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Enbridge makes Horn River shale moves

Gas-processing plant purchase part of larger Asia export plan

Canada’s pipeline rivalry has heated up with moves by Enbridge to stake out a strategic position in Canada’s emerging Horn River Shale play.

Enbridge, known mostly for its oil pipeline from Alberta to Ontario, said this week it is buying a large gas-processing plant in northeast British Columbia (BC) and wants to buy into a planned liquefied natural gas (LNG) terminal on the country’s west coast. Enbridge would help gather and process the shale gas before moving it onto LNG tankers bound for Asia.

Enbridge acquired a 57.6% interest in the Cabin gas plant, 60 km north of Fort Nelson, from Encana for C$220 million ($214 million). Following two proposed expansions, Enbridge said it will spend about C$900 million on the project to increase capacity to 800 million cubic feet a day (cf/d) of service.

It marks the first time a large pipeline company has proposed taking an active role in the gas-gathering networks of the Horn River basin, which the Geological Survey of Canada suggests is one of the largest natural gas deposits in North America, with estimates as high as 600 trillion cf of in-place reserves.

“Our investment in the Cabin gas-plant development is a substantial initial step in the execution of our strategy to establish a strong position in the Canadian midstream business, focused on growing unconventional gas production in BC and Alberta," said Al Monaco, Enbridge’s president of gas pipelines.

Change of tack

It’s a bit of a departure for Enbridge, which operates Canada’s oldest and longest oil pipeline. But it has experience with offshore gas gathering in the US Gulf of Mexico and owns Canada’s oldest natural gas distribution company, Consumers Gas, in Ontario.

Two days earlier, company officials told investors in Toronto that the company wants to partner in any of Canada’s three proposed LNG terminals as an outlet for the Horn River gas, or gain support for a new one. It’s a bold move, considering that many analysts see Horn River’s resources as stranded because of its remote location and low North American natural gas prices.

Rival TransCanada – which has traditionally dominated Canada’s natural gas pipelines – has signed up US producers to connect to its Nova gathering system in Alberta, the largest in North America. From there, gas can be funnelled to the US west coast, the mid-continent and big consuming regions such as New York city. But new discoveries closer to those traditional markets, such as Pennsylvania’s Marcellus Shale, are threatening to undermine the profitability of Canada’s own growing unconventional reserves, prompting producers to seek out new markets in Asia.

LNG advances

In addition to being a large landholder in Horn River, Encana partners US independents Apache and EOG Resources in the proposed Kitimat LNG project. The companies are applying to Canada’s National Energy Board (NEB) for long-term licences to export gas to South Korea’s Kogas and Japan’s Mitsubishi, both of which have Canadian production ventures.

In June, Malaysian national oil company Petronas teamed up with Calgary’s Progress Energy in a C$1.3 billion production/export scheme in northeast BC including an LNG terminal on the west coast. Shell Canada has also proposed the idea of a third terminal to export its own growing volumes of unconventional gas.

It amounts to a lot of interest in a short time, but Canada lags other emerging LNG exporters, such as Australia, which are competing for the same markets. Canadian operators are counting on long-term oil-indexed pricing to make their grand visions of becoming global LNG players a reality.

Asia gets wise

But potential Asian buyers are wising up to North America’s gas-supply glut. With several countries – such as China – refusing to link gas contracts to oil prices, the economics of Canadian LNG once again become questionable.

Earlier this summer PetroChina walked away from a $5.5 billion production venture with Encana  – one more reason the Canadian gas firm is looking to sell assets. As a result of the PetroChina fiasco, it has to come up with $1.2 billion-worth of divestitures to fill a gaping hole in its balance sheet.

In that sense, this is a strategic move by Encana to reduce costs while buying time for markets to recover. Horn River is easily the highest cost, but most promising asset in its portfolio, By bringing in Enbridge, Encana is offloading the costs of developing infrastructure in an area that barely has passable roads, while allowing its production to continue to grow.

But the idea of exporting LNG from Canada’s west coast still faces several hurdles, the least of which is economic viability in the face of competition from Australia and Qatar. In the grey world of shale-gas economics, it’s probably best to take one step at a time.

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