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Pricing Issue Said to Slow Kitimat LNG Exports

Some glitches are being observed in the rush to develop liquefied natural gas (LNG) export projects in Western Canada as the timeline shortens for U.S. Department of Energy (DOE) rulings on more than a dozen similar projects aimed at non-free trade agreement (FTA) nations, according to a report issued last week by Barclays Commodities Research.

The stumbling blocks on the Canadian side of the border appear to include an insistence on oil-indexed pricing and uncertainty in the regulatory arena, the report said. Ultimately, a series of DOE approvals in the near-term could further cloud the Canadian landscape, according to analysts Trevor Sikorski and Miswin Mahesh, who authored the Barclays report.

Despite multiple LNG export projects now being developed in Western Canada and the region's geographical advantages in serving lucrative Asian markets, "a number of major LNG market participants have signaled their intent to start development projects by purchasing Canadian gas companies," they said. The analysts cited a proposal by Malaysia's Petronas to buy Progress Energy (see NGI, July 2), ExxonMobil Corp.'s proposed purchase of Celtic Exploration, and China National Offshore Oil Corp.'s move to acquire Nexen Inc. as examples, acknowledging that "some barriers" need to be cleared by these forays (see related story and NGI, Oct. 22)

Barclays cited at least two of the hurdles: slow LNG facility development in Kitimat on British Columbia's West Coast because of growing insistence on oil-indexed pricing deals to cover the high cost of the projects which also include yet-to-be-built large, long-distance pipelines from the developing Horn River and Montney basins to the north. The projects also face a Canadian regulatory environment that may be tougher than previously characterized.

The analysts said in an environment in which a "common theme" is to reduce oil-indexed exposure, deals similar to those that are Japanese oil-indexed, or Japanese crude cocktail (JCC) deals have "little appeal since there are few buyers who want that sort of long-term exposure. One of the biggest appealing factors for the U.S. projects to buyers is the promise of direct exposure to Henry Hub gas prices. The U.S. projects, particularly on the Gulf Coast, can handle more flexible pricing because of easily accessible competing supplies. If the regulatory bottleneck in the United States is loosened post-election, then the Canadian projects could find themselves having to compete with such pricing to find buyers.

"While these may just be some teething problems, and LNG will start to flow from the West Coast in the second half of this decade, both the price expectations of developers and the openness of the government to equity positions in its energy companies might need to evolve," said Sikorski and Mahesh.

Bob Braddock, the project manager for the Jordan Cove, OR, import-export LNG project, said he thinks the "primary reason for Kitimat having problems with securing customers is the fact that they utilize a business model that attempts to have the owners of the LNG liquefaction facility (Apache, et. al.) capture the pricing differential between Henry Hub gas pricing and JCC LNG pricing. This contrasts with Sabine Pass [and others in the United States] who are developing LNG liquefaction facilities and charging customers for the cost of service, thereby allowing the customer to capture the savings from buying gas indexed to Henry Hub rather than JCC."

With Jordan Cove's desire to move Western Canadian shale gas supplies to its proposed export terminal and with Canadian projects' slowing, Braddock said the proposed pipeline to Kitimat remains "vulnerable to the uncertainty of when they will secure First Nations approval," and this could indirectly help his multi-billion-dollar project. "Kitimat's problems seem to provide an opening for export terminals in the United States."

The chief of a Oregon LNG, the second proposed Oregon-based LNG import-export project, agreed that the slowdown in Western Canada may help U.S. West Coast LNG plans.

"It is becoming clearer that all of the Canadian projects are turning into mega-projects," said Oregon LNG CEO Peter Hansen. "That is the only way they are going to work. They have many billions of dollars required just for pipelines."

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