A consulting firm’s global market review makes a case for a Canadian open door policy, allowing foreign firms to have an equity share in developing Canadian liquefied natural gas (LNG) export projects and the resources that supply them.

Canada gains a competitive edge on the global market for LNG by keeping supply development open to foreign participation, according to a review by consultant PFC Energy. The report was submitted to the National Energy Board (NEB) as a supporting document for a LNG export license application by the joint venture (JV) proposal led by Shell Canada Ltd. that includes three Asian partners (see Daily GPI, Aug. 6, 2012).

Shell’s LNG Canada seeks a license to export 32.95 Tcf over 25 years, or up to 3.3 Bcf/d through a jumbo Kitimat complex to be built in stages as markets develop. Diamond LNG Canada Ltd. (a subsidiary of Mitsubishi Corp.), Kogas Canada LNG Ltd. (an affiliate of Korea Gas Corp.) and Phoenix Energy Holdings Ltd. (an affiliate of PetroChina Investment Hong Kong Ltd.), are partnering in the JV.

The Canadian advantage for LNG exports is described as extending beyond the open door that allowed the $6 billion takeover last month of Progress Energy Resources Corp. by Malaysia’s Petronas Carigali Canada Ltd. (see Daily GPI, Dec. 11, 2012).

“Canada’s resource development policies allow companies to take an ownership interest in the entire value chain. The ability to secure equity in the entire value chain is a critical value creator and it also enhances security of supply, as buyers have direct knowledge of and participating interests in the projects that supply them,” says PFC.

The message appeared to run counter to a new stricter stance on foreign investments. In approving the Petronas takeover, and at the same time the buyout by the Chinese national oil company, CNOOC Ltd. of Nexen Inc., Canadian Prime Minister Stephen Harper unveiled prohibitive new rules for investments in Canadian companies by foreign state-owned corporations and slightly lesser rules for investments by foreign investor-owned companies.

“Canadians generally and investors specifically should understand that these decisions are not the beginning of a trend, but rather the end of a trend,” Harper said. “When we say that Canada is open for business, we do not mean that Canada is for sale to foreign governments.”

However, the advantage of staying open is double-edged by generating payoffs on both the supply and demand sides of the LNG market, says PFC. In addition to rewarding foreign investment in upstream exploration and development, a national economic open door enables Canadian projects to carve out sales niches downstream on overseas — and especially Asian — markets, which are expected to become increasingly competitive as entries multiply from the United States and Australia.

“Almost all LNG projects are joint ventures with two or more partners,” PFC notes. “Successful projects tend to have partners that have experience in upstream development and in previous liquefaction projects. Joint ventures between buyers and sellers have become increasingly popular, as this structure provides buyers with greater supply security and allows sellers to more easily monetize their gas. This merging of the upstream and downstream segments of the LNG value chain fosters enduring relationships between buyers and sellers to the benefit of the project.”

Opportunities to expand gas-trading relationships span the Asia-Pacific region, PFC says. The primary markets are expected to remain Japan, South Korea and China. Potential destinations for North American gas, with LNG projects springing up to open escape routes from the continental glut fostered by shale supply development, also include smaller but still significant outlets in India, Taiwan, Singapore, Thailand, Vietnam, Indonesia and Malaysia.

PFC estimates the available market for new LNG tanker deliveries — the excess of demand over “secured supply” already nailed down by long contracts, typically lasting up to two decades – will be 49 million tonnes per year (MMt/y) (2.4 Tcf/year) as of 2020.

By 2025, a combination of expiring long supply contracts and rising gas consumption is forecast to increase the available annual LNG market to 112 million tonnes (5.6 Tcf). As of 2025, the potential annual demand available for new supply contracts is expected to reach 279 MMt/y (14 Tcf/y), a volume about equal to one-half of U.S. production capacity currently anticipated by the U.S. Department of Energy.

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