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Vol. 18, No. 52 Week of December 29, 2013
Providing coverage of Alaska and northern Canada's oil and gas industry

Wave of LNG exports

Approved Canadian volumes exceed current output; future supply, demand concerns

Gary Park

For Petroleum News

Canada’s National Energy Board has approved a bundle of four LNG export permits, raising the total to seven and the natural gas equivalent to 14.68 billion cubic feet, bcf, per day, stirring the first sign of concern about the impact on domestic supply and demand.

The federal regulator, whose approvals face an automatic review by the Canadian government and final ratification by the federal cabinet, offered assurances that the gas resource base in Canada and in North America is “large and can accommodate reasonably foreseeable Canadian demand, LNG exports and potential increases in demand.”

Concerns from IGCAA

But the Industrial Gas Consumers Association of Alberta, IGCAA, without formally opposing the newest applications, urged the NEB to “consider the aggregate impact of the LNG exports.”

While expressing confidence in the NEB’s observance of its mandate to ensure that the gas to be exported is surplus to Canadian requirements for the 25-year permit period, the IGCAA said it was concerned that overall impact of the license applications was not being considered.

The IGCAA submitted a table to the NEB that tallied the approved and proposed LNG export volumes, but the NEB said it did not find the data useful in making its “surplus determination in the context of a dynamic natural gas market.”

“The board considers price as one indicator of market conditions as North American natural gas supply and demand adjust to changes in price signals.”

Resource described as ‘robust’

The NEB also factored in supporting submissions by Ziff Energy Group (a division of HSB Solomon Associates) and Roland Priddle, a former NEB chairman who is now an international energy consultant.

Ziff said North American and Western Canadian gas resource bases are “robust and continue to grow with the development of horizontal drilling and multi-stage fracture technologies and that supply is not constrained to meet projected base demand and incremental demand” from the projects over the forecast period.

The NEB said Ziff expects the North American gas markets to continue functioning in a “rational manner during the forecast period.”

Priddle described the North American market as “highly liquid, open and efficient, and that Canadian gas markets have been adequately supplied ...” the NEB said.

The NEB argued that since deregulation of Canadian gas markets in 1985, North American markets have functioned efficiently, with no evidence that they will fail to do so in the future.

NEB satisfied with quantity

The regulator said it was satisfied that the quantity of gas proposed for export did not “exceed the surplus remaining after due allowance has been made for the reasonably foreseeable requirements for use in Canada, having regard to the trends in the discovery of gas in Canada.”

Bill Gwozd, senior vice president at Ziff Energy Group (a division of HSB Solomon Associates), said the “very quick turnaround (in the NEB decision) represents a huge Santa Claus present for the four operators” giving them a chance to show to prospective LNG buyers that they are serious.”

Ed Kallio, Ziff’s director of gas consulting, said his firm’s submissions in support of the four applications used the same template as accompanied the Shell application for an LNG Canada export permit.

He suggested that if the evidence did not support the applications the NEB would have been “asking questions.”

Chris Theal, CEO of Kootenay Capital Management, said the NEB “fully recognizes the challenges facing the Canadian gas market.”

The fact that the U.S. Northeast has moved from dependence on Canadian gas to a self-sufficient market “underscores the need for new markets for Canadian energy.”

Methods to be scrutinized

Natural Resources Minister Joe Oliver said in a statement Dec. 17 that his department will scrutinize the methods used by the NEB to determine whether the LNG gas requirements are surplus to Canada’s forecast supplies over the license periods which cover 25 years for each of the four latest approvals. But he did not elaborate on how the review process would be conducted.

Geoff Morrison, British Columbia manager for the Canadian Association of Petroleum Producers, said the NEB would only have granted the approvals if it deemed there were ample gas resources to serve domestic and international markets.

He said that position was reinforced with the release a month ago by the NEB and the governments of British Columbia and Alberta of “staggering” new resource estimates for the Montney formation in the two provinces. That report put the resources at 3,000 trillion cubic feet of gas, of which 449 tcf is thought to be economically marketable.

The latest permits approved by the NEB cover WCC LNG operated by ExxonMobil for up to 30 million metric tons per year or a gas equivalent of 4 bcf per day; Prince Rupert LNG operated by the UK’s BG Group for 21.6 million metric tons per year or 2.91 bcf per day; Pacific NorthWest LNG operated by Malaysia’s Petronas for 19.68 million metric tons per year or 2.74 bcf per day of gas; and Woodfibre LNG Export for 2.1 million metric tons per year or 290 million cubic feet per day of gas.

Other licenses awarded

Over the past two years, the NEB has awarded licenses to Shell-operated LNG Canada for 24 million metric tons per year requiring gas supplies of 3.23 bcf per day; Chevron-operated Kitimat LNG for a first train of 10 million metric tons per year or 1.28 bcf day; and BC LNG Cooperative for two trains of 1.8 million metric tons per year each and combined gas needs of 230 million cubic feet per day of gas.

Also before the NEB is an application by Aurora LNG, operated by China’s CNOOC, which is seeking permission to export 24 million metric tons per year.

None of the projects has received a final investment decision, with most waiting for the British Columbia government to release its fiscal regime in the next provincial budget, expected in February, while they negotiate offtake orders.

The seven permit approvals and Aurora are all counting on obtaining their gas supplies from British Columbia’s extensive shale and tight gas basins — notably Montney, Horn River, Fort Liard and Cordova — and northwestern Alberta’s Duvernay play.

Cabinet must ratify

NEB permit approvals require final ratification by the federal cabinet before permits can be issued. That has occurred for the initial three permits.

The combined gas needs of 14.68 bcf per day for the seven authorized licenses exceed Canada’s forecast current domestic and export consumption of 13.1 bcf per day, which the NEB forecasts will drop to 11.4 bcf per day in 2015, reflecting the impact of the rapid growth of shale production in North America. Canada’s peak consumption year was 17 bcf per day in 2005.

Oliver said the government of Prime Minister Stephen Harper “supports energy projects that will create jobs and generate economic growth in Canada for future generations.”

He said the government is “aggressively working to reach new markets for Canadian natural resources,” provided the projects are safe for Canadians based on an “independent, science-based environmental and regulatory review.”

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