Canada has taken a giant leap towards Asia by approving the Kitimat LNG project, which provides the first major outlet for an estimated 300 trillion cubic feet of stranded shale gas deposits from British Columbia and Alberta and the first LNG exports from Canada.
It took the National Energy Board little more than four months to conduct public hearings and issue a 20-year export permit.
The authorization to export 200 million metric tons of LNG is equivalent to 9.36 trillion cubic feet — about 50 percent more than the proven reserves currently backing the Mackenzie Gas Project — or a maximum 468 billion cubic feet a year.
It was the first application for a gas export license since the deregulation of Canada’s gas market in 1985 and has raised some concerns about the impact on domestic gas prices and supplies.
But the NEB said the “proposed term volume is unlikely to cause Canadians difficulty in meeting their energy requirements at fair market prices.”
“The board is of the view that the proposed export will not only open new markets for Canadian gas production, but that ongoing development of shale gas resources in B.C. and Alberta will ultimately further increase the availability of natural gas for Canadians,” the regulator said.
Apache operatorThe Kitimat partnership — operator Apache, with a 40 percent stake, and Encana and EOG Resources, each holding 30 percent — will now complete its engineering and design work, including cost estimates and labor force requirements, and make a final investment decision in the first quarter of 2012, said Apache spokesman Paul Wyke.
The partners also have vital ammunition as they target potential customers in China, Japan, South Korea and India. So far, Encana said it is negotiating with six prospective buyers.
Wyke said the NEB decision is a “fantastic milestone, letting us move forward and move forward quickly.”
He said the final cost, including a supply pipeline from British Columbia’s Horn River basin, where the Kitimat partners are the leading producers, should be close to previous estimates of C$5.5 billion.
Kitimat LNG President Janine McArdle said the project is a “remarkable opportunity to open up Asia-Pacific markets to Canadian natural gas and we’re leading the way in being able to deliver long-term, stable and secure supply to the region.”
Edward Kallio, director of gas consulting with Ziff Energy Group, said the export license provides another “cornerstone” that will help attract buyers and financing.
Toehold in Asian LNG marketIt also gives Canada in a toehold in a fast-emerging battle for Asian LNG markets with Australia, which has an estimated C$200 billion of plans in various stages of development.
The NEB said the “forecast demand growth for LNG in the Asia-Pacific region provides a new opportunity for Canadian producers to diversify their export markets,” adding that long-term oil-indexed sales contracts could provide for higher netbacks to Canadian producers.
Encana Vice President Dave Thorn said the Kitimat partners anticipate that Canadian gas will sell in Asia for the equivalent price of crude oil in Japan and expect that level to remain strong through 2020.
He said Asian countries are “seeking to both meet their forecast growth as well as to diversify their sources of supply. The highest growth regions are expected to be India and China.”
Thorn said negotiations of potential off-take agreements for Kitimat are based on volumes associated with a two-train facility, each designed to process 700 million cubic feet per day, with the first coming on line in 2015
Peter Tertzakian, chief energy economist with ARC Financial, said a steep drop in exports to the United States – because of rapid shale gas development and an economically depressed market – is costing producers “tens of millions of dollars each day” has forced Canada to “act on market diversification … at least the industry buzz is now all about tapping into a new era of growth.”
In addition to Kitimat, BC LNG Export Co-operative is waiting for an NEB decision on its application to start exports in 2013 of 125,000 thousand cubic feet per day. The proponent is a 50-50 joint-venture of Houston-based LNG Partners and the Haisla First Nation.
Six producers doing evaluationEvaluation work is under way by six producers: Shell Canada, with Mitsubishi and Korea Gas as possible partners, to possibly process 1.8 billion cubic feet per day; Penn West Energy, as 50 percent operator, with Mitsubishi holding 30 percent and the balance distributed among five South Korean and Japanese utilities, is eying a 500 million cubic feet per day venture; Malaysia’s Petronas, as 80 percent operator, and Progress Energy, are eying LNG exports from their North Montney development joint venture; Nexen has signaled its interest in LNG, drawing on gas from British Columbia’s Horn River, Cordova Embayment and Liard basins; and Talisman Energy and South Africa’s Sasol are keeping an LNG option open while examining the feasibility of building two gas-to-liquids plants in Western Canada.
The Kitimat partners are in the final stages of engineering and design work on the C$1.2 billion Pacific Trail Pipelines that will cover 280 miles and provide capacity of 1 billion cubic feet per day to the planned LNG terminal from Spectra Energy’s gas processing complex at Summit Lake, British Columbia.
Site clearing at terminalOver recent months, site clearing has also taking place at the terminal site, using previous regulatory approvals for an LNG import facility before the original Kitimat ownership switched to an export project to take advantage of Asian demand.
The Kitimat partnership has circumvented most of the bitter opposition from environmentalists and First Nations that has hindered progress on Enbridge’s planned 525,000 barrels per day Northern Gateway oil sands crude pipeline along a similar route to the deepwater port at Kitimat.
Using C$35 million from the British Columbia government, 15 First Nations are positioned to take an equity stake in the Kitimat pipeline and collect about C$550 million over 25 years from pipeline profits.
But some First Nations are starting to register concern over the impact on their water supplies from hydraulic fracturing and forecasts that up to C$65 billion in new pipelines and liquefaction terminals will be needed over the next years if Western Canadian producers are take full advantage of LNG opportunities and target 7 billion cubic feet per day for export.