The British Columbia government has sent out a clear message it will waste no time trying to get LNG export projects on track.
In unveiling her new cabinet after the May 14 election, Premier Christy Clark gave top priority to doing what she can to lock up sales contracts and using LNG as her best chance to promote job creation, resource development and economic growth.
She named Rich Coleman, former energy minister, as the head of a new Natural Gas Development Ministry and, just to reinforce the importance she attaches to LNG, deputy premier.
Clark gave Coleman a single over-riding mission: “Close those sales deals ... bring them home.”
She expressed hope that some contracts will be signed this year, enabling British Columbia to achieve her goal of three operating LNG projects by 2020 and, overall, generating C$1 trillion in economic activity in 30 years.
In addition to helping companies such as Chevron, Shell, Petronas and British Gas negotiate sales commitments, Clark has many hurdles to clear — an unclear long-term demand for LNG in Asia, the reluctance of prospective Asian customers to entertain oil-indexed pricing, the looming threat of environmental and First Nations opposition, and the absence of a clear strategy by government-owned BC Hydro to provide the power to serve LNG facilities.
The Liberal government, re-elected May 14 in a staggering come-from-behind victory, will also include Bill Bennett as minister of energy and mines, along with presiding over a core review of government spending.
Clark’s cabinet selections coincide with warnings over rising LNG capital costs, the lessons to be learned from Australia’s challenges, and the competition between LNG proponents and others who have their sights fixed on using Western Canadian gas for transportation, industrial uses and oil sands production.
Ally in EnbridgeHowever, she has found an unlikely ally in Enbridge, which said in its final submissions to regulators handling the Northern Gateway application that if the pipeline is built it could attract C$18 billion in oil and gas investment, providing a “ready source of capital ... (for) the development of a British Columbia LNG industry.”
Northern Gateway President John Carruthers said it needs to be understood that higher netbacks for oil producers as a result of Northern Gateway can underpin “more and more activity, including natural gas.”
Kevin Petak, vice president of gas market modeling for ICF International in Fairfax, Va., said the window of opportunity for LNG exporters will remain open for only a decade.
He told a Canadian Energy Research Institute conference in Alberta that competition from Australia and North Africa could limit the United States and Canada to serving 30-40 percent of global LNG demand.
Steve Lewandowski, a senior director for global ethylene with IHS Chemical, issued a blunt message.
“The dithering about LNG projects in British Columbia has to stop,” he said.
Although British Columbia is closer by sea to China than the U.S. or Australia and its colder climate makes the liquefaction process more efficient, uncertainty stems from fracturing regulations, carbon taxes and the question of how much LNG can be tied to oil prices, Petak said.
He said the 2015-25 period will likely be one of rapid expansion when sources of market growth come together, but construction cost pressures could limit the number of projects that get an investment go-ahead.
Rising gas prices forecastICF forecasts that Henry Hub natural gas prices will be US$4 per million British thermal units through to 2015, then rise to US$5-$6, driven by market growth, while Western Canadian prices are likely to be 50 cents to $1 lower.
At the same time, North American shale gas production is expected to almost double to 65 billion cubic feet per day by 2025, with Marcellus production adding another 20 bcf per day by 2025.
ICF offers a “middle of the road” estimate of 526.6 trillion cubic feet of gas resources in the Montney, Horn River, Cordova Embayment and other plays, Petak said, adding that some of the newer plays have yet to be fully evaluated.
Skya Kruithof, senior commercial manager for petrochemical feedstocks at Dow Chemical Canada, said LNG exports could also be positive for his industry by opening the way to liquids extraction from the gas, although the lack of infrastructure in the gas-liquids areas could pose challenges.
Gerry Goobie, a principal with Gas Processing Management, said companies that plan to build grassroots LNG export facilities in British Columbia have yet to estimate how much gas prices could rise, but he agreed with Petak that a marginal increase would spur renewed drilling activity in British Columbia and Alberta.
“You will be amazed at how many producers will be chasing that kind of margin,” he said.
Petak forecast that about 134 percent of total gas produced in Western Canada by 2025 will be used by LNG operations.
High costs similar to AustraliaAt a Calgary forum Samantha Santa Maria, Platts managing editor of natural gas, said Canada should look “really carefully” at what happens in Australia because the two countries have high costs, especially labor, and need “oil indexation at some point in their pricing formula.”
She said the Canadian and provincial governments must work with various stakeholders such as First Nations to ensure the infrastructure that is needed can be constructed cost effectively, but added the “availability of labor is a real concern.”
Because China is ramping up its shale development its need for LNG may start to decline, making it critical to get LNG projects operating by 2020 at the latest, Santa Maria said.
She suggested the British Columbia projects that have the best chance of “getting off the blocks” are the BC LNG Export Cooperative, with the recent addition of Golar LNG, to export up to 700,000 metric tons a year starting by late 2015 or early 2016; Kitimat LNG, whose operator Chevron is a “very reputable player with lots of experience in LNG markets”; and Shell Canada’s LNG Canada partnership whose Asian owners have a “real vested interest in taking that gas to their market.”
Also competing for Western Canada’s shale gas supplies are the industrial sector and the oil sands.
Team effortAllan Wilms, commercial west vice president of Parkland Fuels Corp., said a team effort is already under way to gain access to LNG.
Parkland recently announced a branded distribution agreement for LNG with Shell Canada for commercial and industrial customers in various high horsepower markets, including oil and gas exploration, well stimulation applications and off-grid power generation.
Among the lengthening list of potential LNG users, Encana is counting on oil and gas companies being the “first and fastest” adopters of LNG for their daily operations; the Canadian Natural Gas Vehicle Alliance expects gas to underpin transportation; Royal Dutch Shell said LNG is a better fuel for trucking, the marine sector and rail than diesel because it is cleaner burning; and Irving Oil is talking about offering LNG at its fueling stations between Montreal and Halifax.
The oil sands sector is also in the thick of the chase for new gas production, needing an estimated 1 billion cubic feet per day for every 1 million bpd of incremental output.