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Shifting Market Prompts Reversal of Kitimat LNG Plan

Shifting global gas supply and demand fundamentals have moved Kitimat LNG Inc. to revise its plans for a liquefied natural gas (LNG) import terminal to instead construct an export terminal near Kitimat, British Columbia (BC), on the Bish Cove site where it had planned to construct the import facility.

Rising natural gas demand in Asia and recent increases in supply throughout North America -- including in the United States -- have led to significantly higher gas prices in Asia than North America, the company said. "These market and pricing conditions provide a compelling opportunity for companies looking to export LNG from North America to Asia."

Kitimat is not alone in its rethinking of LNG's role in the North American and world gas markets during a year in which LNG imports to the United States have languished and domestic supply growth, particularly from unconventional plays, has surprised many.

Last month Cheniere Energy Marketing Inc. asked the U.S. Department of Energy for permission to export on a spot market basis LNG that had previously been imported and stored at the Sabine Pass LNG Terminal in southwest Louisiana (see NGI, Sept. 1a). Royal Dutch Shell, a major LNG player, is watching what happens. "That's a good first indication [of interest in exporting LNG from the United States], and then we'll watch it and see if it makes sense," Kathleen Eisbrenner, executive vice president for global LNG with Shell Gas & Power International, told NGI recently (see NGI, Sept. 15). Additionally, some have called for increased exports of LNG from Alaska to Asian markets as part of that state's commercialization of its North Slope gas reserves (see NGI, Sept. 1b). And Aubrey McClendon, CEO of major gas shale play producer Chesapeake Energy Inc., has touted LNG export facilities to capitalize on growing production from unconventional gas plays in the United States (see related story).

As for Canada, production is growing, and British Columbia (BC) is leading the way. BC is posting its eighth annual increase in gas reserves while continuing a streak of strong monthly drilling rights sales. The industry replaced 177% of gas production with added supplies in 2007, according to a recent inventory compiled by the BC Oil and Gas Commission (see NGI, Sept. 15a).

"Kitimat continues to be a viable and advantageous location to build a West Coast LNG terminal," said Kitimat President Rosemary Boulton. "The growing economies of the Pacific Rim and rapidly increasing demand for LNG make Asia a natural market for BC's plentiful and expanding supplies of natural gas. Kitimat is close to Asian markets and an extensive pipeline network already connects BC gas suppliers to the Kitimat area."

Boulton told NGI the project will be capable of exporting 3.5 million to 5 million metric tons per year, probably closer to the latter, or 500-700 MMcf/d. Tanker traffic and vessel size will be the same as was proposed for the import facility. The port will see four-five ships per month and will have the capability to handle tankers as large as the Q-max class.

Kitimat does not have any capacity contracted yet. Boulton said her company is seeking 20-year baseload contracts and that some capacity will be left available for spot production. She said it is yet to be determined what percentage of terminal capacity will be left uncontracted in order to take advantage of the spot market.

As for whether additional LNG exports from Alaska would be a threat to the project's competitiveness, Boulton said any Alaska project is too far off in the future to predict what impact it might have, but the Kitimat backers see a robust Asian market for LNG.

The Kitimat project will not be seeking an export license from Canada's National Energy Board (NEB) for several years, Boulton said. Repsol Energy Ltd. recently received an LNG import and regasified LNG export license for its Canaport LNG terminal on the East Coast, but the NEB denied a request to allow the export of native Canadian gas to the U.S. that Repsol had sought (see NGI, Sept. 15b). Asked about this and what it might mean for Kitimat's pursuit of an LNG export license, Boulton said the NEB is "well versed" in issuing both long- and short-term licenses and that Kitimat will cooperate with the regulators when the time comes.

The fundamental changes altering the global gas market have made Kitimat LNG's proposal to export LNG more viable than its earlier proposal to import LNG to North America, the company said. One sign of the times: the troubles of once high-flying Gulf Coast LNG import terminal developer Cheniere Energy Inc. Cheniere continued to produce more red ink than regasified LNG in the second quarter as losses more than tripled from the year-ago period and more than doubled from the first quarter. However, investors took heart from the company's recent announcement that it had secured $250 million in financing (see NGI, Aug. 18).

"Delays and cancellations of several LNG liquefaction terminals have caused major LNG shortfalls globally. Regasification terminals in North America are underutilized. At the same time, the trend away from coal is accelerating and demand for clean-burning gas has never been stronger," said Ilene Schmaltz, vice president of supply marketing at Kitimat. "These long-term trends create opportunities for stable sources of natural gas supply to take advantage of high demand in Pacific Rim markets."

The export plan provides a number of benefits for the Province of British Columbia, the Haisla First Nation, the District of Kitimat, and the local region, according to Kitimat. "The Haisla First Nation offers its full support to Kitimat LNG and its new LNG export proposal," said Haisla Chief Counselor Steve Wilson.

The company's previous import proposal received all regulatory, environmental and government approvals (see NGI, June 12, 2006), and the company said it will work with all levels of government on approvals, processes and permitting for the export proposal. There are no additional environmental impacts resulting from a change in use to a liquefaction terminal from a regasification terminal. The amount of space the terminal would require remains constant, and the number of vessels moving in and out of the terminal also remains the same, Kitimat said. The company said it has entered into a memorandum of understanding with "a leading multinational corporation" that is currently studying the feasibility of participating in the project.

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