US investors' difficulties in financing a second wave of LNG export projects have given Western Canada the chance to prove it can be more competitive than the Gulf Coast as a supply source to Asia and able to satisfy domestic producers' demand for new outlets, provincial government and industry leaders said Monday.
As the Canada Gas & LNG Exhibition and Conference opened in Vancouver, there was an all-in atmosphere among attendees, with regulators, developers and even First Nations advocates -- sometimes at odds with fossil fuel energy expansion -- joining to support LNG exports from British Columbia.
The market's eyes have turned north to see if one or two export projects may reach a positive final investment decision later this year. A big project backed by Shell and a small- to medium-sized proposal by Woodfibre LNG have made progress. Midstream operators, too, are watching closely, as they have been looking for infrastructure growth focused on linking feedgas with liquefaction facilities.
"Part of the energy map we are developing involves the natural gas industry and our ability to export LNG to the rest of the world," British Columbia Minister of Energy Michelle Mungall said at the annual conference.
Western Canadian gas production has faced continuous challenges as demand in the region is far outweighed by its production, leading to a large net-long imbalance. As a result, utilization on key outflow corridors runs high, and fully contracted delivery areas on major pipelines, such as NOVA Gas Transmission in Alberta, leave little optionality for where gas produced in that province can flow.
Another challenge for Western Canadian producers is mounting in the form of growing, low-cost gas production from US shale basins. Some US gas basins are now in direct competition for the limited downstream markets previously served primarily by Western Canadian volumes. Pipelines being built in the US Northeast, such as Rover Pipeline and NEXUS Gas Transmission, are designed to transport growing production volumes from Ohio, Pennsylvania, and West Virginia to markets such as the Dawn Hub in Ontario, which had previously been supplied mostly by Western Canadian gas. As a result, pipeline operators like TransCanada have offered discounted transportation rates to the Dawn market in order to maintain competitiveness with newer supply basins.
The continual brush-up against outflow capacity in Western Canada has also resulted in deeply discounted prices, especially at trading pools like the AECO Hub, where prices have dropped into negative territory during low-demand periods. As recently as 2012, cash prices at the AECO Hub averaged a 49-cents/MMBtu discount to US benchmark Henry Hub. This year to date, prices there have traded at an average discount of $1.27/MMBtu, and this month to date prices have averaged $2.39/MMBtu less than Henry Hub, data compiled by S&P Global Platts Analytics shows.
LNG projects are viewed as a major outlet for Western Canada's abundant gas production and an opportunity to move volumes into growing international demand markets. Until a major export project is advanced to completion, however, the options for Western Canadian producers are fairly limited and almost always involve trying to outprice and out-compete their low-cost US shale counterparts for limited demand-growth markets in the US.
Unfavorable economic and market conditions forced Malaysia's Petronas last year to cease work on its Pacific NorthWest LNG project on Lelu Island near Prince Rupert. A Shell unit nixed plans for an LNG facility on Ridley Island at the Port of Prince Rupert.
But despite those setbacks, there has been progress. Other developers have been advancing front-end engineering efforts and getting a hold on expected construction costs, and the B.C. government issued a policy framework March 22 that encourages natural gas development, especially LNG exports, as long as such projects help the province meet its goals for reducing greenhouse gas emissions .
The mayor of Kitimat, British Columbia, said in April that based on conversations he had with the developers of the proposed LNG Canada export project, he expected a final investment decision by October. That project is a joint venture of Shell, PetroChina, South Korea's Kogas and Japan's Mitsubishi.
Another major project in the mix, though its prospects are unclear, is Kitimat LNG, backed by Chevron and Australia's Woodside Energy. Several smaller export projects in Western Canada also are being pursued.
"We have the potential of two FIDs this year, and potentially others coming in future years," David Keane, president of industry trade group B.C. LNG Alliance, said at the conference. "It's like a three-legged stool. The first leg are the proponents and the controllable costs. The second leg of that stool is fiscal policy costs linked to the provincial government."
Keane added, "The third leg of the stool is the fiscal policy costs related to the federal government. We're working with the government to manage those costs as well."
