Canadian shale-to-LNG project advances
First Canadian LNG exports from 2015; Kitimat LNG secures environmental approval
THE final building blocks are being put in place for Canada’s first gas exports to the Pacific basin. The liquefied natural gas (LNG) project, which will tap an expected tripling of British Columbia’s (BC) unconventional-gas production over the next decade, is gearing up to compete with planned export projects on the US Gulf Coast.
It’s the culmination of Galveston LNG’s surprise, and astute, decision two years ago to turn plans for the Kitimat LNG import terminal into an export facility – Canada’s first. That was followed early this year by a change of ownership, to a joint-venture of Apache, 51% and operator, and EOG Resources.
The two big US independents wasted no time pursuing approvals and seeking supply contracts with Asian customers to find an outlet for their extensive gas holdings in the shale- and tight-gas plays of northeastern BC.
Apache is tackling the final regulatory hurdle by seeking a gas-export permit – the first in 15 years – from the National Energy Board. The application is for 10m tonnes a year (t/y) over 20 years, double the planned initial volumes if the C$3.5bn ($3.5bn) project secures corporate sanctioning and comes on stream in 2015.
Start-up gas supplies of 0.7bn cubic feet a day (cf/d) would come exclusively from Apache, which in a joint-venture with Encana has an estimated net resource potential in Horn River alone of 10 trillion cf, and EOG, which has an estimated 9 trillion cf at its disposal.
Wave of discoveries
A wave of discoveries in recent years in the Horn River (which EOG calculates has 500 trillion cf of gas in place) and Montney plays is forecast to trigger a surge in BC output to 7.6bn cf/d from 2.8bn cf/d over the next seven to 10 years. With little hope of finding outlets in North America, the Asian market, with the highest gas prices in the world, beckoned, bolstered by attractive shipping routes to South Korea, Japan and China, with the average laden voyage from the deep-water port at Kitimat taking between 8.5 and 11.5 days.
Apache says supply contracts are under discussion with “a number” of prospective buyers in China, Japan and South Korea. Memoranda of understanding are already in place with Spain’s Gas Natural, for 40% of output, and South Korea’s Kogas for 30% – which it hopes to convert into firm agreements.
LNG exports from Kitimat will be unencumbered by “destination clauses” – which stipulate a delivery point – providing a strong platform for LNG trade. In addition, the expansion of the Panama Canal in 2014 would provide cargoes from Kitimat access to the Atlantic-basin market.
The most immediate challenge to the project comes from the operators of increasingly under-utilised US Gulf Coast LNG import terminals. Rising production from the Barnett and Haynesville shales in Texas and Louisiana has made LNG imports unnecessary – in 2009, US import-capacity utilisation was under 10%.
Looking for escape routes, Cheniere Energy plans to export 2bn cf/d (nearly 14m t/y) from its Sabine Pass, Louisiana, terminal and a joint-venture of Freeport LNG and Australian bank Macquarie wants to convert Freeport’s Texas terminal to a liquefaction facility with an export capacity of 1.4bn cf/d.
Janine McArdle, president of the Kitimat partnership, says the project will “demonstrate that Canadian LNG is a secure and reliable source of supply that can compete for market share in Asia-Pacific” with rivals exporters in Australia, Southeast Asia, the Middle East and Russia. Apache says supply diversity is increasingly important, as traditional Pacific-basin suppliers in Indonesia, Malaysia, Oman and Brunei “reduce contract volumes and shorten delivery terms”, while buyers look for a low-risk geopolitical source, giving priority to OECD nations.
Kitimat LNG has obtained environmental approvals from the Canadian and BC governments. It has even won solid backing from First Nations, including 15 of 16 along a 280 mile pipeline right-of-way, and the Haisla Nation, which overwhelmingly endorsed a 40-year land lease for the liquefaction terminal.
The pay-off for the First Nations is a possible 30% equity stake in the C$1.2bn Pacific Trail pipeline, which could return over C$0.5bn to them over 30 years.
Kitimat LNG is undisturbed by a 7 December vote in the Canadian parliament calling for a permanent ban on crude oil tankers in northern BC’s offshore, further fuelling opposition to Enbridge’s planned 0.5m barrels a day Northern Gateway project to ship oil-sands crude to Asia. Following the lead of Kitimat LNG, Enbridge has since offered First Nations 10% ownership of Northern Gateway.
But the Kitimat partnership does not fear it will become entangled in the parliamentary vote, arguing that “two very different projects” are at stake – one involving a highly contentious oil sands-related plan and the other involving LNG, which even environmentalists have remained largely silent about.