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June 7, 2010

U.S. to become LNG exporter?

Could the U.S. become an LNG exporter? That might seem an improbable prospect given the number of LNG import terminals that have recently come on stream and the fact that more than 20 more have been approved of which four are under construction. Another half dozen have been proposed but are awaiting approval.

However, things have changed since the not so distant past when the U.S. thirst for LNG imports looked to be unquenchable. For one thing, it seems that the U.S. has vast potential unconventional gas resources such as tight sands, coalbed methane (CBM), and gas shales.

Cheniere Energy Partners, L.P. (NYSE Amex: CQP) thinks that the time is right to get into the LNG export market. Its general partner's Board of Directors has approved initiation of a project to add liquefaction services at the Sabine Pass LNG receiving terminal in Cameron Parish, Louisiana.

Adding liquefaction capabilities would transform the Sabine Pass terminal into a bi-directional facility capable of liquefying and exporting natural gas in addition to importing and regasifying foreign-sourced LNG. Cheniere expects to take advantage of the existing infrastructure at the Sabine Pass terminal to offer customers bi-directional services at attractive pricing.

Based on preliminary estimates, the expected fee for bi-directional services will be approximately $1.40/MMBtu to $1.75/MMBtu. This added service would provide customers with an attractive option to source natural gas supply from the U.S. pipeline grid at prices indexed to Henry Hub.

Henry Hub is the pricing point for natural gas futures contracts traded on the New York Mercantile Exchange (NYMEX). It is a point on the natural gas pipeline system in Erath, Louisiana. Owned by Sabine Pipe Line LLC, it interconnects with nine interstate and four intrastate pipelines.

"We believe current market fundamentals have created an opportunity for the U.S. to offer natural gas to global markets at competitive prices," says Charif Souki, Chairman and CEO of Cheniere Energy Partners. "The U.S. is experiencing an increase in natural gas production, primarily driven by unconventional gas plays, while natural gas demand in the U.S. continues to lag behind market projections. Due to the depth of the markets in South Louisiana with an abundance of supply and existing pipeline infrastructure, we can provide an additional outlet for U.S. natural gas production while offering a low cost source of supply for global buyers seeking alternatives to oil-indexed contracts."

Mr. Souki says Cheniere has begun pursuing contractual arrangements related to the project and has gotten "favorable preliminary indications of market interest from both potential natural gas buyers interested in capacity and U.S. natural gas producers interested in committing supply to the project."

According to Cheniere, the Sabine Pass site can readily accommodate up to four LNG trains capable of processing approximately 2 Bcf/d of natural gas. The capacity of each liquefaction train would be approximately 3.5 million tons per annum (mtpa). The initial project would include two trains with liquefaction capacity of approximately 1 Bcf/d. Further expansion would be considered based upon customer interest.

Cheniere estimates that it can construct liquefaction capacity comparable to liquefaction expansion economics since the Sabine Pass terminal already has many of the needed facilities for an export terminal. Cheniere would use its existing infrastructure, including five storage tanks and two berths at the Sabine Pass terminal, as well as Cheniere Energy Inc.'s 94-mile Creole Trail Pipeline, which would be reconfigured as a bi-directional system. The 853-acre Sabine Pass site is strategically situated to provide export services given its large acreage position, proximity to unconventional gas plays in Louisiana and Texas, and its interconnections with multiple interstate and intrastate pipeline systems.

Cheniere plans to work with Bechtel Oil, Gas and Chemicals, Inc. to design and construct the liquefaction facilities, using the ConocoPhillips Optimized Cascade(R) liquefaction technology. This proven process has been successfully deployed at several LNG export terminals around the world, and offers a high degree of reliability and control.

Assuming typical project development scenarios, Cheniere anticipates LNG export could commence as early as 2015. Cheniere plans to make a request to the Federal Energy Regulatory Commission to begin the NEPA pre-filing process by the end of June 2010. Cheniere says it will work with federal and state regulators to facilitate the permitting process. Commencement of construction is subject to regulatory approvals and a final investment decision contingent upon Cheniere obtaining satisfactory construction contracts and long-term customer contracts sufficient to underpin financing of the project.

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