Canada’s Natural Resources Minister Joe Oliver told an international LNG conference in Tokyo earlier in September that five export projects could be shipping 9 billion cubic feet per day of Canadian gas to Asia by 2020 — two-thirds of Canada’s current gas output and by far the most optimistic target any government official has set to date for an LNG industry that has yet to make a final investment decision for even one project.
“The opportunity is huge, our competitive advantage is clear and we are poised to become a major new safe, reliable and cost-effective LNG supplier to Japan, Korea and other Asia-Pacific nations for years to come,” he said.
Oliver’s sales pitch to top energy officials and business leaders in Japan and South Korea conveyed a clear message: the government of Prime Minister Stephen Harper is now pinning greater hopes on LNG than on oil sands crude exports into Asian markets.
There is little doubt that British Columbia alone has the gas resources to back LNG ventures.
Equally important, British Columbia First Nations show more enthusiasm for LNG as a potential source of revenue for their communities, while the opposition that threatens to stall or scuttle plans for crude oil exports has yet to spill over into the LNG sector.
How many projects?But not everyone shares Oliver’s boosterish view that Canada can launch several LNG projects this decade.
Real Cusson, senior vice president for marketing at Canadian Natural Resources, has estimated that five projects could cost C$50 billion-C$75 billion to construct and argued it would be more profitable to use Canada’s surplus gas for its domestic power-generation sector, which relies heavily on coal in Alberta and Saskatchewan.
In addition, he said there is a concern about the availability of skilled workers to construct pipelines and LNG plants in remote corners of northwestern British Columbia.
But Oliver countered that LNG proponents are confident they can proceed, especially given the hunger by Asian markets for a secure source of gas.
“The private sector is going to determine the economics of LNG, but they certainly are of the view that it is realistic,” he said. “And there is certainly a belief among everyone involved that the economics do in fact work and that, for the Japanese and Koreans, Canada can represent a reliable supply of significant size.”
Competition an issueBut he stressed it is vital that Canadian LNG developers waste no time if they are to head off competition from Australia and other suppliers.
“There is, without a doubt, a role for Canada to play in (the Asian) marketplace. But they’re not going to wait forever. So we’ve got to get moving.”
To that end, Oliver said the Canadian government is doing all it can to streamline environmental assessments and implement its “one project, one review” policy.
He also brushed off concerns that Canadian companies are planning to export a greater volume of gas than is currently consumed in Ontario and Quebec, Canada’s two most populous provinces.
“We have well over 100 years supply of gas,” he said. “We don’t have the constraint based on our internal needs that the Americans have.”
Oliver did acknowledge the underlying First Nations and public opposition in British Columbia to LNG exports, especially to the use of multi-stage fracturing to release gas from shale deposits, but suggested it does not match the resistance to pipelines carrying oil sands crude across the province.
Shell Chief Executive Officer Peter Voser echoed Oliver’s warnings, saying Canada likely has only until the end of this decade to build an LNG industry or get overtaken by other countries looking to take advantage of the booming Asian demand.
What pricing?Away from the public spotlight, LNG exporters and potential Asian customers are engaged in crucial discussions on the pricing of Canadian LNG.
Tim Wall, president of Apache Canada, operator of the Kitimat LNG project, said the joint-venture with EOG Resources and Encana is offering prospective Asian buyers oil-indexed pricing for its gas.
But he said some Japanese buyers prefer to import LNG from North America at Henry Hub gas prices, which were at 10-year lows earlier this year, while others don’t.
Because of the horse-trading that is taking place, Wall said there was no chance of concluding sales and purchase agreements by the earlier target of the third quarter.
However, he was unwilling to provide a revised schedule because of the ongoing talks that have been under way “for quite some time.”
A natural gas conference in Calgary in late September was told that the LNG buyers prefer the structure of planned export plants in Western Canada, with the value chains incorporating upstream and midstream development, over the United States Gulf Coast model in which they simply acquire export capacity.
Edward Kelly, vice president of North American gas consulting with IHS Global Consulting, said there is a “huge contrast” between Gulf Coast and Western Canadian projects.
He said that if a project is built from scratch, with new wells, pipes and liquefaction facilities, that is a “much more familiar and a much more comfortable structure to the Asian buyers than going to a U.S. Gulf Coast LNG facility and simply taking a position in the export capacity.”
However, trading-oriented Japanese buyers who are taking positions in Gulf Coast facilities are able to “get their gas earlier at a lower initial cost and lower all-in capital costs, or they can hard-wire an entire value chain” in Western Canada, he said.
Kelley also said Canada, like Australia, is considered a lower political risk country than the U.S.