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Partnering With Customers Gives Canada LNG Competitive Edge, Progress Energy Says

Canada still has one competitive edge on international liquefied natural gas (LNG) markets, said the Asian entry in the lineup of export terminal proposals on the northern Pacific Coast of British Columbia (BC).

The BC project formula answers demand for security by dedicating gas reserves to fulfill decades-long supply contracts, Progress Energy President Mike Culbert told the annual Calgary conference of the Canadian Society for Unconventional Resources.

Overseas buyers like the low prices today in North American markets but question whether surpluses and bargains will last for the long tomorrows of LNG trade, Culbert said. “What puts us out ahead of other projects is that we have customers who are partners as well.”

As the Canadian branch of Malaysian state energy conglomerate Petronas, Progress owns 62% of the Pacific NorthWest LNG plan to build a 2.7 Bcf/d terminal at Prince Rupert for C$9-11 billion (US$6.9-8.5 billion). The project sponsors include Sinopec with a 15% interest, JAPEX and Indian Oil Corp. with 10% each, and Petroleum Brunei with 3%.

More partners are being sought for up to 10% of the project, Culbert said. Consortium members secure gas volumes equal to their shares. Ownership includes northern BC shale reserves and production that the group is proving and drilling.

Over the past three years, the group has identified 17.9 Tcf of reserves plus enough resources to make full use of its 25-year export license for 24.5 Tcf. A recent regulatory change enables the National Energy Board (NEB) to lengthen gas export permit terms to 40 years and allow volume increases to cover the extensions.

The Pacific NorthWest team is embarking on a 2015-2020 development phase of investing C$1-2 billion (US$770 million to $1.5 billion) per year on wells, field gathering pipelines and processing capacity, Culbert said. Costs are being pared as experience is gained, he added.

The NEB has also awarded TransCanada Corp.’s western pipeline grid, Nova Gas Transmission Ltd., approval to build a 300-kilometer (180-mile) hookup to Pacific NorthWest’s production fields for C$1.6 billion (US$1.2 billion). TransCanada is advancing an allied 900-kilometer (540-mile) conduit from the Nova grid west to the Pacific Coast for a forecast C$5-6 billion (US$3.8-4.6 billion) through federal, provincial, environmental and aboriginal regulatory processes.

At the Canadian political level, where cabinet ratification of regulatory approvals is a must, Culbert said the LNG consortium talked privately to the national Liberals before they won the Oct. 19 national election. Like their political cousins that hold provincial office in BC, the federal party has been supportive, he added. The BC Liberals held a special summer session of the provincial legislature to enact a favorable tax, royalty and regulatory agreement with Pacific NorthWest.

Benefits agreements have been concluded with three of five aboriginal communities affected by Pacific NorthWest, a fourth deal is imminent and work continues on the fifth, Culbert said. Recent decisions by Canadian appellate courts affirmed that native groups do not have veto powers over industrial projects, and that settlements of unresolved land claims do not have to be completed before crossing traditional tribal territories if proper consultation initiatives are done but fall short of obtaining formal consent.

“We’re very close,” Culbert said. He predicted that export terminal construction could start in first quarter of 2016, or about a year later than the original target, which was dropped last winter due to “challenging” market conditions of falling energy commodity prices. “For a project of this magnitude slipping by a year is not unusual.”

Culbert added that North American shale supply surpluses, bargain-basement gas prices and long LNG export project lineups in the United States as well as Canada are keeping the budding international trade a challenging arena to break into.

“This is an extremely active and competitive market,” he said. He pointed to transactions that have cut the duration of some overseas LNG contracts in half to 10 years and the emergence of once-only quick sales of “spot cargoes” aboard single tankers.

Northern LNG export schemes need all the help they can get from overseas preferences such as long-range supply security, according to a review by the Canadian Energy Research Institute (CERI).

A CERI survey of the Pacific Coast lineup found that a typical BC project needs a gas price of US$11.20/MMBtu to cover delivered supply costs, including a moderate 12% rate of return: a US$2.25 field price for gas, US$1.25 in pipeline tolls, US$6.50 for liquefaction terminal services and US$1.20 for tanker loading and transport.

On a standard overseas pricing scale that indexes the value of LNG to oil, known as the Japan Crude Cocktail, the BC project requirement works out to US$70/bbl, CERI calculated. Provided participants in the supply transaction have faith that oil will recover from its current lows CERI said, “This puts Canada in the running with the various other options to get natural gas to Asia, including Russian pipelines.”

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