Chevron Joins Forces with Energy Transfer to Bolster Potential Game-Changing Expansion Plan
Energy Transfer's Big Leap (ET -0.74%) has been determined to transform its existing Lake Charles LNG import and conversion facility into an export one for quite some time now. The project, which started a decade ago, has faced numerous hurdles, such as market turbulence and regulatory challenges.
However, there seems to be a light at the end of the tunnel as the master limited partnership (MLP) is edging closer to making a favorable Final Investment Decision on this project. It recently took a significant step towards this goal by partnering with Chevron (CVX -0.24%) as a client for the proposed facility.
Significant Partnership
Energy Transfer aims to turn Lake Charles into an export terminal with an annual LNG capacity of about 16.5 million tonnes. It has spent years trying to secure the necessary clients to commercialize the facility. Recently, it signed a 20-year deal with Chevron, providing 2 million tonnes of capacity.
The agreement with Chevron is noteworthy as the energy giant is a major player in the global LNG sector. This move indicates Chevron's faith in the project, which Energy Transfer considers one of the most attractive on the U.S. Gulf Coast. The deal allows Chevron to provide more affordable, less carbon-intensive energy to the world.
Chevron is just one of the many commercial entities backing the project. By late 2023, the company had secured contracts for nearly 8 million tonnes of capacity. Other notable clients include Shell, a former joint venture partner on the project, as well as Expand Energy, EQT, and several international gas customers. Experts estimate that Energy Transfer needs to secure contracts for about 12 million tonnes of capacity to approve the project.
Regulatory hurdles have been a significant obstacle in the company's quest to secure additional clients over the last year. The Department of Energy denied an extension of the company's export permit, and the Biden administration put a hold on approving new LNG export terminals. However, with the more fossil fuel-friendly Trump administration taking office in January, Energy Transfer should be able to secure the necessary approvals to move ahead with this project.
2025: The Year of Breakthrough?
Energy Transfer's leadership believes that the election could mark a turning point for Lake Charles LNG. Co-CEO Marshal McCrea stated on the company's third-quarter conference call immediately following the election that he is "very optimistic about getting LNG to the finish line."
In addition to securing permit approvals, Energy Transfer needs to secure additional client capacity contracts and bring in one or more strategic financial partners to help fund a portion of the project's cost. The company has previously stated that it would like to sell down its stake in the project to around 20%. It is currently in negotiations with energy companies willing to invest in the project and take substantial volumes. It is also working with infrastructure funds to invest in the project.
Maintaining a minority stake in the project would allow the company to earn a portion of the facility's steady cash flows. More importantly, the project would significantly benefit Energy Transfer's existing natural gas pipeline system, driving significant volume growth and potentially opening up more expansion opportunities. In simple terms, the project would be a game-changer for the MLP. McCrea stated that the project would "generate significant incremental cash flows from transporting natural gas on our Trunkline pipeline system and other Energy Transfer pipelines upstream from Lake Charles."
Closer to the End Game
Despite facing setbacks, Energy Transfer remains committed to Lake Charles LNG. A recent positive development was securing Chevron as a significant client. While there is still work to be done, it is increasingly likely that the company will approve the project next year. This would significantly improve and extend its long-term growth prospects, providing even more fuel for its lucrative 6.9%-yielding distribution.
After securing a significant partnership with Chevron, Energy Transfer is actively seeking additional financial investors to help fund the Lake Charles LNG project. Successfully securing these partnerships and obtaining necessary regulatory approvals could potentially lead to Energy Transfer selling down its stake in the project while benefitting from steady cash flows and increased growth prospects.
With the recent partnership with Chevron and the positive outlook following the election, experts believe that Energy Transfer is making notable strides towards securing the remaining necessary contracts and approvals to transform the Lake Charles LNG facility into an export terminal by 2025, significantly boosting its long-term growth prospects.
