Posted - September 04, 2013 7:00 AM - By Shaun Thomas - The Northern View
Western Canada is going to have to overcome a number of challenges to
have a successful liquefied natural gas (LNG) export industry, states
the International Gas Union (IGU).
In the 2013 World LNG Report the IGU, which represents
over 120 members in 81 countries, points to significant commercial and
environmental risks that need to be addressed. One challenge, which the
report claims to be quite significant, is the difference in pricing. LNG
future contract price is set by a system called Henry Hub (HH), named
after a distribution point on the gas pipeline in Louisiana, but the IGU
said that is not what Canadian companies are wanting to charge.
"Project costs in Canada far exceed counterpart
projects in the United States where the natural gas market is much more
liquid. Moreover, the distance between the proposed export facilities
and the North American gas pipeline grid is large, and connections are
small in both capacity and number. Exporting Henry Hub-linked LNG is
risky because it forces sellers to produce no matter what happens to
Henry Hub," the report explains.
"These factors are exacerbated by the tension between
Asian buyers' insistence on Henry Hub pricing and the sellers'
preference for oil-linked prices –a difference that has so far been hard
to reconcile ... despite numerous marketing leads for Western Canada's
slate of projects, there are currently no finalized agreements with Asia
Pacific buyers."
Greg Kist, president of Pacific NorthWest LNG, said
pricing discussions are the subject of confidential negotiations, but
acknowledged it is a consideration.
"Historically, LNG prices have been linked to world oil
prices but with the growing potential for North American natural gas to
be shipped to LNG importing countries, the interest has grown on the
part of buyers to have exposure to North American natural gas prices ...
today, natural gas prices in North America remain at relatively lower
levels as compared to world oil prices because of the growth in natural
gas supply. Just on the face of it, North American natural gas prices
are approximately US$3.50/mmbtu [British thermal unit] as compared to
approximately $15.00/mmbtu for natural gas in Japan. You must, however,
factor in the cost of pipelines, liquefaction and shipping in order to
assess the net difference between the two pricing points," he said.
The BG Group said Henry Hub pricing is a subject of discussion with potential clients.
"We think traditional LNG projects will continue to be
predominantly oil-linked. Customers will always want lower prices. But
Henry-Hub source cost/indexation does not mean a low sales price. The
industry costs for liquefaction, shipping and regasification, which are
in addition to the cost of sourcing the gas itself, dictate the cost of
LNG delivered to any particular point ... if we are seeing the
introduction of some HH linked volumes into pricing then oil indexation
is, by definition, losing market share. But this is not the start of a
trend to transfer all LNG prices onto HH related pricing. A balance will
be reached, with oil indexation still likely to account for the
majority of LNG volumes," said a spokesperson for the company.
“Although some customers have expressed an interest in
adding some Henry-Hub priced volumes into their portfolios we believe
that this is based on a desire to diversify their price exposure rather
than transfer their prices fully onto a HH basis. This means there will
likely be a natural limit to the amount of HH linked volumes they want
in their portfolios ... LNG is an expensive commodity and the price
represents the costs of production just as much as it does the
historical indexation.”
The most touched upon risk to the industry in the report is the distance between the export point and the gas supply.
“Based on announced costs, projects in Western Canada
face inexpensive liquefaction costs (~$1,000 /ton) relative to
greenfield projects in Australia. However, a major factor affecting
Western Canadian projects is the need for a long, expensive pipeline to
bring gas from eastern British Columbia to the coast ... as of May 2013,
four projects have proposed building approximately 500 mile pipelines
with costs of between $1,000 per million metric cubic feet per day
(mmcf/d) to $3,000 per mmcf/d, which will significantly increase total
project costs,” reads the report, which does point to opposition to
pipelines in the region.
“There has been significant local backlash to
Enbridge’s proposed oil pipeline, which would connect Alberta’s oil
sands to an export terminal at Kitimat, traversing a similar route as
many of the proposed. However, local groups (including First Nations)
have so far put up little opposition to gas facilities, partly due to
the differing scale of negative effects of an oil spill versus a gas
leak.”
Despite the challenges, the report does note that Canada’s political climate is right for the industry to grow.
“Liquefaction projects in Western Canada face a smaller
range of political risks than those in the Lower 48, as Canada is much
more accustomed to energy exports on a large scale ... although projects
that have not yet received export licenses still face the risk of delay
or a potential limit being placed on the number of licenses granted,
these risks are quite small,” reads the report.
Regardless of the report, both Pacific NorthWest LNG and the BG Group see a bright future for LNG in western Canada.
“Western Canadian LNG projects will have an advantage
in terms of distance and time to key LNG markets in Asia. In terms of
nautical miles, Prince Rupert to Tokyo is approximately the same
distance, in nautical miles, as it is from Australia — the fastest
growing LNG producer,” said Kist
“Prince Rupert is one of four new LNG supply projects
that BG Group is progressing to help meet growing global demand for
natural gas. With Prince Rupert, we have an attractive site (in a
designated industrial zone) for a LNG plant and an agreement with
Spectra, a major pipeline operator, for them to build and fund the
pipeline ... Prince Rupert offers another option for a significant LNG
project later in the decade, playing to our inherent skills in putting
together complex projects and LNG chains,” said the BG spokesperson.
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