Time to think huge

Economist tells industry execs LNG is their ‘friend’ provided they can adapt

Gary Park

For Petroleum News

Those trying to get a handle on global energy trends could use England’s industrial revolution of the late 18th century as a starting out point, then extrapolate that into a “super-megatrend,” suggests Peter Tertzakian, chief energy economist at ARC Financial.

His message for Canadian oil and gas producers at a Calgary outlook conference is to start thinking globally and adapt to change as the industry embarks on a permanent reshaping.

Known for the scope of his thinking, much of it captured in his book “A Thousand Barrels a Second,” Tertzakian told a packed meeting room that the industry is “in a period of change, which can either be discomforting, or seen as an opportunity.”

While conceding that the prospects for 2008 are not all that positive, and that the days of counting on other people to “take care of us” are over, he tried persuading his audience to act on what many of them have claimed over the years, that Calgary is an international energy center.

Suggesting that the longer-term trend for both oil and gas prices is upward, Tertzakian said the challenge for Canadian companies is to figure out how to get a piece of the emerging global energy action.

“This is not an overnight story,” he said. “But it is a story that we’re actually seeing emerging and playing out already, sooner than I thought it would.”

Overseas LNG demand rising

Although LNG imports into the U.S. will compete with Canadian gas, price will determine how much reaches North America.

Over the past two years, it has become apparent that LNG demand is rising overseas, especially in Japan, the United Kingdom and Spain, where the landed price for LNG is much higher than in North America, Tertzakian said.

As a result, LNG is selling for almost US$14 per million British thermal units, close to US$8 higher than on the U.S. Gulf Coast.

Thus LNG is good news for Canadian gas producers because it is facilitating the globalization of gas, he said.

A similar view was expressed by TransCanada Chief Executive Officer Hal Kvisle, who argues that because of LNG’s mobility, it will be delivered to North America only if prices compete with those in Europe and Japan.

To date, that has occurred only when European storage reaches capacity in the summer, he said, noting that current LNG imports are a lot less than they were six months ago and, despite rising volumes, still account for less than 5 percent of total North American supply.

“If the price in North America is high enough to attract a lot of LNG then that is a great day for Alberta,” Kvisle said.

North American price unsustainable

In a world of high gas demand, the North American price will eventually have to rise to global levels, he predicted.

He suggested that last summer — when high LNG imports to the U.S. were blamed for driving gas prices down — was an exception because Europe had low prices for “anomalous reasons.”

“The market doesn’t think the price for gas is going to be low in Europe next summer (given that) forward curves are all over US$10,” Tertzakian said, while cautioning that he does not think globalization will generate sustainable higher prices before 2009 or 2010.

Meanwhile, he forecasts that as more LNG infrastructure is built and the financial community adjusts, full globalization of gas will take hold in two or three years.

Shift of manufacturing a factor

As Western countries impose tighter restrictions on greenhouse gas emissions, companies in those locations will simply move their manufacturing capacity to China and elsewhere, as they have done since the 1990s, Tertzakian said.

He said future energy growth will be driven by the scale of industrialization taking place outside countries that belong to the Organization for Economic Cooperation and Development.

That in turn puts pressure on North America’s oil and gas producers to go global — a message that has been hammered home to the Canadian industry in the past 14 months as currency exchange rates and royalty changes have taken their toll.

He said it should now be apparent that “nobody is defending our interests anymore … (and) maybe that’s something that will wake us up, because we do need to think about taking our own interests into our own hands, becoming more competitive and thinking more globally.”

Tertzakian said there are a number of options — such as investing in new supertankers that carry LNG and have regasification facilities on board — open to Canadian gas producers looking to develop new markets.

Kvisle: LNG will be a price taker

His view is that LNG will be a price taker, not a price-setter in the continent.

Kvisle said TransCanada forecasts that the need for Western Canadian gas will stabilize production at 15 billion to 18 billion cubic feet per day, although he expects demand to feed the oil sands sector will reduce the volumes available for export to the U.S.

Evidence of the appetite for gas was reinforced in TransCanada’s recent coordinated non-binding open season, when it attracted expressions of interest for more than 1.5 bcf per day on its North American network.

The company will hold discussions with those potential customers early in 2008 to get a better fix on how soon it will need to move ahead.

TransCanada used the open season to make sure the market understood that growth supply in the U.S. Rockies, shale plays of East Texas and LNG imports is expected in the next few years.

It found out there is strong interest in having TransCanada’s various affiliates working together to offer service alternatives, said Dean Ferguson, vice president of market development.