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FirstEnergy: Global Market Changes Make Kitimat Export Plan Viable

A British Columbia (BC) proposal for a northern Pacific liquefied natural gas (LNG) terminal has converted itself into an export project, highlighting a 180-degree turn seen ahead for supplies when Canadian producers catch up to Americans in applying new technology.

"Market and pricing conditions provide a compelling opportunity for companies looking to export LNG from North America to Asia," Calgary-based Kitimat LNG Inc. said in announcing the about-face (see NGI, Sept. 29). While overseas markets jump, North America is headed into a long spell of mediocre prices and full storage facilities through 2010, FirstEnergy Capital Corp. told a Calgary market outlook conference.

The BC LNG project's conversion from imports to exports about quadruples its original C$700 million price tag, more than doubles construction labor requirements for the planned 1 Bcf/d operation to 1,500 workers and doubles its forecast permanent staff requirement to 100. But "fundamental changes altering the global natural gas market have made Kitimat's proposal to export LNG more viable than an earlier proposal to import," the company said.

A "leading multinational corporation" agrees with the changed outlook enough to have signed a memorandum of understanding that enables it to conduct a feasibility study of signing on as a new partner in the project, Kitimat LNG added. The prospective partner's identity was kept confidential.

Signs of the times include slippage in Canada's benchmark gas price at the AECO market and storage hub in southeastern Alberta, FirstEnergy reported. Trading has lately slipped into a range of C$5-6/Mcf (US$4.80-5.75), raising questions about how much life is left in a drilling surge that started last spring during a spell of increased export prices and favorable exchange rate trends.

The investment house, which makes a specialty of tracking gas, lowered its expectations for annual average AECO prices by 10% to C$8.33/Mcf (US$8) for 2008, C$7.24 (US$6.95) for 2009, C$7.86 (US$7.54) for 2010 and C$9.15 (US$8.78) for 2011.

As in the U.S., Canadian storage facilities are within sight of full with a record 456 Bcf on hand in the western provinces alone, FirstEnergy reported. Only a severe, prolonged winter will lower the inventory enough to make a significant difference to prices, the firm suggested.

Also as in the U.S., gas field output is on its way up thanks to technology breakthroughs accelerating "unconventional" production from coal seams, "tight" geological formations with few natural flow channels and shale "source rock" where horizontal wells and high-pressure fluid injections manufacture virtually all routes for gas to make its way to the surface, Kitimat LNG said. Reserves additions owed to the new technology are expected to be measured in trillions of cubic feet.

Growth ahead for unconventional gas production in Canada is rated as potentially large and rapid, at least by the relatively small cluster of large firms and subsidiaries of U.S. companies involved in transplanting the new methods to date. The techniques are still in their infancy in British Columbia and Alberta. But producers in the two provinces are taking cues from American counterparts that Canadian analysts estimate currently generate 40-50% of U.S. production from unconventional wells.

FirstEnergy continued to predict that Canadian gas output will taper off in the near future due to high finding and development costs, coupled with slow progress in developing unconventional production. But Kitimat LNG described BC as a rapidly emerging source for "plentiful and expanding supplies." Northern BC alone harbors 250-1,000 Tcf of shale gas, the province's energy ministry estimates.

FirstEnergy calculated that U.S. producers will chalk up their biggest annual production gain since 1971 this year by adding 3.6 Bcf to daily output.

Kitimat LNG observed that "rising natural gas demand in Asia and recent increases in supply throughout North America -- including in the U.S., Canada's traditional export market -- have led to significantly higher prices in Asia than North America."

Spot LNG sales on Asian markets have approached US$25 per MMBtu, FirstEnergy estimated. The "stratospheric" overseas prices will likely drop over the next two years as liquefaction and export projects now under construction in seven countries from Australia to Yemen are completed, the investment house added. The lineup is forecast to add 240 Bcf per month to LNG cargoes, loosening up tight Asian markets and enabling increased landings at North American import terminals. The international trade trends are expected to limit price increases in Canada and the U.S., and to contribute to the emerging quest for LNG export capacity.

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