Canadian natural gas producers are hoping to spend a minimum $20
billion on shipping Liquid Natural Gas ((
LNG
)) to Asia in the next 2-9 years. The size of the prize is
huge-spot natural gas in Japan can be as high as $17/mcf-more than
10x Canada's spot price of $1.50 now. But competition is fierce
from Australia, Qatar, and United States … as I wrote about
here
.
Those prices could be going higher. Asian demand for LNG is
expected to increase 45% from the 20 bcf/d (billion cubic feet per
day) now to 29.1 bcf/d by 2016-just four years from now.
In this article I'll outline:
a. who the Canadian players are
b. the estimated size and cost of their projects, and tentative
timelines
c. some simple economics
d. and what has to happen still for shipments to actually
start
Shipping LNG to Asia is not just a great opportunity for
Canadian producers, it's a necessity. U.S. gas production is
expected to stay strong-and prices low-for years. In 2008, the U.S.
imported 13% of its total natural gas supply-almost all of it from
Canada-but the U.S. Energy Information Administration estimates
that by 2035 that figure will be lower than 1%. And this shift is
already happening.
Now, if all of these projects had been fully operational in
2010, Canada would have been the second-largest LNG exporter in the
world, behind only Qatar. Each of these facilities is now forecast
to be built in the small town of Kitimat B.C., located at the end
of a long narrow (protected) ocean water inlet … where Alcan has
had a large aluminum facility for decades.
Here are the three most advanced LNG export projects in
Canada:
KM LNG Operating General Partnership
Who:
Apache Corp. (
APA
) 40%
Encana Inc. (
ECA
) 30%
EOG Resources (
EOG
) 30%
Capacity:
1.4 bcf/d (11.66 million tons annually)
Projected cost of facility:
$10 billion (but $5.6 billion if only do 0.7 bcf/d)
Approved?
Yes-20-year license
Projected completion date:
Late 2015
This group-all upstream producers-is also the only one to have
approval for a pipeline to transport the gas from the field to the
LNG facility-the Pacific Trails Pipeline. Despite the approvals,
the partners haven't made the final decision to build the
project.
What's left to bring the project together?
Money and customers. They're still looking for money, which should
come from, potentially, the pipeline company, but certainly from an
anchor customer in Asia who would come in for 20% equity on the
project AND the upstream resources; the gas itself. Everybody would
reduce their interest pro-rata in that case.
The
Globe and Mail
reports that the project has two deals already signed with Japanese
power producers, and other potential customers are lined up.
But analyst Gerry Goobie with Purvin & Gertz Inc. told the
Calgary Herald
that the fact that the partnership is looking for equity shows that
it still needs to secure long-term customers.
"The bottom line is they're still trying to strike a deal," he
said. "The assumption is the deal that they have will be sufficient
to cover off all the capital costs that they are going to spend to
build this thing and give them a reasonable return."
BC LNG CO-OPERATIVE
Who: 13-member group (includes LNG Partners LLC of Houston and
the Haisla First Nation)
Capacity:
0.22 bcf/d (1.8 million tons annually)
Projected cost of facility:
$360 million - $450 million
Projected completion date:
2014
Approved?
Yes-20-year license
This proposal has the earliest (tentative) start date-early
2014. This is by far the smallest of the three proposals, and would
be unique in that they will be located on a barge 7 km south of
Kitimat, and grounded on the shore.
"This thing should be fun to get it off," Tom Tatham, the
managing director of BC LNG (and of LNG Partners LLC of Houston),
told Reuters. "There's really nothing that's ever been done like
this in the LNG industry."
The project is partially intended to allow smaller natural gas
producers to ship LNG abroad to more lucrative markets.
Specifically, an operating company at the facility will liquefy
a cooperative member's natural gas for a fee. Companies can buy
into the cooperative for $50,000 or can receive membership for free
by writing a letter to the National Energy Board stating an intent
to buy or sell gas through the terminal (cooperative members can be
buyers or sellers).
What's left to bring the project together?
Pipeline capacity. It only makes sense for them to use Pacific
Trails (I think it would be politically difficult for Apache et al
to not allow small producers access, including those with First
Nations ties, for a toll fee), but it may not be ready by then.
Shell
Who: Royal Dutch Shell (RDS.A) 40%
Mitsubishi 20%
Kogas 20%
CNPC 20% (China National Petroleum Corp)
Capacity:
1.44 bcf/d (12 million tons annually)
Projected cost of facility:
$12.35 billion
Projected completion date:
2020
Approved?
Pending
What's left to bring the project together?
Approvals, pipeline capacity and pipeline approvals. All the
players together in that consortium have lots of financial
ability.
The project could come online at the end of the decade and might
be able to send as much as 2 bcf/d abroad per year. Shell has a lot
of experience in LNG, operating 2.4 bcf/d export capacity in other
areas of the world, and another 2.9 bcf/d coming into production by
the end of 2015.
Shell first announced its plan for the venture last fall,
shortly after it (and some of its partners) purchased the Methanex
marine facility in Kitimat, which is no longer in use.
That's the Tier 1 list of Canadian LNG exporters. Other groups
looking include:
Petronas-Progress
(PRQ-TSX)
Petronas is a large Malaysian oil and gas company with this
80/20 partnership aims to build a 1.0-1.2 bcf/d LNG plant in B.C.,
bringing the first 0.5 bcf/d online in 2017-2018 and the rest a
year later. A feasibility study on the project should be complete
by the end of Q3 2012.
INPEX-NEXEN (
NXY
)
Inpex is a large Japanese oil and gas producer. In November 2011
they joint ventured 40% of Nexen's holding in the Horn River,
Cordova and Liard basins, all in B.C. There is little doubt they
will be going after an LNG license. Do they do it on their own or
join one of the three more advanced projects?
Potential issues with Canadian LNG projects
There are still potential speed bumps for Canadian LNG exports.
These pipelines need to get built, which means passing through
areas that have attracted so much opposition to the Northern
Gateway oil pipeline.
Where will all the electricity and power that's needed come
from, and what infrastructure is required for that?
The economics of Canadian LNG exports to Asia should be similar
to those of Australia, says Canadian brokerage firm CIBC Wood Gundy
in a report earlier this year.
Japan is the largest LNG market, and the shipping route from
Canada to there is 4300 km., vs. 3100-4300 km. for Australian
projects. They add that Japan will want to have several sources of
LNG.
Long-term LNG contracts are usually priced at 12-15% of Brent
crude, which at $100 Brent means US$12-$15/mcf-still 8-10x Canadian
spot prices. CIBC is forecasting Canadian LNG exports can earn a
17% internal rate of return at $4/mcf gas. That would be higher at
today's low gas prices.
They broke down how the costs of getting the gas from the field
to a Kitimat LNG facility, liquefying it, and shipping it to market
would cost:
(Click to enlarge)
So you can see a 50% gross margin here, under their pro forma
model. If cost inflation doesn't escalate out of control, and Asian
demand meets expectations, then the size of the LNG will make a
very healthy return for Canadian exporters.
The top LNG exporters are Qatar, representing nearly 25 percent
of global LNG exports with 7.3 bcf/d. Then there's Indonesia (23.7
million tons, 3.03 bcf/d), Malaysia (23.1 million tons, 2.96
bcf/d), Australia (19.1 million tons, 2.45 bcf/d), Algeria (18.7
million tons, 2.39 bcf/d), Nigeria (18 million tons, 2.31 bcf/d)
and Trinidad and Tobago (15.4 million tons, 1.97 bcf/d).
Note how Canada - the world's third-leading natural gas producer
- is nowhere to be found on this list. However, that could soon
change with the three projects in Kitimat.
Disclosure:
I have no positions in any stocks mentioned, and no plans to
initiate any positions within the next 72 hours.
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