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Vol. 17, No. 21 Week of May 20, 2012
Providing coverage of Alaska and northern Canada's oil and gas industry

Canada feeling LNG heat

Ernst & Young report, federal cabinet minister issue urgent infrastructure call

Gary Park

For Petroleum News

Canada urgently needs to hasten the development of its stranded natural gas for export as LNG, or miss the boat to Asia, said Ernst & Young and federal Natural Resources Minister Joe Oliver.

A report by the consulting firm said joint ventures and partnerships — such as those being sought by EnCana — could make all the difference between capitalizing on global LNG opportunities in high-demand Asian markets, or losing out to foreign suppliers.

Lance Mortlock, senior manager in Ernst & Young’s oil and gas advisory practice, wrote that countries around the world are fast posing threats to Canada’s potential market share.

“Total Pacific basin demand is expected to rise from 120 million metric tons today to 241 million metric tons per annum in 2020 and exporters in Australia, Russia, Malaysia and Qatar have been quick to respond,” he said.

“These countries are already well on track to developing the necessary infrastructure to fulfill the needs of this expanding market — leaving little room for Canada.”

Mortlock also noted that seven U.S. LNG terminals have also been filed for regulatory approval and, if they proceed, could put them ahead of Qatar in export capacity, changing the regional dynamics in Asia significantly.

Canada lacks market

While Canada has immense domestic gas reserves, it lacks the population to consume supply, the report said.

Add to that the steadily shrinking share of the U.S. market for Canadian gas, along with sustained low gas prices for the indefinite future, Canada is suddenly facing limited opportunities for LNG development, Mortlock wrote.

“To avoid losing out on opportunities in emerging demand markets, Canada must accelerate infrastructure development, seek new capital sources and tie down long-term customers,” he said.

Ernst & Young estimated that $50 billion in industry investment will be needed over the next five to 10 years if Western Canadian producers are to take full advantage of the prospects in Asia.

But, because of their size, LNG projects are often too risky for companies to tackle on their own, putting pressure on Canadian companies to pursue joint ventures and partnerships — although those options also come with many complexities.

Companies must consider the various aspects of their business operating model, including strategy, business processes, information systems, structure and governance, leadership people management and corporate culture — all of them critical for success, Ernst & Young cautioned.

Possibility of 12 million tons

The report predicted Canada could have 12 million metric tons per annum of LNG export capacity in place by 2015, but Mortlock said that figure depends on whether U.S. Gulf Coast LNG proponents and other competitors worldwide move in.

The firm’s capacity outlook for Canada is more than double the initial size of the most advanced British Columbia proposal — the Apache-operated Kitimat LNG venture.

Qatar, the most ambitious LNG player, has more than six times Canada’s capacity planned by 2015.

Ernst & Young said Canada is faced with laying hundreds of miles of pipelines to connect the gas fields to liquefaction terminals on the British Columbia coast, while construction has yet to start on the export terminals.

“Those pipelines need to go across pretty sensitive environmental lands, so overcoming those challenges from an environmental perspective and First Nations perspective will be very important,” Mortlock said.

Oliver said the slow pace of progress could see Canada miss out on the global LNG boom.

“I am concerned about that,” he said. “Japan has a very strong interest in our gas, as does China and other countries, but the Australians have been moving very rapidly to secure long-term LNG contracts.

“And that’s where Canada could lose out, because, while the Asian countries want to expand their sources of supply, they are not going to wait. It’s in their strategic interest to tie-up as much of the resources in long-term contracts as they can, so timing is crucial,” Oliver said.

BC LNG Export Cooperative, which plans to liquefy only 125 million cubic feet per day, is targeting initial shipment in 2014, but the Kitimat project is targeting late 2015 at the earliest.

Over that wait time the economics of LNG should shift dramatically, said ratings agency Moody’s Investors Services.

“Proposals for new LNG terminals in Australia and other countries could lead to a capacity glut for LNG, which could cause global LNG prices to drop,” said analyst Terry Marshal in a note to clients.

“So North American producers could face some risk from poor future economics, although no project will be built without long-term contracts ensuring each specific project’s economic returns,” he said.

In another twist, the United Arab Emirates Abu Dhabi National Energy Co., better known as TAQA, is weighing the possible export of Canadian LNG to more lucrative markets outside North America because of the low commodity prices in Canada.

TAQA, which has interests in Canadian gas properties, views the option of exporting LNG as “something we should look into because of the great dislocation in the price of gas,” said Carl Sheldon, the head of TAQA, which is 75 percent owned by the Abu Dhabi government.

“Clearly the disequilibrium (in gas prices) will have to be addressed, although we have no specific plans in that regard,” he said.



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