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Canaport LNG: Repsol's New England Gateway

With the Canaport LNG terminal due to receive its first shipment of liquefied natural gas (LNG) within days, Spain's Repsol YPF is poised to enter the North American gas market with up to 1 Bcf/d of supply delivered "at the end of the pipe" to the hurricane-free Northeast/New England market.

The first cargo is on its way from Trinidad to the Canaport facility at Mispec Point, near Saint John, NB, and was expected to arrive by early this week. Regasified LNG from Canaport will travel through the Brunswick Pipeline to the New Brunswick-Maine border for delivery to the New England market via Maritimes & Northeast Pipeline LLC. In January Maritimes placed in service its Phase IV expansion to carry regasified LNG from Canaport (see NGI, Jan. 12).

Canaport along with Repsol's other natural gas assets will be capable of meeting about 20% of the gas demand in New York and New England, which is a 5 Bcf/d market, Repsol said.

"We certainly expect the New England market to be a growth market relative to the rest of the U.S.," Repsol's Vincent Morrissette, vice president of North American origination and regulatory affairs, told NGI, following an event last Thursday to announce the company's first Canaport cargo. "In addition, we really have the unique capability of responding to two growth needs. A significant portion of the market, approximately 25-30%, is currently fed with gas from western and eastern Canada. The bulk of the rest of that comes from the Gulf Coast of the U.S. We will be coming in from the North, being able to back-feed the capacity-constrained pipeline system there, and we'll be able to make up or help to supplement the reserve depletion from the eastern and western Canadian gas resources."

Power generators and local distribution companies (LDC) are the customers for the gas, Morrissette said. "There are actually a few [gas-fired power generation] projects under development in the New England area. We expect growth probably in the two- to five-year horizon. We certainly expect some growth in natural gas-fired power generation. There's a lot of talk of course of renewables, but we think natural gas is the near-term fit for the growth of the power markets in the Northeast. It's a big part of our expectations with respect to our gas sales. Also, of course, the LDCs will pick up some of that as the commercial and industrial load picks up."

Canaport, a project of Repsol and Canada's Irving Oil, is the first terminal of its kind to be built on the East Coast of North America in 30 years and the first ever to be built in Canada. Repsol said the project will help consolidate its joint venture with Gas Natural as the world's fourth-largest shipper and marketer of LNG. Repsol has supply contracts with a number of other gas sources that will complement operations at Canaport and ensure that clients "have access to competitively priced and reliable natural gas supplies delivered under flexible contractual arrangements," the company said.

All of Canaport's capacity is contracted to Repsol Energy Canada Ltd. The facility, which is owned 75% by Repsol and 25% by Irving, has storage capacity of 9.9 Bcfe. Repsol has contracted all of the firm capacity in the Brunswick Pipeline.

Further penetration of regasified LNG from Canaport is certainly possible, according to Morrissette. "It depends on a lot of factors," he said. "We're going to sell our gas at market prices, so we'll have gas-on-gas competition, and to the extent that we can compete we would like to go as deep in the market as possible."

That said, gas delivered via Canaport won't be bumping molecules with supplies from the Rockies or Appalachia's Marcellus Shale, at least not in New England, which is the primary target of Canaport-sourced gas. "In the Pennsylvania, New York markets -- where all that [Rockies/Marcellus] gas will hit -- certainly there will be a lot of gas-on-gas competition there," Morrissette said. "The problem with getting all the way into New England is the infrastructure isn't there yet to accommodate the growth of that gas supply from the Marcellus or from the Rockies Express [pipeline]. I know there are some projects on the table, but right now as far as going all the way into New England none of those projects have customers signed up."

Canaport is one of Repsol's 10 key growth projects outlined in its 2008-2012 strategic plan. Besides exploration and production activities in the Gulf of Mexico and elsewhere, Repsol is participating in the construction of an LNG liquefaction plant in Peru, from which the company will purchase 100% of the LNG produced beginning in 2010. Swaps and other instruments will allow Repsol to move gas around notionally as well as physically, noted Benjamin Palomo, Repsol executive director of LNG.

"The market is very fluid," he told NGI. "At the moment it is affected by the financial and economic crisis. We have seen a slight decrease in industrial demand that is affecting the overall demand for gas and LNG as well. This is a long-term project. We have a contract for 25 years and we take a long-term view. We are quite confident in our business model and that the investment will pay off. The trends that we can see in the short term, because of the decreasing demand and also because of the high [gas storage] stock levels in the U.S., the prices of gas are at unusually low when you look at the long-term trend of crude oil prices to gas prices, and that is to us a short-term situation that will eventually balance itself."

Repsol is joining Gazprom in targeting the North American LNG market. The Russian gas giant has said it could supply 10% of the North American LNG market by 2020 (see NGI, June 15).

Irving Oil first sought approval for the Canaport project in the summer of 2001 (see NGI, July 30, 2001), and much has changed in the North American gas market since then, particularly the emergence of robust production from unconventional gas shale plays where producers continue to drive down costs. Palomo is undaunted. "We are quite confident in our business model. The abundance of shale gas will have an effect on the overall market, but there will be a balancing effect as well," he said. "LNG has been imported in the U.S. historically even when gas prices were around $2/MMBtu. And I don't think that at that kind of level of prices we are going to see a lot of shale gas around."

Cool-down and ramp-up at Canaport will take all of July, Palomo said, noting the goal is to be fully ready for the winter heating season.

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