Port Arthur LNG Lands Financing And Long-Term Contracts

Originally published March 22, 2023.

Sempra Infrastructure, a 70%-owned subsidiary of Sempra, announced during its Q3 2022 earnings call and press release that it is was targeting a final investment decision (FID) for Phase 1 of its Port Arthur liquefied natural gas (LNG) project in Q1 2023. With less than two weeks before the quarter’s close, Sempra Infrastructure closed its joint venture (JV) with an affiliate of ConocoPhillips and announced an agreement to sell an indirect, non-controlling interest in the project to an infrastructure fund managed by KKR. Additionally, Sempra Infrastructure announced the closing of the project’s US$6.8 billion non-recourse debt financing and the issuance of the final notice to proceed under the project’s engineering, procurement, and construction agreement.

“At Sempra, we believe bold, forward-looking partnerships will be central to solving the world’s energy security and decarbonization challenges,” said Jeffrey W. Martin, chair and chief executive officer of Sempra. “With strong customers, top-tier equity sponsors in ConocoPhillips and KKR, and a world-class contractor in Bechtel, this project has the potential to become one of America’s most significant energy infrastructure investments over time, while creating jobs and spurring continued economic growth across Texas and the Gulf Coast region.”

Project Development

Sempra said that the Port Arthur LNG Phase 1 project is fully permitted and designed to include two natural gas liquefaction trains, two LNG storage tanks and associated facilities with a nameplate capacity of approximately 13 MTPA. Total capital expenditures for the Port Arthur Phase 1 project are estimated at US$13 billion.

The long-term contractable capacity of approximately 10.5 MTPA is fully subscribed under binding long-term agreements with strong counterparties — ConocoPhillips, RWE Supply and Trading, PKN ORLEN S.A., INEOS, and ENGIE S.A., all of which became effective upon reaching FID. Sempra Infrastructure is also actively marketing and developing the competitively positioned Port Arthur LNG Phase 2 project, which is expected to have similar offtake capacity to Phase 1.

Sempra is hoping that the infrastructure projects provide a reliable stream of steady cash flows that eventually exceed the development costs and can support further growth, share buybacks, and dividend raises.

Takeaway Capacity And Compression Requirements  

For Port Arthur LNG to secure reliable supply, it needs new pipelines and compressor stations. Port Arthur LNG’s affiliate, Port Arthur Pipeline, is proposing two new pipelines that would connect to more than 17 Bscf/d (481 × 10⁶ m³/d) of natural gas from major supply basins. Both new pipelines have a capacity of 2 Bscf/d (56.6 × 10⁶ m³/d).

The Texas Connector Pipeline would also involve the construction of two new compressor stations, known as the South Compressor Station and North Compressor Station. Meanwhile, the much longer Louisiana Connector Pipeline would use the new Beauregard Parish Compressor Station.

Sempra’s Partnerships

Sempra and ConocoPhillips closed their joint venture whereby an affiliate of ConocoPhillips has acquired a 30% non-controlling interest in the project. ConocoPhillips is purchasing 5 MTPA of LNG offtake from the project under a 20-year sale and purchase agreement and is managing the project’s overall natural gas supply requirements. ConocoPhillips will also have certain rights to participate in future expansion projects in both equity and offtake.

“Our strategic LNG partnership with Sempra will help supply growing global demand for natural gas, a lower greenhouse gas emissions-intensity fuel expected to play a critical role in the energy transition and global energy mix going forward,” said Ryan Lance, ConocoPhillips chair and chief executive officer. “ConocoPhillips has more than 60 years of experience with LNG, and we look forward to continuing to build our LNG portfolio and expanding our role in delivering a lower-carbon future that strengthens US and global energy security.”

Sempra Infrastructure announced an agreement whereby KKR will acquire a 25% to 49% indirect, non-controlling interest in the Port Arthur LNG Phase 1 project. Pursuant to the agreement with KKR, Sempra Infrastructure will retain certain economic and other rights with respect to the interest being transferred while granting KKR certain minority interest protections. KKR is making the investment primarily through its Global Infrastructure Investors IV fund.

“We are pleased to invest in this critical energy infrastructure project and extend our strategic partnership with Sempra,” said James Cunningham, partner at KKR. “Phase 1 will create new jobs, support American economic growth, and deliver reliable and cleaner energy during the global energy transition. Consistent with KKR Infrastructure’s strategy of seeking stable and predictable returns for investors, our investment in Phase 1 is backed by robust cash flows through long-term contracts with high-quality counterparties.”

Sempra Infrastructure is targeting 20% to 30% of indirect ownership interest in the project, subject to the closing of the KKR sale. For illustrative purposes, if Sempra Infrastructure’s indirect ownership interest is at the midpoint of the referenced range, or 25%, Sempra Infrastructure would expect its share of average adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) after full commercial operations to be approximately US$410 million annually and its equity commitment to be approximately US$1.55 billion. Sempra’s share of the above estimates would be equal to 70% of these amounts. The foregoing estimates exclude other potentially significant economic benefits associated with, among other items, the development of future phases and further optimization of the project.

Sempra Infrastructure has contracted with global engineering, construction, and project management firm Bechtel Energy Inc. and has issued a final notice to proceed for the project. The expected commercial operation dates for Train 1 and Train 2 are 2027 and 2028, respectively. “We’re proud to partner with Sempra to deliver a world-class LNG facility. Building from mature, scalable energy technologies helps safeguard our energy supplies and promote the transition to lower-carbon energy,” said Brendan Bechtel, chair and CEO of Bechtel. “Bechtel has a record of delivering LNG infrastructure on the US Gulf Coast and bringing quality jobs and training opportunities to local communities. The 5000 construction jobs this project creates will provide outstanding opportunities for craft professionals — growing a skilled workforce that will benefit the region for years to come.”

Local Benefits

Sempra Infrastructure believes that building strong relationships and supporting the communities where its employees live and work is fundamental to how it does business. Moreover, the company focuses its community development initiatives on local priorities including education and leadership development, environmental stewardship, and safety.

Since 2015, Port Arthur LNG has invested more than US$40 million to support Jefferson County communities, including working with local vendors to procure materials and services for the relocation of a portion of Highway 87 and on grants to more than 60 local non-profits, schools, and business development groups.

The Phase 1 project is another significant opportunity to expand Sempra Infrastructure’s economic impact. The project is expected to create an estimated 5000 highly skilled jobs during construction and boost the economies in Port Arthur and Jefferson County.

The successful completion of the KKR sale is subject to regulatory approvals and other customary closing conditions, and the completion of construction of Port Arthur LNG Phase 1 is subject to a number of risks and uncertainties. Citi advised Sempra on various aspects of the transaction and JP Morgan Securities LLC acted as advisor on the project financing.