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Hope for near-term gas prices Peters & Co. says several factors will aid price recovery, warns infrastructure, challenges on offtake could impede LNG growth Gary Park For Petroleum News
Calgary-based energy brokerage Peters & Co. has injected some hope into the outlook for natural gas prices, but is hesitant about including the prospect of LNG exports in its pricing equation.
A report by the investment dealer said rising demand for natural gas by power generators, tightening inventories and less gas-targeted drilling should all contribute to a price recovery in North America.
But it raised some questions over how many of the LNG export projects now on the table in the United States and Canada will go ahead.
The report said that despite the supply glut in the United States and Canada there are broad grounds for hope, especially with inventories lagging 36 percent behind injections at the same time last year.
As well, Peters said summer consumption has risen 20 percent because of high temperatures and coal-to-gas switching, the U.S. gas-directed rig count has dropped 52 percent in the past year, notably in the Haynesville and Marcellus plays, while the rebound in oil prices is diverting capital to oil from gas projects.
“Our 2013 storage forecasts suggest that continued robust power demand and a slowdown n activity levels will set the stage for a more bullish supply/demand environment,” the report said.
“Over the longer-term we expect that half-cycle profitability for natural gas producers would still require prices of US$4.50/Mcf” before LNG exports out of North America can open up new market outlets, the report said.
However, Peters cautioned that rising production in the Marcellus and the volumes of associated gas being produced with growing oil production are downside factors.
The report estimated that LNG projects in the works have the capacity to export 24 billion cubic feet per day from the U.S. and 5 bcf per day from Canada, but said there is uncertainty about how much of the premium between North American and global LNG prices can be captured because of the substantial infrastructure costs and the commitments required from international buyers.
In addition, there are no guarantees that projects can overcome regulatory and political challenges, Peters said, raising questions about whether licenses will be issued to export one-third of North American production.
Kitimat going slower Peters’ doubts echoed concerns expressed by Mark Papa, CEO of EOG Resources, who told a Barclays conference in New York that the Apache-operated Kitimat LNG project in British Columbia “is not going to go anywhere until the consortium gets an oil index contracts with an (Asian) buyer for a majority of the offtake.”
He said that process has “certainly gone slower than any of us expected. I wouldn’t even hazard a guess on the timeframe as to how that’s going to move forward.”
Papa said that if Kitimat does proceed it will be a “positive augmentation for EOG, but don’t buy EOG on the basis of Kitimat because it’s still kind of a long putt.”
“So that’s why we’re not really tooting the horn of Kitimat until we see something a lot more firm than we’ve seen so far,” he said.
Apache controls 40 percent of the project, with EOG and Encana holding 30 percent each.
Encana has remained quiet on Kitimat over the last five months since CEO Randy Eresman said talks were under way with as many as six buyers to secure long-term sales contracts, including offers of equity positions up to 20 percent in Kitimat for one or two buyers.
He said a final investment decision on the plans to build two trains of 700,000 million cubic feet per day each, with the initial LNG exports scheduled for late 2015 or early 2016, would not be made until at least 80 percent of the volumes were under long-term deals.
Strong interest from India But not everyone is downplaying the outlook for LNG shipments from North America, with India’s state-owned ONGC Videsh expressing its strong interest in establishing a presence in Canadian LNG plans, along with the Alberta oil sands.
The company’s Chief Executive Officer Dinesh Kumar said an agreement is on the horizon as ONGC’s overseas investment arm OVL expands its hunt for global oil and gas assets.
Recent media reports have OVL involved in talks with ConocoPhillips Canada to invest about C$5 billion to acquire oil sands interests several leases.
Kumar said OVL is also exploring the prospect of importing LNG from Canada and the United States, breaking away from its current reliance on the Middle East.
He said the current gas prices in North America offer “significant benefits for India, given that we are importing LNG from other places globally at much higher prices.”
ONGC already has a memorandum of understanding with ConocoPhillips for shale gas exploration in India and North America.
GAIL, another of India’s state-run companies, signed an offtake deal last December with Cheniere Energy Partners for 3.5 million metric tons per year of LNG deliveries, due to start in 2017.
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