Juggling the gas mix; Apache targets LNG exports from Kitimat

Apache has now become the lead player in a venture that will test the outer limits of Canadian natural gas sales and determine whether there is a viable market in Asia.

In reaching a deal with Kitimat LNG to take 51 percent ownership of the proposed terminal on the northern British Columbia coast and 51 percent of the facility’s planned capacity of 700 million cubic feet per day, Apache has taken a headlong plunge into what is designed as Canada’s first LNG export project.

There’s little sign of hesitation on Apache’s part as the U.S. independent pushes ahead with plans to expand its Canadian activity in the British Columbia shale plays.

“Apache’s investment in Kitimat LNG demonstrates our long-term commitment to the resource development in Canada and in particular in British Columbia,” Apache’s Canadian President Tim Wall told reporters in a conference call.

“B.C. represents an area of significant growth opportunity for Apache and the Kitimat LNG project will continue to foster our growth in that area,” he said.

Stage set for gas surplus

“I do think it could benefit other markets by being able to export some of that surplus gas,” he said.

“With the excess gas here in Canada you are not captive to the United States. You are actually opened up to new markets around the world.”

Alfred Sorenson, chief executive officer of Galveston LNG, the parent company of Kitimat LNG, said the economic fundamentals “remain strong for exporting natural gas from Western Canada to international markets where natural gas is in demand, such as Asia.

“As natural gas supply and reserves continue to increase in North America, Kitimat LNG’s terminal will provide producers in Canada with secure access to key worldwide markets.

Irene Schmaltz, Kitimat LNG’s vice president of supply marketing, told a gas conference last November that the export terminal will enable producers to “include LNG in their portfolios. It will help stimulate the development of gas reserves in Canada.”

“For end users, it’s a new source of supply for them. They like that. They want to diversify their supply source and, from a political point of view, they consider Canada very low risk.”

Kitimat LNG President Rosemary Boulton said Apache brings a “great presence” to the project’s supply equation and provides an opportunity “for us to bring additional partners, on either capacity or equity, into the plant,” which is estimated to cost C$3 billion and come onstream in 2014.

EOG Resources has also signed a memorandum of understanding to contribute 100 million to 200 million cubic feet per day of Horn River gas to Kitimat, but has yet to comment on the change of ownership.

Not all sold on LNG

Russ Girling, chief operating officer of TransCanada, said a producer shipping gas to the British Columbia coast would need a netback higher than C$9.25 per thousand cubic feet, assuming a wellhead price of C$5.25, C$1 for pipeline transportation to the Kitimat port and C$3 for liquefaction.

In contrast, a shipper seeking access to the Alberta gas hub would pay only a 25-cents-per-gigajoule receipt charge for a minimum three years and the Canadian mainline toll to the Eastern Zone would add only C$1.60 per gigajoule.

TransCanada Chief Executive Officer Hal Kvisle said LNG proponents are targeting gas prices of $15 per million British thermal units from Asian buyers.

“If I was a Japanese utility buyer I would be asking why I should pay that price,” he said. “The world has changed. There’s now lots of LNG out there. Let’s see what the price of LNG is rather than tying it to oil.”

It’s not yet clear whether Kitimat LNG will affect projections for LNG imports to the Pacific Northwest region (Idaho, Oregon, Washington and British Columbia), which the Northwest Gas Association forecast in a 2010 outlook will see grow by 1 percent a year over the next decade, driven by demand for gas-fired electrical generation and continue growth in residential demand.

“Dozens of new import terminals have been proposed across North America, including three in Oregon,” the NWGA report said. “North American supply developments notwithstanding, LNG will serve a key role in the continental and regional energy picture over the long term.”

The NWGA predicted that LNG imports to the United States will double in the next five years to 1 trillion cubic feet.

In addition to LNG, the NWGA listed four overland pipeline projects that have been proposed to serve the Pacific Northwest drawing on new production from the U.S. Rockies and northeastern British Columbia.