CANADA'S LNG: LIQUID SOLUTION

The Canadian energy industry is at a pivotal moment. For decades it has been dependent almost exclusively on a single export market: the US.

In the past few years, however, the US has become a much less reliable customer.

Reynold Tetzlaff of PwC says Canada is bound to become less dependent on the US, and more of a supplier to the world.

There are, however, great uncertainties over how fast it will get there.

For Canada's oil, the problems with the US market are largely political. President Barack Obama's procrastination over approving the Keystone XL pipeline from Alberta to Nebraska has left Canadian producers uneasy about being able to deliver their oil to US markets in the future.

For gas, it is not government that is obstructing exports, but the market.

The shale gas boom in the US means that it has less need for Canadian gas, and its imports are dwindling, falling 26 per cent in 2007-13 and expected to fall further.

That leaves Canadian gas producers with just one alternative route to market: liquefied natural gas, supercooled so it can be shipped in tankers. A back-of-the-envelope calculation suggests that could be an attractive business.

Canada has extensive shale reserves of its own, in the Duvernay formation of Alberta and the Montney formation that runs from further north in Alberta into British Columbia.

ompanies from around the world have been acquiring lease positions and drilling to confirm their potential, and it seems likely the resources are large.

With an estimated long-term gas price in western Canada of about $5 per million British thermal units, and liquefaction and transport costs of about another $5, and with LNG cargoes being sold in Japan and China for about $13 per m BTU, it looks a good proposition.

There are now 13 projects that have been proposed to build LNG plants on the west coast of Canada to export gas to Asia.

Companies including ExxonMobil of the US, Royal Dutch Shell from Europe, Petronas of Malaysia and Cnooc of China are involved in different consortiums.

However, it is unlikely that more than a handful of those plans will become a reality in the next decade.

Chevron, the second-largest US oil group by market capitalisation, has one of the most advanced projects: a 50-50 joint venture with Apache, also of the US, called Kitimat LNG.

The plan is to extract gas from the Horn River and Liard Basin gasfields in British Columbia, send it to the coast through a new pipeline, and liquefy it for export at a plant on the coast near Kitimat, more than 400 miles north of Vancouver.

Jeff Lehrmann, president of Chevron Canada, says the resource base in the gasfields is one of the best he has seen in his 28-year career. But Chevron and Apache still need to do a lot of work on Kitimat LNG before they will commit to spending the tens of billions of dollars needed to build it.

The other companies looking at possible export projects are making similar calculations.

Kitimat LNG, Mr Lehrmann says, is like a stool: it has four legs, all of which need to be firmly in place before he can stand on it.

The first is the technical design and engineering of the plant and pipeline, and planning the development of the gasfields. Kitimat LNG is quite well advanced in that process, because it had been under development for four years when Chevron bought in December 2012.

At the start of this year a consortium of JGC and Fluor was appointed as the engineering contractor. Work has even started preparing the site for the LNG plant on the coast.

That, however, is probably the easiest part of the project.

The second leg is ensuring the right fiscal terms with the government of British Columbia.

The provincial government set out its proposed LNG tax in February, but Mr Lehrmann says the companies are still "explaining" how fiscal terms could affect their plans.

The third leg is finalising agreements with First Nations – native Canadians – who live along the route of the planned pipeline from the gasfields to the coast. Mr Lehrmann says that Kitimat LNG has agreements for sharing the benefits from the development with 15 of the 16 nations along the route, but it still needs to strike a deal with the remaining one.

Finally, the project needs customers for its gas. Chevron has said it wants to tie up about 60-70 per cent of the plant's production on 20-year sales contracts, and so far it has not reached a single agreement.

At the end of April Pacific Northwest LNG, a competing project led by Petronas, announced that Sinopec of China would take a 15 per cent stake in the development and agree to buy additional gas, so that it will take 40 per cent of the plant's output. This gives that project an important head start.

In spite of all the political and economic uncertainties, however, Kitimat LNG is pressing ahead with its preparations.

The few projects that go ahead are likely to be the ones that have all their requirements in place first, and can tie up customers for the gas and staff to build their facilities.

"We want to be ready from a design and early works point of view," Mr Lehrmann says.

"So that, when the project makes economic sense, we're ready to go."

ft.com