While Chesapeake Energy Corp. works to finalize its natural gas supply deals with LNG buyers, management says it's narrowing down opportunities to link more of its Haynesville and Marcellus shale supply to international benchmarks in the months to come.
Chesapeake currently has tentative agreements with liquefied natural gas traders that could link up to 3 million metric tons/year (mmty) worth of feed gas supply to international indexes.
Chesapeake’s Justin Brady, LNG and commercial operations director, told NGI the company is looking to capitalize further on that momentum and potentially place as much as an additional 4 mmty under supply agreements in the short-term.
“The goal to get into LNG is ultimately about diversification for Chesapeake,” Brady said. “We're going to be a 100% U.S. natural gas player, and that means we’ll be highly dependent on Henry Hub. Diversifying across these other indexes just makes a lot of sense for us.”
From The Well To Water
Chesapeake announced a heads of agreement (HOA) in October to potentially supply up to 1 mmty to global commodities trader Vitol Inc. for 15 years at prices indexed to the Japan-Korea Marker (JKM). Chesapeake previously signed a 2 mmty HOA with Gunvor Group Ltd. linked to JKM and both companies have selected Energy Transfer LP’s Lake Charles LNG project in Louisiana as the possible liquefaction point.
So far, Chesapeak’s deals have leaned toward Asian LNG prices as trading houses look to meet regional demand for more U.S. LNG supply. Brady said the firm is also looking for opportunities to diversify further with its next partnerships, possibly netting agreements linked to European gas prices or Brent crude.
Brady said forging deals with large trading houses like Vitol and Gunvor has been a great way to expose Chesapeake’s natural gas to foreign markets, but the types of deals and partners it can bring to the table are expected to expand as the company nears an investment-grade rating.
“We have a full trading team that knows how to move gas around the United States, and we do that really well, but once you get out on the water, we're not one of the big players anymore,” Brady said. “We’re working now to better understand how everything fits and if we find people to partner up with that have a bigger presence in the space, it could be a benefit.”
Last month, Chesapeake management told analysts during a third quarter call that the firm plans to keep 2024 production near this year’s average level of 3.2 Bcfe/d, with an option to add an additional rig if prices begin to firm.
Other gas-focused exploration and production companies in and around the Haynesville have been powering through the current North American supply glut with an eye on keeping production levels elevated in preparation for more Gulf Coast liquefaction capacity that’s expected to come online at the end of 2024.
NGI’s Forward Look shows Henry Hub spot prices peaking at $4.226/MMBtu in January 2025 from current levels at just above $2.70.
Meanwhile, NGI data shows Gulf Coast LNG netback prices from Asia could average around $12.483/MMBtu through next year. The netback to the Gulf Coast from Europe could average slightly higher at $12.586.
Agreements And Acquisitions
In the long term, Chesapeake plans on gradually exposing 20% of its net natural gas production to the international LNG trade. Brady said that goal is based on the runway Chesapeake has for its current assets to meet growing LNG demand over the next two decades, but also factors in the company’s plan to keep boosting production numbers.
“If we were to go make another large acquisition or merger of some sort, then you would see that 20% share scale,” Brady said. “Regardless of what the overall volume is, it's not a fixed number strictly based on where we're at right now.”
Chesapeake disclosed Thursday that it has exited the Eagle Ford Shale after completing the sale of its remaining assets in the play to SilverBow Resources Inc. for $700 million. The company started marketing its Eagle Ford assets late last year as part of a broader shift in focus from oil to natural gas.
Chesapeake hasn’t been the only large U.S. gas player to strike direct deals with LNG buyers and producers in what has become another big year for U.S. LNG supply agreements.
Late last month, one of Canada’s largest natural gas producers, Arc Resources Ltd. disclosed an agreement to supply natural gas to Cheniere Energy Inc. for liquefaction at prices linked to the Dutch Title Transfer Facility in Europe. EQT Corp. has also signed tolling agreements for 2 million metric tons/year of liquefaction capacity at the Lake Charles and Commonwealth LNG projects in Louisiana.
Other companies like Devon Energy Corp. have plans to invest in proposed LNG projects. Along with a tentative tolling agreement for up to 2 mmty of LNG, Devon took a stake in the Delfin LNG project and signed a frame-work agreement to gain possibly more equity in the future.
While Chesapeake has invested in projects like Momentum Midstream LLC’s Haynesville system that could deliver more gas to Gulf Coast terminals, Brady said the overall investment cost in liquefaction projects doesn’t align with its focus on natural gas production.
“Most of our capital is always going to go into the drill bit and producing more gas,” Brady said. “Maybe over time we’ll see an opportunity to develop and move further down that value chain, but staying closer to the wellhead makes sense for us right now.”
