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Vol. 17, No. 39 Week of September 23, 2012
Providing coverage of Alaska and northern Canada's oil and gas industry

Careful haste in BC

Government needs LNG revenues; proposals need time for FEED, approvals

Gary Park

For Petroleum News

It would be easy for the British Columbia government to get swept up in the tsunami of announced and planned LNG export projects, given that tens of billions of investment dollars are on the line and the proposals offer the only viable hope of developing trillions of cubic feet of stranded shale gas resources.

But the realities are also being hammered home by partners in the various projects and by analysts.

A spokesman for Apache, the 40 percent operator of the Kitimat LNG venture, with EOG Resources and Encana holding 30 percent each, and EOG Chief Executive Officer Mark Papa have delivered a plain message about what obstacles have yet to be cleared, even though preliminary work has started on a terminal at Kitimat.

They are backing away from initial forecasts that exports would start in 2015, emphasizing that the “to-do” list includes front-end engineering and development, or FEED, costs for the plant and pipeline, obtaining all of the necessary permits and negotiating contracts with off-take customers before a final investment decision will be made.

Bill Gwozd, vice president of gas services with Ziff Energy Group and one of the closest observers of the LNG business, told a recent Infocast LNG webinar that “it’s good news that Apache has taken the time to do due diligence with EOG and Encana.”

“It’s so easy for companies to jump the gun and just put money in the ground and not have all the I’s dotted and T’s crossed.

“By taking time, it just shows the prudence and the detailed level of internal-review and scrutiny that these large companies are going through to ensure that they actually have markets lined up so they don’t spent money and have a low load factor,” he said.

Deepwater ports ‘prime locations’

Gwozd said that the deepwater ports at Kitimat and Price Rupert, which are competing for the LNG business, are “prime locations for exporting gas. The LNG projects will have country-to-country arbitrage whereby it’s important to look at the price differentials between different countries.”

Gordon Pickering, director of energy with Navigant Consulting, agreed with Gwozd that one of the biggest challenges is ensuring there is sufficient electricity to power liquefaction plants, although the British Columbia government has already proposed to exempt those sources of power from its Clean Energy Act, giving the LNG sector access to a reliable, timely and cost-competitive mix of gas-fired and renewable power generation.

Gwozd said that in addition to British Columbia’s hydro power, the province could also use natural gas to fire its power plants.

Pickering noted that power generation resources are not sufficient in parts of the United States to support the growth and development of LNG plants, identifying the Jordon Cove Energy project at Coos Bay harbor in Oregon as one example.

He suggested that ultimately U.S. LNG exports will be in the range of 5 billion-6 billion cubic feet per day based on an assessment of the global natural gas and LNG market, along with firms that are in the marketplace.

Multiple projects

Currently 16 U.S. (two West Coast, two East Coast, 11 Gulf and one Alaska) and three Canadian projects (with about five others joining the preliminary line-up) are going through the export and construction approval process to handle 29 billion cubic feet per day of gas.

The plans by the Kitimat partnership, Canada LNG (with Shell Canada, Mitsubishi, PetroChina and Korea gas as partners) and now the joint venture by Spectra Energy and BG Group would likely export at least 6.9 billion cubic feet per day, only 800 million cubic feet per day short of Canada’s total domestic consumption.

Pickering said the development of LNG export projects in the U.S. will be constrained by a number of factors, including proliferation of emerging global shale gas resources, including countries in Europe and the Asia-Pacific region; the existence of plentiful gas supplies and LNG resources in Qatar and Australia; the likelihood of the Panama Canal expansion being limited by passage rates tied to the arbitrage value of commodities going through the canal; and the possible delinkage of international LNG prices to oil over the long term.

Qatar, Australia main rivals

He rated Qatar and Australia as North America’s main LNG rivals, but said Russian gas should not be overlooked, while China’s potential shale gas resources could enter the equation.

Hal Kvisle, newly appointed chief executive officer of Talisman Energy and previously CEO of TransCanada, said the raft of LNG projects “underscores that there is a lot of continuing potential in the Asian LNG market and there are a lot of big players that have come in.”

British Columbia Energy Minister Rich Coleman said gas supply is not an issue in his province.

“We have the reserves,” he said. “That’s the key. We have lots of gas. We could probably supply half of North America for the next 80 years with what we’ve got today.”

For a province which has been forced to admit that its revenues face a possible hit of C$1.1 billion over three years because of weak natural gas prices, LNG exports represent more than just a valuable budget cushion. They could save British Columbia from toppling into a financial hole.

B.C. groundwork

That prospect explains why the government of Premier Christy Clark is doing all it can to lay the groundwork for LNG projects.

Its latest move was to strike a deal with the Haisla First Nation, giving the aboriginal community rights to lease or buy almost 2,000 acres of land and “submerged” foreshore that could facilitate planning for an LNG export project.

Failure to win over the Haisla and other First Nations on the LNG plans is not guaranteed, but failure could see the LNG plans face the same threats of legal action and blockades that confront the efforts by Enbridge and Kinder Morgan to gain approval for exports of oil sands crude from the British Columbia coast.

The Haisla agreement involves property in the Douglas Channel near the deepwater port at Kitimat which three partnerships have identified as a possible location for their planned LNG terminals.

But the Haisla land is outside specific areas selected by the Apache-operated Kitimat LNG project, the Shell Canada-operated LNG Canada venture and a small project by a consortium of natural gas producers.

However, a partnership of Imperial Oil and ExxonMobil is in the “early stages” of an LNG feasibility study, although it has yet to release any indications of where it might locate a terminal.

Agreement provides certainty

British Columbia Aboriginal Relations Minister Ida Chong said in a statement that the Haisla agreement will “provide certainty for investors. It will also ensure that First Nations have a meaningful role in the decisions about land and resources that could affect their rights.”

The deal gives the Haisla rights to secure leases for up to 60 years, or the ability to buy the land outright, although the price in either case will not be made public.

Haisla chief councilor Ellis Ross said the land is viewed as an “essential element in building a strong and sustainable economic future for the Haisla people.”

The agreement could pre-empt any disagreement between the Haisla and LNG proponents and head off the opposition from First Nations that post one of the biggest hurdles to Enbridge’s plans to build its Northern Gateway oil sands crude pipeline to Kitimat.

Spectra-BG pipeline

The other most recent LNG-related development occurred Sept. 10 when Spectra Energy and the BG Group announced a deal for a pipeline to carry natural gas to Prince Rupert on the British Columbia coast to support an LNG project that could cost C$20 billion.

The 510-mile, 42-inch-diameter pipeline is being designed to carry 4.2 billion cubic feet per day. A final investment decision is expected in 2015 and the tentative in-service date is 2019.

The BG Group and Malaysia’s Petronas are both considering a terminal at Prince Rupert, 120 miles northwest of Kitimat.

The British Columbia government said that two other companies it would not name are also interested in the Prince Rupert region and Doug Bloom, president of Spectra’s Western Canadian transmission operations, confirmed other companies are also interested in B.C.’s export gas potential, but “have chosen to not yet make themselves public.”

“The government has done a very good job of putting British Columbia on the map and there are a lot of good companies looking at where and how they can do business in the province,” he said.

Bloom said that in the end it is possible that several LNG export terminals will be developed in British Columbia beyond the government’s declared goal of having three projects up and running by 2020.

Spectra Chief Executive Officer Greg Ebel said in August that the pipeline planned for BG Group will likely spur further investment in B.C. by his company, which currently transports 60 percent of the gas produced in the province.

“We are ideally positioned to create further value for our investors by leveraging surplus B.C. natural gas supplies and facilitating export to high-demand markets in Asia,” generating multiple opportunities to increase Spectra’s gas gathering and processing facilities.

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