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Korea Gas to Buy U.S. LNG as Gas Slump Attracts Asian Importers

Korea Gas Corp. (036460) agreed to buy liquefied natural gas from Cheniere Energy Partners LP (CQP), the second such deal by an Asian company in two months, seeking to take advantage of the cheapest U.S. supplies in a decade.

The world’s largest LNG importer agreed to buy 3.5 million metric tons annually from the proposed Sabine Pass terminal in Louisiana for two decades starting 2017, Houston-based Cheniere said yesterday. The price will be linked to monthly levels at Henry Hub, a U.S. benchmark, plus a fixed component.

Asia accounts for more than 60 percent of global LNG demand and buyers are turning to North America, where record production from shale deposits has driven down U.S. prices. GAIL India Ltd. (GAIL) last month became the first Asian buyer of U.S. LNG at Henry Hub prices, weakening a 40-year-old oil-link currently used to price long-term supplies in Asia.

“More and more Asian buyers will look to buy LNG from the U.S., that will be their first choice because it’s cheaper,” said Osamu Fujisawa, an independent energy economist in Tokyo. “As more companies get U.S. LNG, Asia’s link to oil will start weakening over the years.”

Bank of America Corp. has said LNG shipments to Asia from the U.S. may slow the development of new projects in Australia, a traditional supplier of LNG to the region. Ventures in Australia and Qatar sell LNG to Asian buyers at prices linked to the so-called Japan Crude Cocktail.

Korea Gas declined 1 percent to 44,400 won at the close of trade in Seoul. Cheniere Energy Partners rose 0.6 percent to $21.43 at the close in New York. Cheniere Energy Inc. (LNG), the owner of 90.6 percent of Cheniere Energy Partners, fell 1 cent to $12.70.

South Korea, India

The contracts signed by the state-controlled companies from South Korea and India are subject to Cheniere getting approvals and financing to expand the proposed liquefaction facility at its Sabine Pass terminal, according to the Houston-based partnership.

Increased U.S. gas production from shale formations has helped drive prices to a 10-year low and led owners of LNG terminals to explore exports. U.S. gas production grew by a record 4.5 billion cubic feet a day in 2011, the Energy Department said in a Jan. 10 report, while demand growth lagged behind at 920 million. About 482 trillion cubic feet can be produced from U.S. shale basins, according to the department.

Gas in New York trading has declined 11 percent this month after falling 32 percent last year, a fourth straight annual decline. Prices were 2.3 percent lower at $2.65 per million Btu at 1:38 p.m. Singapore time.

Foundation Customers

Korea Gas becomes the “fourth foundation customer” for the project, which has sold 16 million of the 18 million metric tons of annual export capacity being developed, Cheniere Chairman Charif Souki said in the statement.

BG Group Plc (BG/) in October agreed to import 3.5 million tons a year of gas from Cheniere’s Sabine Pass terminal and raised the purchase volume by 2 million tons this month. Spain’s Gas Natural SDG SA (GAS) said in November it also agreed to buy 3.5 million tons of the fuel from the same facility for 20 years beginning in 2017.

GAIL, based in New Delhi, agreed to buy 3.5 million tons a year of LNG from the terminal starting 2017. GAIL is negotiating its second U.S. LNG contract, seeking Henry Hub-linked supplies from a Freeport LNG project scheduled to start in 2016, a person with direct knowledge of the matter said Jan. 16.

Construction is expected to begin on the liquefaction facility this year and the first phase will begin operating in 2015 or 2016, potentially making Sabine Pass the first North American LNG exporter since 1969.

LNG is gas chilled to liquid form by cooling it to minus 260 degrees Fahrenheit (minus 162 Celsius) for shipment by tanker.

To contact the reporters on this story: Edward Klump in Houston at eklump@bloomberg.net; Rakteem Katakey in New Delhi at rkatakey@bloomberg.net

To contact the editors responsible for this story: Susan Warren at susanwarren@bloomberg.net; Amit Prakash at aprakash1@bloomberg.net.

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