by ship overseas. China and other developing nations have turned to LNG as a cleaner alternative to coal.
The support from deep-pocketed Saudi Arabia could offset trade war headwinds facing America’s US LNG industry.
But US-China and US-Saudi relations are tense.
China imposed a 10% tariff on US LNG in September. Earlier this month, China retaliated against new US tariffs by raising the duties on LNG to 25%. US oil, on the other hand, has been spared China’s tariff wrath – for now at least.
The Saudi Arabian government has been accused of ordering the death of journalist Jamal Khashoggi, and its conflict with Yemen has been condemned by the US Congress. Sempra other companies doing business with Saudi Arabia faces a risk of criticism.
Sempra did not respond to a request for comment about concerns over its partnership with Saudi Arabia.
State oil companies hedge their portfolios
Foreign oil companies are helping to accelerate America’s transformation into an LNG powerhouse.
ExxonMobil (XOM) has partnered with Qatar’s state oil company on Golden Pass LNG, an export project located in Sabine Pass, Texas. The $10 billion project, scheduled for completion in 2024, is expected to have the ability to eventually export about 16 million tons of LNG a year.
The deals are further evidence of OPEC nations trying to hedge their bets due in part to rising concerns about climate change.
“As the energy transition intensifies,” Farrer said, oil-focused national oil companies are “diversifying their exposure away from oil and into gas and LNG.”
Farrer said Aramco has also been rumored to be interested in LNG deals in Australia, Arctic Russia and other major markets.
For Sempra, the Aramco deal is likely to increase confidence around the Port Arthur project, which is one of five LNG developments the company is working on in North America.
Wood Mackenzie said the Port Arthur project now likely has enough export volume under contract to secure debt financing. A final investment decision could be reached by the end of 2019 or early 2020.