Natural gas: Asia beckons as promising market for LNG

26 Nov

By Michael Kavanagh, November 19, 2012

As the US shale gas glut undermines demand for Canada’s natural gas, can output from above the 49th parallel find a market by going west to Asia?

Several projects are proposed for exporting liquefied natural gas (LNG) from terminals on the northern coast of British Columbia, to establish Canada as a leading provider to energy-hungry Asian economies

The task of finding new export markets for Canada, the world’s third-largest producer of natural gas, is particularly pressing now that its dominant customer – the US – is awash with it.Joe Oliver, Canada’s minister of natural resources, accepts that the country must look west across the Pacific rather than to the south and east to profitably extend the exploitation of its gas reserves – assuming the tricky problem of extraction and preparation for transocean transportation can be solved.

In recent weeks the minister has made courtesy calls to government and industry leaders in Japan, South Korea and India.

Included in his itinerary was a meeting in September with Yukio Edano, the Japanese trade minister, to gauge Japanese interest in purchasing liquefied natural gas from Canada’s west coast – an appetite that was sharpened by last year’s Fukushima nuclear power plant disaster, which has heightened Japan’s reliance on imported gas.

Mr Oliver’s aim has been to convince Asian economies, including China, that Canada is serious in its early-stage ambitions to compete against rival suppliers in the global LNG market.

But to deliver on the potential of booming international demand requires Canada to secure tens of billions of dollars of investment in the infrastructure required to move large quantities of LNG out west via pipelines to processing terminals on the coast of British Columbia.

Mr Oliver said in Tokyo in September that Canada had plans to liquefy and export 9bn cubic feet a day of gas if demanded, stating: “We are poised to become a major new safe, reliable and cost-effective LNG supplier to Japan, Korea and other Asia-Pacific nations for years to come.”

However, before the trip to Japan, he conceded that Canada still needed to convince potential investors and customers that unnecessary delays to planning consents could be avoided.

Securing domestic support for the development of LNG appears to be an easier task than for schemes aimed at piping bitumen-rich sand oils for export across large swaths of Canada, which have roused environmental protest.

Two months ago the government of British Columbia reached a further agreement with the Haisla First Nation native tribe that allows more coastal land to be opened up for LNG export projects from Kitimat on the Pacific Coast.

LNG Canada – comprising Royal Dutch Shell, Korea Gas Corporation, Mitsubishi and PetroChina – is among consortiums that are proposing terminals around the Kitimat area of British Columbia, which would make the Pacific coast inlet a new global LNG hub. The Shell-led project has been costed at $12bn.

The Apache Corporation, based in Houston, is backing Kitimat LNG, another consortium seeking partners in the development of another terminal in the area costed at a more modest $4.5bn. Apache expects to make a final decision on development early next year, with earliest production expected in 2017.

Further northwest along the coast, near the southern tip of Canada’s border with Alaska, BG Group is also proposing the development of an LNG terminal at Prince Rupert, capable of drawing off up to 4.2bn cu ft per day of natural gas from fields in northeastern British Columbia and neighbouring Alberta.

But if few doubt Canada’s potential as a source of natural gas for Asia’s booming economies, questions are being raised as to whether all Canada’s slated LNG projects will proceed.

Scepticism on specific projects mirrors wider concerns over whether the country will come too late to the race to bring LNG to Asian markets to outscore rivals, such as Mozambique and Australia, in securing development backing.

According to a report released by the energy industry consultancy Wood Mackenzie this month, competition from US shale gas has resulted in western Canada gas exports slipping by 4bn cu ft a day in the past five years. This, combined with reduced gas prices, has seen annual gross revenue from the region’s gas exports fall by some US$26bn – or 80 per cent – since 2008.

Yet some fields could be developed at break-even costs as low as US$2.40 per million British thermal units (mBtu).

The main problem facing Canada’s push to beat others – including the US itself – in becoming a leading gas exporter is the cost of infrastructure rather than producing the gas itself.

Even so, according to Asish Mohanty, analyst for Wood Mackenzie: “A well-managed western Canadian LNG export development could achieve costs of delivery into Asian markets similar to those from major competing options.”

An aggressive approach by federal authorities could also favour Canada’s ambitions if competitors lose their way.

“A combination of prolonged high-cost environment in Australia, east African delays and US regulatory uncertainty could pass the impetus to Canada,” concludes the consultancy’s report.

Republished from ft.com:

http://www.ft.com/intl/cms/s/0/7f77b24c-281c-11e2-afd2-00144feabdc0.html#axzz2DJ7ZVPVF

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