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Canadian LNG projects still alive Seven liquefied natural gas projects are in various stages of development, dealing with regulatory applications, negotiating for supplies, shipping contracts and markets Gary Park For Petroleum News
The future of seven liquefied natural gas projects in the works for the Canadian east and west coasts is a hodgepodge of hope and uncertainty, but none has yet hit a wall.
The dominant issues still to be resolved were identified by Petro-Canada Chief Executive Officer Ron Brenneman in a presentation to investors March 30 — clearing regulatory hurdles and securing LNG supplies.
The list of challenges also includes a worldwide shortage of LNG tankers, raising financing and securing markets.
But Petro-Canada is upbeat about its chances of possibly cracking a supply source almost without parallel anywhere.
For two years, it has been negotiating with Russian gas giant Gazprom to join TransCanada in a partnership to build a regasification plant at Gros Cacouna, Quebec, capable of handling 500 million cubic feet per day.
What Gazprom brings to the table is its control over the vast Shtokman field in the Arctic Barents Sea, with proven reserves of 3.5 trillion cubic meters — seven times Europe’s annual gas consumption.
Petro-Canada could bring in Russian LNG Although Petro-Canada has apparently been left on the sidelines as Gazprom has entered negotiations with Chevron, ConocoPhillips and Norway’s Norsk Hydro and Statoil to take a possible 49 percent stake in developing Shtokman, the Canadian company believes it has a chance of becoming the bridge to carry the first LNG supplies from Russia to North America.
Brenneman, while anxious to get the message across that “we’re a long way” from locking up a supply arrangement, sees the Canadian government as a key player in smoothing the way.
He said it is “plain (the Russians) like the Canadian relationship,” based on state-to-state contacts between Canadian Prime Minister Stephen Harper and his predecessor Paul Martin and Russian President Vladimir Putin “who oversees” the gas industry.
Others have put it less tactfully: Without Putin on its side there is no chance of a deal with Gazprom.
Canada’s newly appointed Finance Minister Jim Flaherty startled many observers in February when he gave a vote of confidence to the Kremlin at a time when Russia responded to a price dispute by dropping the pressure in European gas pipelines in the depth of winter.
Unlike those who questioned how much trust they could place in Russia as a reliable supplier, Flaherty described the cutback as a “good development with respect to energy security and supply.”
Deal signed in mid-March By mid-March, Petro-Canada and Gazprom had signed a deal to start preliminary engineering for a possible C$1.5 billion liquefaction plant near St. Petersburg — a breakthrough after two years of involvement.
“What this project does is access gas off the grid which Gazprom would supply,” Brenneman said. “Gazprom is the largest producer of gas virtually in the world and has a tremendous resource base behind their current production.
“Essentially that’s the kind of assurance that we have at present in terms of supply.”
He has no question about the edge a Cacouna terminal has over some of its rivals in the U.S. Gulf Coast.
It opens access to 20 percent of the North American market and can deliver gas to those customers for 50 cents to $1 less per thousand cubic feet than the Gulf Coast facilities.
But the pieces that still have to fall in place include satisfying Gazprom’s desire to have an interest “right through the value chain” including a stake in the regasification terminal and joint marketing, in exchange for which Petro-Canada has its eye on a stake in the liquefaction plant.
Asked about the future impact of LNG on North American gas prices beyond 2010, and whether it will set a floor or a ceiling price, Brenneman said the experience of negotiating with Gazprom has “changed our thinking completely.”
Two years ago, the company opted for long-run prices of $4.50 per thousand cubic feet at Henry Hub; given the difficulties of bringing the projects together it has since raised the bar to $7, he said.
However, given the struggle to keep supplies in step with demands, he doubts that LNG will be “of sufficient quantity to set a cap on prices,” Brenneman said, while conceding there are “other schools of thought.”
Analyst: LNG imports will depress prices One of those alternative voices is Lasan Johong, a New York-based analyst with RBC Dominion Securities, who contends LNG imports will depress gas prices from $8 per million British thermal units (a Btu is roughly equivalent to one thousand cubic feet) over the next several years to $4.50 in 2010 and thereafter.
He believes today’s strong gas prices will result in major LNG imports from countries such as Russia and Qatar and believes the North American market rate will ultimately be set by the cost of producing and delivering LNG rather than the comparable costs on the continent.
Johong also expects state-owned companies to virtually wipe out the ranks of North American E&P companies.
He concedes his forecasts are scorned by E&P companies.
Tristone Capital analyst Chris Theal, who closely tracks the LNG market, said in March that the supply cost of gas produced in North America will set the bar, which he predicts will be about $7.15 per thousand cubic feet over the long term.
Theal thinks LNG consumption in North America, now 4 billion cubic feet per day or 5.7 percent of total consumption, could rise to 18.5 bcf per day by 2012.
For now, Brenneman noted a few sites on the Gulf Coast and two on the east coast of Canada have been permitted for regasification facilities, meaning there are now more sites available than the liquefaction capacity to support them.
Six other contenders So what of the other six contenders?
• The partnership of Enbridge, Gaz Metro and Gaz de France working on the Rabaska project at Beaumont, Quebec, has embarked on the first phase of the regulatory process, with federal and Quebec authorities conducting the environmental review.
The major public hearings for the C$840 million import terminal to handle 500 million cubic feet per day are scheduled to start this summer. Based on the outcome, construction will start in 2007, allowing the plant to come on stream in 2010.
Supply sources remain an unknown, but Gaz de France’s connections could open doors to Algeria, while Egypt and Qatar are rated as prospects.
But, even with the terminal still in the developmental phase, Gaz Metro is studying a second project to take advantage of a C$1 billion plan to double capacity of a pipeline that currently delivers Western Canadian gas to Quebec.
• LNG supply is the biggest hitch facing Anadarko’s Bear Head terminal in Nova Scotia, which had once hoped to start sending 1 bcf per day of gas to customers in eastern Canada and the northeastern United States in 2008.
But Anadarko reported last month that construction will be slowed while it searches for LNG supplies.
A spokeswoman told reporters that, although talks are taking place with several potential suppliers, the task is “very complex and competitive.”
For now, Anadarko is unwavering in its commitment to Bear Head, but industry analysts said it made sense for the company to scale back construction.
Anadarko has already signed agreements for nominated capacity on a proposed expansion of the Maritimes & Northeast Pipeline system (which currently ships about 400 million cubic feet per day from Nova Scotia’s offshore Sable field to New England).
• Canaport, a joint venture in New Brunswick by Irving Oil and Spain’s Repsol, is still moving towards a 2008 start-up for its C$750 million import facility to handle 1 bcf per day.
Repsol has the task of arranging the LNG, which Canaport is certain is secure, along with long-term shipping arrangements.
Currently, site clearing near Irving’s deepwater marine terminal was expected to finish at the end of March.
• The lowest profile venture on the East Coast is the plan by Keltic Petrochemicals to develop, construct and operate an LNG terminal and petrochemical plant in Nova Scotia.
But it remains very much alive, having just concluded a package of deals with 4Gas, a new London, England, company focused on LNG.
4Gas was created by Petroplus International, owned by RIVR, whose key shareholders are The Carlyle Group and Riverstone Holdings.
Maple LNG, the Canadian affiliate of 4Gas, has acquired 100 percent of the Keltic project plus permits and land options in exchange for payments leading to the acceptance of LNG cargoes, while supporting Keltic’s petrochemical facility by providing feedstock.
* Despite strong doubts that both can survive, two projects are in the works for deepwater ports in northern British Columbia.
Kitimat LNG, a unit of Galveston LNG, and WestPac Terminals are in a race to build import terminals this decade.
A government assessment of the C$500 million Kitimat plan to handle 610 million cubic feet per day is close to completion and a benefits agreement has been reached with a local aboriginal community.
WestPac, aiming to handle 350 million cubic feet per day initially, reports it has negotiated a round of financing and is now drafting regulatory applications for filing by the end of April.
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