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Vol. 18, No. 16 Week of April 21, 2013
Providing coverage of Alaska and northern Canada's oil and gas industry

Japanese to back LNG

Government pledges C$10B in loan guarantees for gas targeted to Japan

Gary Park

For Petroleum News

Japan is ready to support up to C$10 billion of direct investment in Western Canada’s LNG sector, giving one of the biggest lifts yet to the industry.

At a Pacific Energy Summit in Vancouver earlier in April, the Japanese government disclosed it was prepared to cover that amount through loan guarantees to accelerate the advent of trans-Pacific LNG shipments and replace nuclear-generated power lost in Japan’s massive 2011 earthquake.

The backing is designed to help finance the development of natural gas plays in Western Canada, especially British Columbia, along with the construction of pipelines to LNG terminals on the Pacific Coast.

Keisuke Tsujimoto, general manager of the Vancouver office of state-owned Japan Oil, Gas and Metals National Corp., said Japan is eager to participate creating a robust gas industry to replace some of the 30 percent of energy production it has lost since shutting down all but two of its 50 nuclear reactors following the earthquake and Fukushima nuclear disaster.

One of the corporation’s mandates is to help private Japanese companies obtain secure gas supplies as it has already done in Australia.

Price in Japan

The Japanese move is expected to help overcome a major stumbling block to LNG exports by establishing a price for LNG in Japan, said Yuen Pau Woo, president of the Asia-Pacific Foundation of Canada, noting that price uncertainty is delaying final sanctioning of projects in British Columbia.

“We do not know what the price points will be in this new world of trans-Pacific gas trade,” he said. “But this move by the Japanese government will make it easier to find commonality.”

Woo said his foundation has already heard in “very explicit fashion (from Japan and South Korea) that they have an interest in accessing energy resources in North America because there are non-economic benefits that come with it.”

“They would like to diversify their sources of supply away from more risky political environments, such as the Middle East and to some extent Russia. There is a desire to try to align political relations with trade and energy alliances,” he said.

Woo said Japan and Korea are also hoping to benefit from energy know-how in North America to both improve energy efficiency and reduce climate change impacts by reducing their reliance on dirtier sources, primarily coal.

Tsujimoto said the best way for Japan to benefit from North American gas prices is to invest directly in Canadian gas fields and infrastructure projects.

Taking advantage

Japanese companies expected to take advantage of the loan guarantees are:

•Mitsubishi, which has a 20 percent equity position in the Royal Dutch Shell-operated LNG Canada project, and a 40 percent position in Encana’s Montney gas play in northeastern British Columbia.

•Japex, which has a 10 percent stake in the North Montney gas reserves owned by Malaysia’s Petronas and is committed to take 10 percent of production from the proposed Petronas LNG terminal at Prince Rupert.

•Inpex, which is a 40 percent partner with China National Offshore Oil Corp., now that CNOOC has acquired Nexen and is engaged in a feasibility study of a possible LNG project that is counting on British Columbia’s Horn River, Cordova Embayment and Fort Liard shale gas plays for its feedstock.

•Idemitsu Kosan, with an acquisition budget of US$4.7 billion for the next three years, has already formed a joint venture with AltaGas to explore export opportunities for LNG and LPG, aiming to start shipments in 2017.

Canada preferred

Tsujimoto said Japan prefers Canada to the United States for its investments because of British Columbia’s proximity to Asia and the absence of energy security issues that complicate U.S. energy policy.

“We appreciate the stable supply, that Canada is very near Asian markets including Japan, Korea and China and the stable political situation. Canada is a very open market,” he said.

Woo said the evolving Japanese investment strategy is a vote of confidence in Canada’s LNG prospects.

“It will take away some of the challenges with respect to a new pricing regime,” he said. “While buyers want to pay closer to North American gas prices, the producers in Canada are hoping to capture some of the arbitrage opportunities that currently exist.”

Woo said that if the Japanese government effectively takes positions in Canadian LNG ventures it will be “easier to find a meeting ground for an acceptable and viable price to make the construction of an LNG plant feasible.”

But he said Canadian gas producers should lower their hopes of selling gas at the highest possible prices and focus on energy integration with Asia to create an interdependence of interests.

“The sooner Canadian markets and producers appreciate that opportunity rather than thinking of LNG as a one-time opportunity to generate windfall revenues the better because that will make it more likely for us to come up with viable commercial projects,” he said.

Decoupling urged

Tadashi Maeda, managing executive officer with the Japan Bank for International Cooperation, was among those at the Vancouver conference who cautioned the British Columbia government against counting on Asian LNG customers paying at least 2.5 times the North American gas price, generating C$4 billion to C$9 billion in annual royalties and taxes for the province.

“We need some mechanism to make a real adjustment in the market formula,” he said.

“That means we need to decouple the oil price from the gas price. The second issue is how the market can make a proper adjustment.”

Peter Hughes, a UK-based energy analyst, said a mechanism is needed “where gas prices can start acting as a balance between supply and demand,” without which a country such as Japan could see its balance of trade threatened or its industrial competitiveness impeded.

British Columbia Energy Minister Rich Coleman said several companies are “moving along pretty well” with their LNG plans.

“What will happen is that companies will hedge their own market by buying supply,” he said. “They’ll do that by taking somebody’s drilling rights or gas reserves or whatever and applying those for their own use.”

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BC sparks LNG interest

The British Columbia government has attracted a strong international response to its offer of land for an LNG terminal near Prince Rupert.

A month-long call for expressions of interest, EOI, generated four new proposals, which the government is now evaluating to determine how many qualify for use of the site.

If projects go ahead, the land at Grassy Point, 18 miles north of Prince Rupert, would be the province’s third location for LNG terminal clusters after the deepwater ports at Prince Rupert and Kitimat.

The eligible EOIs were submitted by:

•Nexen, which is now owned by China National Offshore Oil Corp., in partnership with Japan’s Inpex and JGC, a Japanese-based engineering company.

•Australia’s Woodside Petroleum which has disclosed it is looking for a potential partnership to enter Canada’s emerging LNG sector.

•Korea-based SK E&S, a multi-utility player in northeastern Asia’s gas and electricity business.

•ExxonMobil and its 69.6 percent owned Imperial Oil, who have been pressing ahead with LNG plans since acquiring natural gas producer Celtic Exploration last year.

Plans date from 1979

The government offered the Grassy Point land because of preliminary interest in the site, but it said no final decisions have been made on how much will be made available or whether it will be sold or leased.

Plans for an LNG terminal at Grassy Point were initially started in 1979 by Dome Petroleum which was forced to withdraw in 1984 because of financial difficulties. That project was designed to supply 2.35 million metric tons a year of LNG to Japan over 20 years.

Plans included a C$500 million pipeline, C$2 billion gas liquefaction plant and a C$1 billion fleet of Japanese-built LNG tankers.

Mobil Oil and Petro-Canada then made an unsuccessful attempt to negotiate agreements with LNG sellers and buyers to use the same location.

Experience, plans required

Participants in the EOI were asked to outline their LNG experience, their financial ability to build an export facility and identify where they would obtain natural gas supplies as LNG feedstock.

They were also required to provide project descriptions, what plans they have to consult with First Nations and other communities in the Grassy Point area and their potential to work in collaboration with other companies.

The government said that once its evaluation work is completed, successful proponents will “be in a position to move forward with final planning and investment decisions.”

Before its takeover by CNOOC, Nexen was the 60 percent operator and Inpex held 40 percent of a partnership that was conducting a joint feasibility study to develop natural gas properties in the Horn River, Cordova Embayment and Liard shales of northeastern British Columbia for LNG feedstock.

ExxonMobil and Imperial have assembled a combined 334,000 acres in the Horn River play, plus the Celtic assets, which Imperial CEO Bruce March told an investment conference earlier this year the joint venture is “anxious to scale up.”

He said the Celtic reserves “would be the underpinning of a potential LNG strategy” that would draw on ExxonMobil’s global LNG experience and ties to prospective customers.

Woodside, which operates six of the seven LNG processing trains in Australia, is examining possible deals in North America as an alternative to Australia’s LNG sector, which is faced with rising capital costs, CEO Peter Coleman said in February.

He said that although British Columbia is counting on as many as seven LNG projects and the province has an estimated 200 trillion cubic feet of gas in shale formations, it “doesn’t really have any material hydrocarbon production (and) is still learning.”

—Gary Park