State-run Korea Gas Corp. or Kogas, the world’s largest importer of liquid natural gas, has given added impetus to Canada’s hopes of exporting gas outside of North America by committing to spend US$1.1 billion over the next five years to explore and produce British Columbia shale gas.
Already positioned to take 40 percent of the proposed 750 million cubic feet of gas initially targeted for the Kitimat LNG project, Kogas has now agreed to participate in the supply end through a joint deal with EnCana.
Yonhap, the South Korean news agency, has reported that Kogas will pay US$565 million over the initial three years to earn a 50 percent working interest in expected production from three shale gas fields in the Horn River and Montney formations.
The fields cover 129,000 acres in the Montney formation and 25,000 acres at Horn River and are expected to produce 137 million cubic feet per day over 40 years, starting in 2017.
The Kitimat project has been tentatively set to come onstream in 2014, although Apache, the new 51 percent owner, has cautioned “there is still a long way to go before Kitimat potentially becomes a real export asset.”
The Kogas entry could give an added boost to the timing by at least putting pressure on the partners to make an investment decision on the C$3 billion terminal and C$1 billion pipeline.
Some 15 percent of holdings
An EnCana spokesman said the deal covers about 15 percent of his company’s Horn River and Montney holdings and occupies sparsely drilled areas outside the core properties where EnCana is not very active.
“This gives us an opportunity to accelerate development faster than we would have otherwise and bring some of this additional gas potential to market,” he said.
What the farm-in arrangement offers is the chance to accelerate development of those prospects and free up EnCana to invest in its more immediate priority plays, such as the Haynesville shale play in Louisiana.
The farm-in sets the stage for Canada to access Asian markets and ends its total reliance on the United States as an export outlet and raises the growing interest by Korea in tapping into Canadian energy sup0plies.
In October, Korean National Oil Corp. paid C$4.1 billion to acquire Harvest Energy Trust, gaining conventional oil assets and oil sands leases in Western Canada and taking control of a troubled Newfoundland refinery.
KNOC said in January it views Canada as a key element of its plans to spend US$6.5 billion on mergers and acquisitions this year to narrow the gap on some of its Asian rivals and lower South Korea’s almost total dependence on imported oil by increasing its own production to 300,000 barrels per day from 130,000 bpd.
Speculation has KNOC eying assets being put on the block by Suncor Energy, or the Nexen-OPTI Canada joint venture which owns the Long Lake oil sands project.
Gordon Kwan, an energy researcher at Mirae Asset Securities, said Canada is very open to foreign investment and is an obvious candidate for KNOC money “with lots of oil sands projects now being valued very cheaply.”
May bolster LNG chances
Ralph Glass, vice president with AJM Petroleum Consultants, told the Calgary Herald he believes the arrival of Kogas will bolster the chances of an LNG project, which is “the only way Horn River will ever see market.”
He said there is too much unconventional gas development in Pennsylvania and Quebec, which have easy access to the largest consuming markets, putting British Columbia and the Arctic at a competitive disadvantage.
Glass said Canadian gas can be competitive with Australian LNG and thinks South Korea is making early moves to pin down long-term supplies.
A Kogas official said in February that the firm aims to sell about 28 million metric tons of LNG in 2010, up 3.4 million metric tons from 2009, attributing the increase to the demand for power generation as the economy recovers.
Without elaborating at the time, the official said Kogas was in discussions with counterparties to participate in exploration and development overseas and expected its overseas investment this year would be about US$855 million.
Bill Gwozd, vice president of Calgary-based consultant Ziff Group, told the Globe and Mail he expects more companies will invest in Canadian gas, but he suggested the cost of tankering LNG across the Pacific could reach C$5 per thousand cubic feet, which raises questions about the profitability of the Kitimat project. However, Kitimat LNG officials believe the shipping costs would be close to C$3-$4 per thousand cubic feet.
