The planned first Canadian liquefied natural gas (LNG) export terminal will be a gateway to a growth dream by the standards of shaky North American markets and prices, Canada’s National Energy Board (NEB) is being told.
The target destinations for tanker shipments from KM LNG’s proposed Kitimat complex on northern British Columbia’s Pacific Coast at Kitimat — Japan, South Korea, Taiwan and potentially China — care more about supply security than price, and demand is on the rise, according to evidence filed with the NEB to support the project’s gas export license application.
Bright prospects are painted in reports by Poten & Partners Inc., a New York City-based international energy and ocean shipping brokerage and advice house, and two pillars of the Canadian consulting community, retired NEB Chairman Roland Priddle and Ziff Energy Group.
“The Pacific Basin offers great opportunities to KM LNG,” Poten says. The firm’s long-range market outlook foresees LNG demand across the Asia Pacific region growing by 2.7% per year during 2014 through 2035. “This steady growth will cause a supply deficit post-2015 if no additional export projects develop.” Japan, South Korea and Taiwan account for 86% of the region’s LNG trade and 54% of global traffic in the commodity, Poten estimates.
The overseas LNG niche inviting the Canadian project to go ahead and help fill it is forecast to start small at nine million tons a year in 2015 but grow to 47 million tons in 2020, 85 million tons in 2025 and 130 million tons in 2035. “KM LNG is well placed to fill some of this gap and gain market share in this premium Asian market,” Poten says.
Prices are projected to stay at lofty levels by North American standards: US$12.00-18.00/MMBtu through 2015, then US$9.50-18.00 (in 2010 dollars, not counting any inflation) for the following 20 years.
“LNG sold under new long-term supply contracts to the Far East is currently priced around 90% of oil on an equivalent heating-value basis. Asian oil-indexed prices are well above gas-on-gas prices in North America,” Poten reports.
“The high prices for LNG reflect the geographic isolation and scarce indigenous energy resources of the traditional Asian LNG buying countries, and China’s large appetite for energy resources,” says the evidence before the NEB. “Far eastern buyers have an overriding concern with security of LNG supply as compared to price sensitivity, as they generally lack alternative sources of gas. Consequently, they are willing to pay a premium for a reliable supply source.”
Priddle describes the Asian LNG market as resembling pre-deregulation Canada and the U.S., with a handful of large suppliers and buyers in enduring relationships established by long contracts, and no trading hubs or middlemen to turn weather and economic variables into volatile prices.
Sponsored by Apache Canada Ltd. and EOG Resources Canada Inc., KM LNG is sized to export up to 10 million tons (468 Bcf/year) of LNG to be made from northern BC shale gas deposits in early stages of development by a lineup of drilling rights owners including the project partners and ranging from Encana Corp. to ExxonMobil Corp.
The project is gaining momentum in order to stay on a schedule that calls for export shipments to begin in 2015 after a prompt start on US$4.5 billion in construction of the 1.4-Bcf/d terminal in two stages of 700 MMcf/d each.
Since the beginning of the year Apache and EOG — as wholly owned subsidiaries of the U.S. namesake parent companies — have taken over full ownership of a northern BC pipeline project (see Daily GPI, Feb. 8) and awarded the terminal engineering and design contract to KBR (see Daily GPI, March 7).
The pair committed to pay US$50 million for the 50% of Pacific Trails Pipeline Ltd. that they did not already own, including US$30 million in cash up front and US$20 million when construction starts. The original sponsor, Pacific Northern Gas Ltd., has obtained BC approvals for the line and will operate and maintain it for the LNG terminal owners. Pacific Trails is laid out on a 463-kilometer (287-mile) route across northern BC that will enable it to collect gas from a wide array of developing production fields, with pipe 91 centimeters (36 inches) in diameter capable of carrying rising volumes with additions of compressor power.
The NEB has scheduled hearings to start June 7 on a KM LNG 20-year gas export permit and begun holding public information sessions in the Kitimat region. And the project recently celebrated passing a milestone for northern BC industrial developments — aboriginal acceptance.
With a host of corporate and native, provincial and federal government dignitaries in attendance the coastal Haisla First Nation and the project’s owners formally signed a long lease for the terminal site. The native community’s acting chief, Ellis Ross, declared, “We are a step closer to making this a reality. Even better, the economics and jobs it will bring to our community are what we have always dreamed of.”
The North American gas market is not about to turn back the clock to old dreams of big growth and unchanging relationships, suggests a long-range forecast presented to the NEB on KM LNG’s behalf by Ziff Energy of Calgary and Houston.
The consulting firm’s 25-year projections foresee North American demand rising by an average 0.8%/year to 89 Bcf/d as of 2035. Most of the consumption growth is expected in Canada, where thermal oilsands projects are forecast to generate annual increases of 1.5% because industrial demand will nearly double to 5.3 Bcf/d as Alberta bitumen production climbs to 3.7 million b/d from the current 1.5 million b/d. U.S. consumption, absent any large government-mandated replacement of coal by gas at power plants, is expected to inch upwards at a glacial annual rate of 0.6%.
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