China will look to drive "a hard bargain" on prices when signing LNG off-take deals with Canadian producers in large part because of its recently signed supply deal with Russia, an official with China National Offshore Oil Corp. said Thursday.
"We are in a strong position with the Russia deal and that puts us in the driver's seat while conducting price negotiations in Canada," Chen Wei Dong, chief energy researcher with the national oil company's Energy Economics Institute said on the sidelines of the Canada LNG Export Conference and Exhibition in Calgary.
China in May signed an deal with Russia to import 38 billion cubic meters/year of gas through a pipeline for 30 years.
"We are negotiating another deal with Russia, which we are hoping to sign late this year or early 2015," Dong said, noting the agreements are part of China's efforts to diversify its energy sources.
While he did not mention a specific price range, Dong said Canadian producers will have to consider disconnecting LNG prices from the price of crude if they wish to be competitive.
Prospective Japanese buyers of LNG from Canada have suggested that British Columbia producers consider a "hybrid" pricing formula that would combined crude and gas prices.
The "pricing formula [in Canada] should change," Mitsuru Sato, director general of oil and gas finance with Japan Bank for International Cooperation, said at the event. "The options are hub-linked, or hybrid or new a cost-based LNG formula."
Coal now accounts for 78% of China's total power generation, followed by hydro at 15% and natural gas at 2%, he said. But to enhance energy efficiency and reduce CO2 emissions, the nation is turning toward natural gas as a cleaner source of energy.
And even with the gas deal with Russia, China's National Development and Reforms Commission has estimated China will fall short of gas by 2020. "[O]ur buyers are looking at global producers to secure additional LNG supplies," Dong said at the conference.
China has been importing LNG from Australia since 2005, but the delivered price of LNG gas been increasing, making the nation look to North America supply, he said.
The NDRC has begun market price reforms and despite coal being priced at $3/MMBtu, or 20% of the average LNG price of about $15/MMBtu, Chinese electric utilities will still have to look at importing gas, Dong said.
"CO2 emissions [are] a big factor that will make us more [interested in] LNG," he said, adding that while China already has eight LNG regasification terminals operating, four more import facilities, with a combined capacity of 16 million mt/year, are being built.
Brian Tuffs, executive vice president of exploration and new ventures with Sinopec Canada, said Western Canadian LNG producers are working on profit margins that typically range from $2/MMBtu to $3/MMBtu.
"Significant consolidation will likely take place between the various players in Western Canada before final investment decisions are taken on moving ahead with construction of the multi-billion-dollar export projects," he told the conference.
Tuffs added that the next 24 to 36 months will be a critical period for planned LNG facilities in Western Canada.
Sinopec Canada which has a 10% stake in the Petronas-backed 12 million mt/year Pacific Northwest LNG project in British Columbia, is in negotiations to buy additional volumes of LNG from the planned facility.
Sinopec has an agreement to buy 1.2 million mt/year from the terminal, with an option to increase off-take volume to 4.8 million mt/year, Tuffs said.
The company also is building two regasification terminals at Wengzhou and Guangxi in China, each with a capacity of 3 million mt/year that are due to be completed next year, he said.
