Depressed North American Price Makes LNG a Risky Business

22 Nov

By Dave Cooper, Edmonton Journal, October 5, 2012

EDMONTON – Shipping North America’s surplus natural gas to willing buyers around the world has become a dream of producers and governments.

Just this week, B.C. Premier Christy Clark was talking about five liquefied natural gas (LNG) plants that could add $1 trillion to the province’s economy over 30 years.

But also this week, Cheniere Energy, owners of the only approved U.S. LNG export terminal project in Louisiana, signed a deal with foreign customers that is based on North American gas prices, not the hoped-for oil-linked index used in Asia. The difference is huge.

Japan has been paying more than $17 per million British thermal unit (MMBtu), while U.S. gas trades in the $3 range.

If the trend started by Cheniere sticks, some of B.C.’s touted LNG projects — which assumed their customers would pay the higher price — will not be built. Even before the Cheniere deal, Eurasia Group, a global energy consulting firm, was predicting that market conditions — another phrase for plenty of competition — will limit Canadian exports to about 3 billion cubic feet (bcf/d) out of two large Kitimat-area facilities.

“When comparing total costs of Canadian projects with those in the U.S. Gulf Coast, the competitive advantage of cheaper transportation costs from (B.C.) to Asia is largely offset by higher upstream costs and construction costs” in Canada, said Nitzan Goldberger in an investment note.

The implications for Alberta are less clear, since the province’s gas production has been declining as low prices make most new wells uneconomic. Our best game plan may be to encourage more use of natural gas locally — such as South African-based Sasol’s new proposal to build a large gas-to-fuel facility near Fort Saskatchewan — and turn some of Alberta’s cheap gas into high quality diesel.

Nevertheless, natural gas is the fastest growing energy source in the world. Consumption has grown by 29 per cent over the past decade, but 70 per cent is consumed in producing countries. The balance is traded internationally through pipelines and on LNG tankers. But LNG is the growth leader, expanding by 131 per cent in the past decade, compared with 69 per cent increase for pipelines.

“LNG is the driving link between domestic and global markets,” said Colin Harrison of global energy consultants Gaffney, Cline & Associates during a recent online seminar hosted by Houston-based Mayer Brown, a global consulting firm.

Qatar has been the world’s biggest LNG producer, while Japan is the world’s biggest consumer, taking about one-third of global LNG shipments. That demand is soaring this year in the wake of the Fukushima nuclear accident. Nuclear power and LNG have each been used to produce 29 per cent of Japan’s electricity, but most nuclear plants are now off-line for maintenance, repair or upgrading.

“Japan’s power firms have rushed to replace nuclear and this trend is expected to continue, but it is all subject to Japan’s nuclear policy. And that is totally unpredictable,” said Toshi Yosida of Mayer Brown.

The Japanese government adopted a resolution to phase out all nuclear power by 2040, but then toned it down and failed to make it official policy.

Many believe an election this fall will return a new government, “so the government is no help to Japanese power companies which are trying to save themselves by importing more LNG and seeking new suppliers” as consumers struggle with shortages and high power prices, he added.

Japanese firms are backers of several LNG projects in Canada and the U.S. in an effort to try to obtain better pricing and guaranteed supplies. But if Japan decides to return most of its nuclear power plants to operation, “these Japanese firms may have to resell the gas they have purchased under contract to other buyers in Europe and Latin America,” Yosida added.

Most LNG experts now concede that China is the elephant in the room when it comes to future LNG growth. They now import 16 million tonnes of LNG per year compared with Japan’s 79 MT. But they plan to add 15 LNG import terminals to the existing five by 2020 and imports could match Japan’s.

So promoters of LNG exports — in B.C., the U.S., Qatar, Australia, East Africa, Nigeria, Indonesia and Malaysia — are keen to fill this expected new demand.

But the U.S. Energy Information Administration (EIA) now estimates China has more shale gas potential — more than 35 trillion cubic metres — than the U.S. (25 TCM). Canada and Australia are estimated to have about 10 TCM, behind Argentina, Mexico and South Africa.

While China could import as much LNG as Japan with their new terminals, their own shale gas potential makes that a risky bet. They could even become exporters, competing with North American, Middle East and Australian shippers.

“Chinese companies are buying U.S. and Canadian shale gas assets to learn shale gas drilling operations and technology to take back to China,” said Yosida.

“The U.S. was importing LNG and is now trying to export LNG because of the sharp increase in shale gas production. This may happen in China as well.”

Add to that mix the potential for new natural gas pipelines from Russia and Kazakhstan, which will add further uncertainty to any LNG forecasts. One proposed pipeline would have a capacity of 35 billion cubic metres per year, the same amount of gas that could be delivered by a fleet of 35 LNG tankers bringing in gas from Australia, for example.

Ironically, Europe offers some hope for LNG exporters, where it can be sold for around $9 MMBtu and compete effectively with current Russian natural gas which arrives by pipeline. The United Kingdom recently overtook Spain as the leading non-Asian importer, increasing its LNG imports by 35 per cent in 2011.

“Despite current weaknesses in Europe, LNG will bring bigger opportunities for U.S. exporters (from the Gulf of Mexico), but the Asian market for now is far more lucrative,” said Stuart McAlpine, based in Mayer Brown’s London office.

He says all forecasts for future LNG markets are based on assumptions, everything from a recession in Europe, potential delays in building Australian LNG facilities because of cost overruns and the impact of “Henry Hub” pricing — contracts for America’s cheap shale gas forcing down global prices.

“All assumptions for LNG are fallible, including what is going to happen in shale gas.”

Republished from the Edmonton Journal:


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