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, a report Monday from Barclays Commodities Research said.
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 Trevor Sikorski and Miswin Mahesh, London-based analysts and authors of the latest energy report from Barclays.
Despite multiple LNG export projects now being developed in western Canada (see Daily GPI, Sept. 18) 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,” Barclays said.
They cited a proposal by Malaysia’s Petronas to buy Progress Energy (see Daily GPI, Oct. 23), ExxonMobil’s proposed purchase of Celtic Exploration (see Daily GPI, Oct. 18) and China National Offshore Oil Corp.’s move to get Nexen Inc. (see Daily GPI, Sept. 21) as examples, acknowledging that “some barriers” need to be cleared by these forays.
The Barclays report cited at least two of the hurdles: slowing of Kitimat’s development because of growing insistent on oil-indexed pricing deals, and a Canadian regulatory environment that may be tougher than previously characterized.
“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.
“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 [Japanese oil-indexed, or Japanese crude cocktail] LNG pricing,” said Bob Braddock project manager for the Jordan Cove import-export LNG project along the south-central coast of Oregon.
“This contrasts with Sabine Pass [and others in the U.S., including Jordan Cove] 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 the Canadian projects’ slowing, Braddock said that 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 Barclays report said that in an environment in which a “common theme” is to reduce oil-indexed exposure, the JCC-type 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. 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.”
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