Join our community of smart investors

Centrica deal signals US export surge

Centrica's gas import deal with Cheniere Energy Partners could be an early manifestation of a major US export push.
March 26, 2013

Centrica (CNA) has signed a 20-year deal worth around £10bn with US gas supplier Cheniere Energy Partners that will see the importation of enough liquefied natural gas (LNG) from North America to supply 1.8m British homes a year. That is, if UK gas prices are high enough to justify Centrica selling to domestic customers. Centrica chief executive Sam Laidlaw described it as a "landmark agreement". As well he might; under the terms of the deal, Centrica is also entitled to sell the gas on international markets, so while it may eventually help to reduce intermittent volatility in wholesale gas prices, it will do little to reduce UK household bills. But the deal could have much wider significance for the oil and gas sector.

IC TIP: Buy at 365p

The logic of the deal is predicated on the price differential that exists between 'Henry Hub' gas prices in the US and those for the rest of the world, which are often linked - somewhat spuriously - to the price of petroleum. Prices in the US collapsed last year due to a production glut brought about by the success of the shale gas industry. Prices have since recovered to an extent, but the US oil and gas industry is pushing hard to get Washington to relax long-standing statutory restrictions on exports. Cheniere Energy is the only company to have been granted an export licence thus far, but that could change rapidly if arguments over the potential benefits linked to exports hold sway. If the US was to scale-up global exports, it would not only have a hugely beneficial impact on the country's terms of trade, but it could also make a significant dent in its fiscal deficit. There are also geo-political issues at stake; though the Cold War is behind us, there are plenty of politicians, both here and in Washington, keen to reduce Russia's influence in global energy markets. The contra-arguments are mainly from energy-intensive industries in the US, such as steel-making, which are considering expansion plans for the first time in decades due to highly-favourable forward cost projections.