Energy Intelligence sat down with Sempra CEO Jeff Martin last week for an interview about LNG and decarbonization plans before he spoke at the Energy Intelligence Forum in London. Sempra, which both develops LNG facilities and has utility gas and electricity customers, aims to reach net-zero greenhouse gas emissions by 2050. The interview has been lightly edited for length and clarity. - Energy Intelligence
Q: Let's talk about the Inflation Reduction Act, opportunities, maybe some challenges you see with what was and wasn't in the legislation.
A: I think it's really exciting to see that the United States has made a decision to take a leadership position in the clean energy transition.
The goal is to stimulate the transportation sector as an adjacency for clean energy; to stimulate, incentivize more renewables on the grid; to make sure below-ground storage, and carbon sequestration is more economic. And just as important, and an area that's interesting, is the establishment of hydrogen hubs. Because at our company we're fundamentally agnostic to a green kilowatt or a green molecule.
I think the aspiration of making sure that we can reduce emissions materially by 2030 en route to 2050 is an important signpost.
Q: There was some expectation of transmission reform being done initially in that bill, and then in the now-stalled permitting bill. I know you all think there needs to be a lot more transmission. What is your expectation for what can get done without permitting reform, and without those tax credits?
A: The challenge that you have is renewables are commonly not in areas where load is.
I think it's going to be very challenging in the current environment for the industry to get through the interstate commerce issues and the state power issues, to cite transmission when there's a lot of local opposition.
Our view at Sempra is: it may cause a little bit of scarcity value to come into transmission. And you're going to see many more transmission that ties that generation source onto a high-voltage system, but it’s going to be a challenge. It will be a limiting consideration in our success, I think, as a nation if we don't solve this problem.
Q: What do you think the domestic challenges for US LNG developers are right now? Are we talking about policy? Are we talking about getting feedstock that you need, or financing?
A: I will give you two that are complementary. Number one, in this higher inflation environment, the overall construction costs of acquiring land and sourcing your hard and soft costs to build a project have really gone up a lot.
So I would characterize it as getting the commercial arrangements with offtakers right, and married up with the overall cost structure, which is constantly changing today in this higher inflation environment.
We’re owned by utility investors, so we take a lower risk approach to LNG. It's making sure that your construction costs can allow you to get the right return based upon your offtake agreements. And then second to that will be permitting. It's the uncertainty of the permit environment with the Department of Energy and Federal Energy Regulatory Commission that extends the timeline and sometimes uncertainty in the regulatory environment can chill development efforts.
Q: Have you had that experience?
A: We have had some challenges in getting the right permits, particularly our non-FTA permits to export from Mexico. Some of our Mexico facilities have been tied up in the USMCA, but I think the principal issue is: get your commercial arrangements right to reflect an appropriate return with your construction cost. And secondarily, it's some of the uncertainty in the permitting environment.
Q: You mentioned getting the contracts in place. In terms of European utilities being amicable to signing the kinds of long-term contracts that underpin final investment decisions for US developers, there still seems to be some reluctance there, or is it changing?
A: To date at that project, we've announced long-term agreements with the Polish oil and gas company, it's a 20-year agreement. We've announced a 15-year contract with RWE, one of the largest utilities in Germany. We've got a long term, 20-year agreement with Ineos here in the UK, which is a chemical manufacturing and user. And we've announced a 20-year agreement with ConocoPhillips.
And they’ve bought basically half the offtake and what's unique here is: ConocoPhillips is the big producer in the Permian, is now buying across the value chain, because they want to take advantage of the basis differential between their production in Texas and be able to source gas to Asia and to Europe. So it's interesting. It's not a European portfolio player or European user, it's an actual producer who's trying to get access to foreign markets, and they're willing to enter the LNG business to do that.
