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Canadian industry report stresses urgency of LNG project approvals
GARY PARK For Petroleum News
Liquefied natural gas exports are the only hope of arresting a steady decline of Canadian gas production over the next decade, putting the pressure on governments and regulators to hasten project approvals, said the Canadian Association of Petroleum Producers.
LNG proponents “require timely ... decisions because global LNG competition is fierce and involves many well-established international suppliers,” CAPP President Tim McMillan said in a statement accompanying the release of CAPP’s 2015 gas forecast and LNG report.
He said that accessing the global LNG market “can strengthen the long-term viability of Canada’s natural gas industry and backstop the significant economic benefits it creates for Canadians.”
Without export breakthroughs, CAPP forecast that gas supplies from the United States will continue to displace Canadian gas from its traditional markets in Central Canada (Ontario and Quebec), the U.S. Midwest and the U.S. Northeast.
CAPP also said the United States also poses a challenge to Canada’s hopes of opening up LNG export markets based on its head start from the flurry of construction of import terminals around the turn of the century.
Although the dramatic use of technology has managed to unlock the vast shale gas potential of North America, that breakthrough has virtually put an end to LNG imports, leaving the U.S. with an inventory of 11 terminals and combined capacity of 18.5 billion cubic feet per day, some of which are now being converted to LNG export liquefaction facilities.
In contrast, Canada has converted the Canaport LNG terminal in Atlantic Canada, with send out capacity of 1 billion cubic feet per day to U.S. Northeast markets.
No sanctions for BC projects But no projects on the British Columbia coast have received corporate sanctioning despite the large gas resource base near the Pacific Coast.
CAPP noted that the National Energy Board has estimated the ultimate potential for conventional marketable gas in the Western Canada Sedimentary Basin is 291 trillion cubic feet, while unconventional gas reserves in five potential plays - Montney, Duvernay, Horn River, Liard and Cordova Embayment - amount to 698 tcf.
That combined total is vastly greater than Canada’s domestic consumption of a mere 3 tcf a year.
Of the 14.1 billion cubic feet per day of gas produced in Western Canada last year, 6.72 bcf per day was consumed in Canada and 7.4 bcf per day was exported to the U.S., a sizeable drop in exports from the days last decade when exports accounted for two-thirds of Western Canada’s output.
Opening up sales in global LNG markets is the best bet for stimulating production of Canada’s more-than-100-year gas supply, the report said.
Otherwise output will steadily decline over the next 10 years, then remain flat at about 13 bcf per day until the end of the forecast period in 2030.
‘Relatively small player’ Although Canada would likely remain a “relatively small player” in worldwide LNG trade, accessing global markets would see Canadian production recover to 14.5 bcf per day by 2020 and could reach 17 bcf per day by 2030, assuming five LNG trains (two of them at the Pacific NorthWest LNG project operated by Petronas) are operating by 2023, with each having capacity of 5 million metric tons a year, CAPP estimated.
But the report emphasized that Canada “needs prompt regulatory approvals (at a time of fierce competition) and a commitment to competitiveness in order to attract the billions of investment dollars required to build an LNG business and expand natural gas production to support it.”
McMillan cautioned that the “window of opportunity for Canada’s LNG market will not stay open forever.”
That reinforced comments earlier in July by Betsy Spomer, chief executive officer of the Jordan Cove LNG project in Oregon, who said Canada’s reputation as a place to invest in LNG has fallen behind the U.S. because of labor costs, productivity concerns and regulatory uncertainty.
Regulatory outlook improving However, Greg Stringham, CAPP’s vice president of marketing, told the Calgary Herald that the regulatory outlook is improving, with the Canadian government signing off on 40-year export permits, up from the traditional 25 years.
In addition, he said, British Columbia has offered greater certainty on taxes, while timelines have been set for pipeline approvals, leaving only environmental impact assessments in need of attention.
For now, some of the signs are encouraging as the emergence of the unconventional plays in British Columbia has “generated worldwide interest and a number of joint ventures” involving Asian investors, who are attracted by the large resource base close to the British Columbia coast and Canada’s proximity to Asian markets.
After almost quadrupling to 32 bcf per day, gas production to support LNG trade has stalled because of the economic slowdown in Europe, but is expected to ramp up again, CAPP said, noting that global liquefaction capacity is expected to reach 50 bcf per day by 2018, mostly the result of projects under construction in Australia and the U.S.
Gas values down On the price front, the report said that as surging U.S. shale production has become available to the market, gas-on-gas competition has dragged North American gas values down from about US$12 per million British thermal units seven years ago to barely over US$2 at the start of 2015, while European prices entered this year at just under US$8 and Japanese prices edged below US$14 from their peak of US$18 three years ago.
CAPP said that even with oil prices sliding by 40 percent to US$60, gas has been selling this year at less than one-third of its energy equivalent basis to crude.
In this environment, CAPP said there is the potential for Western Canadian gas producers to obtain a higher netback for their production if they can access world markets.
But the challenge for those producers is to “control the level of costs so that landed costs of LNG from Canada are competitive in the Asian marketplace and to ensure that producers receive a netback that renders these projects economic,” the report said.
CAPP estimated the incremental costs of transporting gas to facilities on the British Columbia coast, the liquefaction costs and the shipping costs to Asia by LNG tanker could add US$7-US$10 to the Western Canadian gas price.
It said liquefaction would take by far the largest bite, meaning the ability to control those costs would have the most significant impact on the economics of projects.
Although no projects are yet under construction in British Columbia, a number are well advanced in obtaining the necessary regulatory approvals.
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