British Columbia’s LNG industry lobby group has brushed off the claims of a geologist that large scale operations would pose a threat to Canada’s natural gas supplies.
David Keane, president of the B.C. LNG Alliance, said a report released by the Canadian Center for Policy Alternatives, arguing that known gas fields would be unable to meet the demand for feedstock by LNG operations, failed to take into account a number of factors.
He pointed out that gas supplies that are becoming surplus to needs because of shrinking exports to the United States and the continued pace of new gas discoveries should put those concerns at rest.
Keane told the Vancouver Sun that the report’s author, David Hughes, is “cherry-picking some of the facts. When you look at the amount of gas resources available in British Columbia, there is a tremendous amount available for production and export.”
Double current output
The B.C. LNG Alliance consists of seven major project proponents who have received National Energy Board permits to export more than 100 million metric tons a year of LNG. That could translate into gas demands of more than 25 billion cubic feet per day, or double Canada’s current output.
Hughes said that if the projects associated with those licenses go ahead they would require a massive increase in exploration and production.
He estimated that there is enough gas in Western Canada to support only one large-scale LNG export facility, compared with the three to five the industry is counting on.
Hughes has also challenged reports published by the British Columbia Oil and Gas Commission that the province has 2,933 trillion cubic feet of resources, far surpassing the 2013 estimates of 42 tcf of proved reserves and 442 tcf of estimated reserves.
Not all economically recoverable
Keane said the 2,933 tcf figure is one that the commission and the energy board believe reflects British Columbia’s gas storehouse although “probably not all of it is economically recoverable. But when you look at the gas reserves in British Columbia, they continue to grow year after year.”
He said it would be illogical for companies to propose and start designing liquefaction plants costing the C$11.4 billion price tag of the Pacific NorthWest LNG terminal operated by Petronas or C$5 billion of pipelines from gas fields if they did not “firmly believe that the gas supplies were available.”
Capital costs an issue
But industry leaders do concede that ways need to be found to lower the capital costs to allow British Columbia to compete for a place in the LNG export markets.
Unless those costs can be sharply lowered, it will not be possible for projects to compete against surplus supplies that have turned LNG into a buyers’ market, said Woodside Petroleum Chief Executive Officer Peter Coleman.
He told reporters at British Columbia’s third annual LNG summit that Asian buyers will only pay a maximum US$10-US$11 per million British thermal units for long-term deliveries.
“It’s a difficult time to be in the marketplace for LNG,” he said. “That means the cost structure (in British Columbia) needs to come down by anywhere between 25 and 30 percent.”
Similar to late 1990s
Andy Caditz, chief executive officer of the Shell-led LNG Canada venture, said the situation facing world LNG is currently similar to the late 1990s when there was a supply overhang.
“Only the most competitive, in terms of cost of supply and those that are best connected to the markets will survive.”
Steve Lidisky, president of ExxonMobil LNG Market Development, doubts the market glut will start easing before 2021, although he suggested the dramatic drop in oil and gas prices provides the catalyst for a cost shakeout, “with only the strongest projects from financially strong developers likely to succeed.”
Citigroup analyst Ed Morse said in September that LNG is entering a period of oversupply and a demand slowdown means Canada has already missed its opportunity to start LNG exports this decade, having been outpaced by Australia and the United States.
“The window will come back again, but for this round it’s been lost,” he said.
Australia surging ahead
While Canada makes slow progress in issuing final regulatory approvals for its projects, Australia is surging ahead with seven new developments that would see it overtake Qatar as the world’s top LNG exporter in the next three years.
Santos, operator of the US$18.5 billion Gladstone project, made its first shipment in mid-October from a plant fed by coal-seam gas.
The bulk of Gladstone’s 7.8 million metric tons a year of production is locked into 20-year oil-linked contracts with Korea Gas Corp. and Petronas, both of which are involved in British Columbia projects.
But Santos is also struggling to sell assets to reduce its US$8.8 billion in net debt, which the company’s Chief Executive Officer David Knox thinks will be achievable by using “strong cash flows (from Gladstone) for decades to come.”
UBS analyst Nik Burns said “it’s very important to get Gladstone up and running,” and warned that the “outlook beyond the current wave of projects looks very difficult.”
Australia is taking an aggressive approach, with its Resources Minister Josh Frydenberg visiting Japan in mid-October to tout his country’s moves to simplify environmental approvals and accelerate labor agreements for new projects.
