“Tens of millions dollars are being forfeited each day,” economist Peter Tertzakian of ARC Financial said in a recent report. “Canadians are leaving a lot of coin on the table. ... It is disconcerting that it has taken a steep loss in sales to begin acting on market diversification but at least the industry buzz is now all about tapping into a new era of growth.”
A slowdown in the nuclear industry after Japan’s disaster this year has added to the need for more gas in Asia. Buoyed by the region, global demand is predicted to double in the next decade, according to independent research firm Sanford C. Bernstein & Co. It expects the excess of LNG to decline and sees demand sopping up all available gas by 2020.
“While a year ago some market commentators talked of the global glut of LNG, we believe the focus for investors should be on the impending global LNG shortage,” analyst Neil Beveridge of Bernstein said in a recent report.
Royal Dutch Shell PLC , which is pushing gas over oil around the world, feels the pressure to move quickly, too. In 2008, at the top of the continental gas market, it overpaid in its $5-billion purchase of Duvernay Oil, which has large holdings in the Montney shale play in northeastern B.C. The company, chatter in Kitimat suggests, may soon unveil its own LNG plans.
Lorraine Mitchelmore, Shell Canada president, is coy. She concedes that without LNG, the gas Shell bought from Duvernay could be “stranded.” She points to growth in Asian demand, triple the rate of other importing regions, and cites the need to move quickly, noting the competing supply in Australia. Shell is among the players there, moving forward on a floating LNG terminal, which would be the world’s largest ship.
“For [Shell Canada], it’s about Asia. We’re sitting on the doorstep of a great market,” Ms. Mitchelmore said in an interview in Vancouver. “It’s an obvious market for Western Canada gas.”
Apart from its abundant supply, Canada has another advantage. LNG tankers burn some of their product to keep the liquefied gas supercooled at -160 C while in transit. Because of this, the quickest path across the globe is also the cheapest – and ships sailing from Kitimat can get to key Asian markets faster than competitors in Australia and Middle Eastern gas exporters like Qatar, the world’s No 1 in LNG.
“We’ve got it hands down. We’ve got a lot shorter transport time,” Tim Wall, the president of Apache Canada, said in an interview in Calgary. “We can deliver to markets cheaper.”
Apache’s decision to invest in LNG in Canada came after it took a minority stake in Wheatstone LNG, which was approved in September. It’s a giant Chevron Corp. project under construction in Australia. The scale of Wheatstone – $30-billion for everything from gas field development to the LNG plant – speaks to the scope of Canada’s competition. The first gas is to hit the oceans in 2016.
Apache has never built an LNG plant but its Wheatstone position has paid dividends in Kitimat. The company already has marketing teams based in Australia and they have begun the work of selling Canadian gas. Apache has inked deals with two major Japanese power producers and its consortium for Kitimat LNG is in talks with six customers.
The efforts make clear the economic underpinnings for exporting LNG. Sales contracts will span a full 20 years – several lifetimes in the natural gas business – and they bear no relationship to the North American supply and demand dynamics that have so thoroughly depressed prices on this continent. They are instead tied to the price of oil, which has been far stronger in recent years.
That’s not to say a LNG plant will rain profit. Apache initially pegged the Kitimat LNG price at $4.7-billion, with hundreds of millions already spent by the end of this year. But Mr. Wall acknowledges that detailed engineering under way will drive that price up – it’s not clear how much – and suggests margins may be slim.
“There is an economic case,” he says. “But it’s a huge investment – and the payout is going to be somewhat longer. You’re trying to open up markets. There’s a huge prize for Canada, to become a major supplier of energy across the world.”
Competition also looms. Tom Tatham, who runs BC LNG Export Co-operative LLC, has established a 50-50 deal with the Haisla and is proposing a mini-LNG plant. The idea, which would be a world first, is to build a LNG facility on a barge and float it to Kitimat before setting it down against the shore. First gas is targeted to move in 2014.
After the Second World War, the B.C. government wanted to stoke development in the province’s wild and vast northwest. It brought in what is now Rio Tinto Alcan to look at potential hydroelectricity to fuel what became the world’s largest smelter. Kitimat was carved from the wilderness to house workers and the remote town was the Fort McMurray of its time, with some of the highest wages in Canada. “A huge number of men came to work in the pot lines and make a fortune,” says Kieran Leblanc, who was one of the first children born in town, in a makeshift hospital.