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Canada’s shale-gas producers race to new markets

With three LNG projects now on the table, Canadian shale-gas producers are pushing hard for exports to Asian markets

BIG NATURAL gas players in British Columbia (BC) and Alberta are scrambling to find new markets in Asia as an outlet for promising shale-gas discoveries. As US gas production surges, Canada’s is flagging in the face of lower export demand from its traditional market and suppressed prices.

Companies with significant gas holdings in the provinces, such as Encana, Apache and EOG Resources, are so concerned they will be unable to sell their Horn River gas to the US that last week they applied to Canada’s National Energy Board for a 20-year permit to liquefy and ship it to Asia under long-term contracts with companies such as South Korea’s Kogas and PetroChina.

They are joined by South Africa’s Sasol, which has agreed to study the potential for gas-to-liquids developments in a C$1 billion ($1.02 billion) deal with Calgary-based Talisman Energy that closed this week

Also this week, Progress Energy outlined details of a pact with Malaysian national oil company Petronas for a stake in a future liquefied natural gas (LNG) export terminal in exchange for a piece of its Montney Shale acreage.

Progress president Michael Culbert told a Calgary investment symposium that LNG exports are an essential component of the company’s long-term strategy to develop its unconventional-gas resources and secure top value for them.

Shell stirs the waters

Shell has stirred the waters further with rumours of a third LNG-export plant on the Pacific coast to cash in on its own tight-gas production.

Regardless of which part of the world they represent, all these firms have made billions of upstream investments in production and reserves, which has allowed drilling to continue despite weak project economics.

With LNG fetching significantly better prices in Asian markets than pipeline sales in North America, it is unclear who sees a larger opportunity – big shippers such as Mitsubishi that stand to benefit from cheaper supply, or the producers that are assured committed, long-term buyers.

Mitsubishi has teamed up with Penn West in a shale-gas development in Canada. Although LNG is not on the table, vice-president Murray Nunns said it is clearly Mitsubishi’s intent to develop a longer-term export strategy.

Even Nexen’s boss, Marvin Romanow, has weighed in on examining the economics of bringing in a partner and exporting its own Horn River production.

Despite the present market weakness, the International Energy Agency has predicted a “golden age of gas” that will see global consumption of the cleaner-burning fuel double by 2035.

But for now, the Kitimat LNG project will mark Canada’s first foray into a growing market when it comes online in 2015. If approved, it will herald a landmark shift away from US pricing. The Kitimat project is a joint venture between Apache (40% and operator), Encana (30%) and EOG (30%). 

Razor-thin margins

Even with better productivity and advances in technology, Canadian gas margins remain razor-thin. Canadian spot gas has historically fetched less than US production after factoring in transportation costs.

BC’s Horn River and Alberta’s Montney fields are considered to be some of the largest unconventional deposits in North America, but they are hampered by remote geography and distance from infrastructure compared with US plays such as Eagle Ford and Marcellus.

Getting that gas to market can add more than $1 per 1,000 cubic feet (/’000 cf) to the cost, leaving exports struggling to break into a weak market in the lower 48, where Henry Hub prices are battling to stay above $4.50/’000 cf.

And there could be more big discoveries to come in Canada. Encana’s Canadian vice-president confirmed this week that the company has been buying up huge tracts of Alberta to delineate the frontier Duvernay Shale play

Duvernay advances

He did not divulge details other than noting its liquids-rich gas. But the Duvernay is the source of Alberta’s big post-war discoveries of the 1950s and Encana is Alberta’s largest private-sector landowner, with millions of acres of freehold land gained as a successor company to the Canadian Pacific Railroad.

It has been busy adding to that position by paying undisclosed millions for even more land at government sales, where a recent auction of Alberta’s Crown oil and gas rights brought in a staggering C$860 milion. Largely unknown buyers have spent more than $3 billion to buy rights over the past two years.

Graham compared Duvernay with Eagle Ford in Texas, which is close to low-cost infrastructure and saw production scaled up quickly. A decade ago, Alberta’s Nova pipeline system moved a fifth of all the gas in North America. Today, it is under-utilised, with plenty of space available to new shippers that may emerge with Duvernay gas.

If so, expensive areas such as Horn River will be under further pressure to find a relief valve in the face of a flood of low-cost supply from neighbouring Alberta. ExxonMobil seemed to admit as much when it spent $1.8 billion this week to acquire land in the Marcellus. The supermajor also holds Horn River acreage, and the move suggests it has put Canadian unconventional gas on the backburner while it pushes ahead in the Lower 48 and with digesting its $41 billion acquisition XTO Energy

All of which is further rationale for one, two, or even three LNG-export projects in western Canada, producers claim. If they all go ahead, it would represent tens of billions of new capital investment and jobs in BC’s coastal communities, which have long suffered from high unemployment.

More importantly, it would herald North America’s shift from isolated regional market into global exporter. 

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