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Two North American LNG terminals power ahead

Shell plans Canada export projects while Excelerate ponders first US floating liquefaction terminal

Two proposed LNG terminals in Canada and the US will add 15 million tonnes per year (t/y) to North America’s growing slate of natural gas export options.

Shell on 15 May said it is teaming up with South Korea's Korea Gas Corporation (Kogas), Japan’s Mitsubishi, and China’s PetroChina to develop a 12m t/y facility at Kitimat, on Canada’s west coast. The $16 billion facility will consist of two 6m t/y trains and could be online by 2020. Shell will own 40% of the joint venture with 20% for each of the remaining three partners.

At the same time Houston-based Excelerate Energy applied for approval of the first floating liquefaction unit in the US Gulf of Mexico, midway between Galveston and Corpus Christi. If approved, Excelerate plans to begin the first of 3m t/y of exports by 2017. Depending on configuration, the facility can be expanded to 4m t/y as needed.

It is the eighth LNG application to be put forward in the US, and the fourth in Canada. To date, only one American project has reached full approval – Cheniere’s Sabine Pass – and two in Canada at Kitimat.

All will be fed with growing supplies of unconventional gas from North America’s fastest-growing basins, where Mitsubishi, Kogas and PetroChina have upstream production ventures in shale plays including Canada’s Montney, Horn River and Texas’ Eagle Ford. Likewise, each is the dominant LNG importer in their home markets and are moving to secure greater access to cheap North American gas supplies.

According to Lance Mortlock with consultancy Ernst and Young (E&Y), vertical integration through all facets of the LNG supply chain is a relatively new business model that is being aggressively pursued by Asian national energy companies. Kogas has gone further, with significant presence in swapping and trading as well as terminal construction, operations and management.

China and Japan are also increasing their thirst for North American LNG. In February, PetroChina signed a deal with Shell for 20% of its Canadian Ground Birch assets for an undisclosed sum. PetroChina is also partnering with Shell in the Arrow LNG export project in eastern Australia and has a co-operation agreement to explore for shale gas in China.

Mitsubishi, which handles about half of Japan's 80m t/y of imports, has a portfolio of nine non-operated interests in Australia, Indonesia, Malaysia, Brunei, Oman and Russia, and is also developing an operated LNG project in Indonesia.

In much the same way international oil companies built integrated upstream and downstream oil networks in the 1950s, state-sponsored gas importers are diversifying into production, transportation, and trading.

Ostensibly, “it’s all about security of supply”, says Mortlock, whose recent study of supply and demand forecast Canadian export volumes of about 11.8m t/y by 2015.

That is small compared to the US, which is poised to become the world’s largest LNG exporter, at 105m t/y, if all eight proposed projects are approved.

The question is whether the market can absorb all the gas. According to Mortlock, total Pacific Basin demand is expected to double to 241m t/y by 2020, from 120m t/y today. Total exports from Asian suppliers is estimated at 200-230m t/y, leaving a nice gap for Canada to squeeze into.

But with its enormous potential, the US “is the elephant in the room.” Whereas countries like Canada are hoping to lock in long-term fixed contracts linked to oil, the US is threatening to unleash a flood of Henry Hub-based LNG into the global market, which is sure to put downward pressure on prices. 

That will have significant, but undetermined consequences for development projects in other parts of the globe. One country at risk of reduced or slower investment flows is Australia, says E&Y, as investors “hold back” to see what happens in the Gulf of Mexico.

Mortlock concedes it will be tough for even Canada to compete with the US on cost alone. Given higher production costs, it is extremely unlikely that Shell’s project would be economic without long-term contracts from committed buyers.

But that is all speculation, because neither the US or Canada have exported significant amounts of LNG to date, and won’t until 2014. That’s when the Panama Canal will be expanded to facilitate passage of tankers from the Gulf of Mexico into the Pacific.

Despite the enthusiasm for LNG exports, Gil Dawson, with Calgary-based SBM Inc. doesn’t think it’s a sure thing. The threat of a double-dip recession will accelerate oil demand destruction even as gas-fired power generation in the US is up almost 24% so far in 2012.

Given the relatively high cost of LNG transportation, even a modest increase in supply cost would negate the price advantage of selling the gas overseas. In addition, capital inputs are high, with no guarantee of profitable return.

E&Y estimates Canada alone will need some C$50bn ($49.5bn) of infrastructure development, including pipelines and terminals, to support its relatively modest export goals. “It is by far the most capital-intensive part of the value chain.”

It is all the more reason Dawson calls it a strategy fraught with “risk” and assumptions about future gas markets that may not hold true. In fact, he’s advising clients to stay away from what he sees is a risky gamble. “It’s all about arbitrage and returns that may or not be there. In my opinion, LNG is the speculative bet”, he says. “It’s the risk trade, and companies are looking to reduce risk.”

But with pressure from markets to maximise the short-term value of money-losing shale gas production nothing can seem to stop the headlong rush in North American LNG – both for the eager buyers, and the equally desperate sellers.

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