Cautious Optimism On LNG Exports
BMI View : Canada is making headway as it attempts to realise its LNG export ambitions by 2015 in a bid to cement its position in the global LNG market. However, t here are currently two big obstacles standing in the way : regulatory constraints on the development of necessary gas pipeline infrastructure ; and, increasingly, an expectation on the part of buyers that LNG will be price -linked to deflated US Henry Hub prices , which threaten project economics.
Canada's rush to monetise its potential shale gas resources in the form of exported liquefied natural gas (LNG) continues. The past three months have seen developments that suggest the country could start exporting LNG from its West Coast by 2015. They are:
November 2012: Petronas ' acquisition of Progress Energy was given the green light, pav ing the way for the Malaysian national oil company (NOC) to work on its proposed Prince Rupert LNG export terminal.
December 2012: Chevron bought a 50% stake in Kitimat LNG - the first LNG export project in the country to receive an export licence. The supermajor's financial fire power promises to boost available finance for th e long-delayed project.
January 2013 : Douglas Channel LNG , a private collaboration between indigenous Haisla Nation and LNG Partners , signed LNG off-take agreements with LNG tanker and regasification unit operator Golar LNG . Tom Tatham, Managing Director of the BC LNG Export Cooperative , the joint venture (JV) vehicle for the project , was hopeful that supply deals with Asian buyers would be finalised by end-February.
January 201 3 : Japanese oil refiner Idemitsu and energy infrastructure firm Altagas join ed the West Coast LNG export race, announcing that they are also looking into establishing a facility o n the West Coast. Pending the completion of a feasibility study in 2014, they expect the proposed LNG facility to be operational by 2017.
February 2013: Royal Dutch Shell's massive LNG Canada project - with an initial design capacity of 12mn tonnes per annum (16.6bn cubic metres) - was given a 25-year export licence by the National Energy Board.
Only The Beginning
The progress made in moving LNG export projects along is very positive , al though there is still some way to go before t hese projects materialise . Although Kitimat LNG and Douglas Channel LNG have already obtained regulatory approval, final investment decisions (FID) a re yet to be made.
These projects will also miss the original timeline for their start -up. Kitimat LNG was expected to be Canada's first LNG export plant to come onstream by 2015, but its partners have adjusted their plans t o target a 2017 start-up instead . BC LNG's D ouglas Channel Project, which was supposed to face fewer regulatory challenges from the indigenous population due to Haisla Nation's involvement, is now looking at a 2015 operational date rather than the 2014 date outlined initially. Indeed, there are two significant hurdles that project partners have to cross before they can commit to these projects.
The first is regulatory objections to the construction of the pipelines needed to link gas from fields to the ports of Kitimat and Prince Rupert, where all of these LNG terminals will be based. Of the six projects proposed to date, four will require that a new pipeline is build - Kitimat, LNG Canada, Prince Rupert and BG's proposed British Columbia LNG. These pipelines will likely traverse through Haisla Nation territory, andleaders of the indigenous group warned again in January 2013 that no pipeline construction on their land could proceed without their approval. Environmental groups have also fiercely resisted such pipeline projects, which they deem destructive.
Clearing these regulatory hurdles could be a protracted process. For example, the surveying of land for the Pacific Trails pipeline, which will transport gas to Kitimat LNG, has been disrupted by the indigenous population. In January 2013, a tripartite agreement on joint regulation was reached between the federal government, the British Columbia government and Haisla Nation. This agreement could make the process simpler, although we expect firms to have to launch aggressive publicity campaigns to further win over the public.
The Price Is (Not) Right
Growing buyers' d emand for cheap gas is also a growing challenge to project economics. These West Coast projects are clearly targeted at the Asia-Pacific market, which will exhibit huge gas demand growth potential in the decades to come. The participation of large Asian oil and gas corporations and NOCs , which are often also procurers of energy supplies for their respective countries, in North American shale gas projects also highlights their interest in the region's cheap gas. With North American gas price at about a sixth of Asia's, supplies from North America promise to cut the country's gas import bills.
|Taking Over The World|
|Comparison Of Asia's Gas Consumption With Rest Of The World (bcm)|
These demands reduce the incentive s to develop LNG export capabilities in Canada. Chevron has been particularly vocal about this subject . According to Canadian newspaper Financial Post, Chevron's chief executive John Watson stated that 'most companies in the world aren't going to make that commitment without having pricing that gives them a fair return'. Watson had insisted that LNG prices in off-take contracts 'need to be something close to oil parity', otherwise 'the projects won't get built'.
The oil-indexed formula for LNG prices is not likely to sit well with potential Asian buyers given the alternatives that have been offered in the US. Cheniere Energy, whose Sabine Pass LNG project was the first to receive an export licence, has linked the price of its gas contracts to Henry Hub prices. A sales and purchase agreement (SPA) between Japan's TEPCO and trader Mitsui on February 6 2013 will also see the latter sell gas from the proposed Cameron LNG export facility in the US at Henry Hub prices. Canadian LNG sellers will not be able to secure many supply contracts in the short-term if Asian buyers continue to perceive North American gas should be cheap.
|The American (Gas Price) Dream|
|Comparison Of Henry Hub And Asian LNG Prices (US$mnBTU)|
This could affect the willingness of developers to commit to Canadian LNG export projects in the short-term, if they cannot secure long-term buyers that can guarantee the long-term commercial viability of their expensive investments. The growing divergence between the expectations of buyers and sellers with regard to LNG prices will most likely only narrow when the supply glut contributing to deflated Henry Hub prices eases in the US. The emergence of a truly global gas market as infrastructure supporting inter-regional gas trade builds up will also lead to a correction in the large differences in regional prices, which could see buyers and sellers come to a common understanding on the optimum price of gas.
Such agreement could be a long-time coming. We are optimistic that Canada's large gas potential will mean LNG exports materialise in the future; however, in the short-term we expect many of the proposed LNG export plants to come online later than their developers currently expect.
|Name||Partners||Size (Initial, mpta)||Location||Pipelines|
|Source: Company data, BMI|
|Kitimat LNG||Chevron, Apache, EOG, Encana||5||Kitimat||Pacific Trails Pipeline, 463km|
|LNG Canada||Shell, PetroChina, Mitsubishi, Kogas||12||Kitimat||Coastal GasLink, 700km|
|Douglas Channel LNG||LNG Partners, Haisla Nation||0.7||Kitimat||Tie-in to existing Mainline|
|Prince Rupert LNG||Petronas||7.4||Prince Rupert||Prince Rupert Line: Tie-in to Mainland|
|British Columbia LNG||BG Group, Spectra Energy||na||Prince Rupert||Pipeline, 850km|
|Altagas-Idemitsu LNG||Idemitsu, Altagas||2||Kitimat||Existing Pacific Northern Gas pipeline|