A huge transition is taking place in Canada's natural gas industry. As natural gas exports to the United States drop as a result of a drilling boom south of the border, big plans are being made to ship Canada's natural gas to growing markets in the Asia-Pacific, where it can be sold at a premium.
But getting the gas overseas is no small feat. The commodity needs to be condensed into what's known as liquefied natural gas (LNG), stored in tanks and shipped to waiting customers in places such as Japan, South Korea, Taiwan and China. There are no LNG terminals in Canada today – a gap some of the world's largest energy companies are vying to fill.
About a dozen multibillion-dollar proposals are on the table to build export terminals on the coast of British Columbia, many linked through proposed pipeline routes from natural gas fields across northern British Columbia and Alberta.
"What we are talking about here is a complete reorientation of Canada's natural gas supply chains," said Peter Tertzakian, chief energy economist and managing director with Arc Financial Corp., a private equity firm. Of the proposals being considered, Mr. Tertzakian says the market likely can support only three, maybe four. For the energy industry, it's game on.
The leading contenders for control of B.C.'s LNG export market include:
– Kitimat, B.C. Backed by Apache Corp. and Chevron Canada Ltd.
– Status: National Energy Board (NEB) export licence approval received, as well as environmental approvals from British Columbia and federal government.
– Size: Up to 10 million tonnes a year.
– Kitimat, B.C. A joint venture that includes Shell Canada Ltd., Korea Gas Corp., Mitsubishi Corp. and PetroChina Co. Ltd.
– Status: NEB export licence approved and just starting environmental approval process.
– Size: Up to 24 million tonnes a year.
Pacific Northwest LNG
– Lelu Island near Prince Rupert, B.C. Backed by Petronas and Japan Petroleum Exploration Co. Ltd.
– Status: NEB and environmental reviews under way. No approvals at this time.
– Size: Up to 18 million tonnes a year.
BC LNG (also known as Douglas Channel LNG)
– Kitimat, B.C. Jointly owned by the Haisla Nation, Texas-based LNG Partners LLC, and Bermuda-based Golar LNG alongside an unnamed Asian company.
– Status: NEB export licence approved. No environmental approval required.
– Size: Up to 1.8 million tonnes a year.
While these projects are out in front, their owners will be watching their backs after Exxon Mobil Corp., the world's largest energy company, recently announced its plans with Imperial Oil Ltd. to build a giant project of its own for up to 30 million tonnes a year.
At this stage, it's anyone's guess which project will be first – or how the players might change – between now and the first shipment off Canada's West Coast, expected in 2015. Keith Schaefer, editor and publisher of the Oil & Gas Investments Bulletin, said the market is waiting to see the first contract price for gas supply from these project proposals. That will help companies determine whether to move ahead with their projects. "As soon as the first Canadian LNG proposal announces a contract price, we'll see who is really in this game and who isn't," he said.
The most efficient way to get the commodity overseas is to compress it into LNG, then ship it. The process begins by piping gas extracted from the ground to an LNG facility. There, the gas is purified, then cooled to -162 Celsius, turning it into a liquid and reducing its volume by 600 times, which is considered the main advantage of the technology. It's then stored in huge tanks and shipped to its destination. Once it arrives, the liquid is warmed in a re-gasification plant until it's returned to its original state. From there, it's piped to end users, which include homes, businesses and industries.
Why the rush to build LNG facilities on British Columbia's coast? Energy companies are looking to capitalize on natural gas prices in Asia, which today range between $14 and $18 (U.S.) for one million British thermal units, or about four times higher than in North America. Natural gas is cheaper in North America largely because of an increase in supply in recent years. Technological advances in horizontal drilling and hydraulic fracturing have led to increased recoveries, which have increased production and, in turn, have driven down prices.
Natural gas is also more expensive in Asia because prices are linked to the price of oil. What's more, natural gas is harder to come by and demand is rapidly increasing, particularly as countries turn to the cleaner burning fuel to reduce carbon emissions. Japan has been particularly hungry for LNG since the Fukushima disaster took its 48 nuclear reactors offline in March of 2011.
"Canadian gas producers have an opportunity to develop markets in Asia where buyers are seeking stable, long-term LNG purchase agreements with reliable gas producers in politically stable countries," the Fraser Institute said in a recent report. Japan, South Korea and Taiwan accounted for 86 per cent of Asia-Pacific LNG trade in 2009, the report states.
China became a net importer of natural gas in 2007 and its consumption is expected to continue to grow alongside an expanding economy and efforts to reduce industrial pollution. The International Energy Agency (IEA) forecasts China's gas imports will grow from 15 billion cubic metres (bcm) in 2010 to 226 bcm in 2035, making it the world's second-largest importer behind Europe.
While Canada is well positioned to feed LNG demand in Asia, it's not a slam dunk. There is stiff competition from the United States, Australia and the Middle East, which are aggressively building their own LNG infrastructure to meet rising global gas demand.