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Market Dynamics Are Biggest Challenge to Canadian LNG Exports

A check, which says markets, not boosters, decide the fate of projects, is built into the biggest plan for exporting liquefied natural gas (LNG) from new terminals on the northern Pacific Coast of British Columbia (BC).

The WCC LNG partnership of Imperial Oil and its 70% owner, ExxonMobil Corp., includes a hard lesson taught by a previous attempt to make BC an Asian energy supplier in its export license application to the National Energy Board (NEB).

Sales and contracts will drive the scale, pace and locations of LNG development, says the request for permission to load up tankers with 800 million tonnes (39 Tcf) over 25 years from as-yet unidentified deposits, pipelines and terminals.

Market conditions killed the pioneer foray with Canadian gas into overseas trade in 1986, despite enthusiastic political encouragement, akin to the enthusiasm shown nearly 30 years later by BC's freshly re-elected Liberal government.

WCC's owners have a long BC pedigree. Before its 1999 merger with Exxon, Mobil's global asset portfolio included leadership of Canada LNG Corp., a consortium set up to secure a 20-year reliable supply for a group of Japanese gas and power utilities.

On Jan. 28, 1986, the BC tanker export scheme became the first large Canadian casualty of deteriorating oil and gas prices, which eventually tumbled the entire global production industry into a deep, prolonged slump.

Sales contract negotiations "have been mutually ended without agreement," said Mobil in a statement. The project "is at an end," added a company spokesman. "The bottom line is that these negotiations were occurring in an environment of uncertain energy prices. Future prospects for the economic viability of the project were just too risky."

Only seven months earlier, then BC Energy Minister Stephen Rogers had declared himself to be a believer in northern Pacific Coast LNG exports. BC premier at the time, Bill Bennett, visited Japan and talked to prospective customers.

Bennett and his Alberta counterpart in 1986, Don Getty, announced an agreement to give Canada LNG "a good kick to see if we can't get it going" with policies favoring overseas exports as diversification of western Canadian gas markets beyond old mainstays in the United States.

"We're down to price," said Rogers. "We've given the project discounts on electricity [from provincial government-owned BC Hydro], municipal tax discounts, machinery and equipment tax discounts. If it goes now, it's because the Japanese want it to go based on the [LNG] price."

As now, in the mid-1980s international LNG supply agreements used price indexes that tied the price of natural gas to oil. By early 1986, oil was spiraling down a dizzying slope from the Organization of the Petroleum Exporting Countries' official posting of US$28/bbl into a hardship range of $10/bbl as of mid-year, and LNG also took the 65% dive as a result of the contract indexing.

As now, in 1986 launching northern Pacific Coast exports required heavy investment in new production, pipelines and processing. For tanker cargos of 440 MMcf/d Canada LNG's projected cost was C$3.5 billion, or nearly C$7 billion in 2013 purchasing power, according to the Bank of Canada's inflation calculator.

The 2013 ExxonMobil-Imperial project now awaiting an NEB export license calls for a nine-fold bigger operation with up to six LNG processing trains capable of sending out 3.9 Bcf/d in liquefied form. No firm cost forecasts are disclosed.

But there are ghostly echoes of the past. Nowadays, as in 1986, the outlook for LNG prices is murky. An international market study submitted to the board in support of the ExxonMobil-Imperial proposal says that although Asian sales contracts still index oil and gas prices, the benchmark known in the LNG trade as the "parity coefficient" is fluttering downwards as sales competition grows among Canadian, Australian, U.S. and Middle Eastern suppliers. Since 2007 the value of 1 MMBtu of LNG sank from one-sixth the price of a barrel of oil, or full energy equivalency, to one-seventh, and the direction in new contracts continues to be down, the report says.

The NEB license will only be one of many elements that must come into alignment before tanker terminal construction begins, says the application to the board. All realistic site, supply, pipeline and sales options are under review and negotiation with various branches of the gas industry, the documents say.

"Timing could be influenced by a number of variables, including but not limited to project economics and available pipeline capacity to the west coast of British Columbia," says the export license application.

"A key component...will continue to be ExxonMobil's ability to secure LNG sales," the board was told. "The magnitude of the investment required throughout the value chain, from upstream supply to downstream markets, requires firm long-term sales agreements."

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