Companies, countries jockey to fill mid-2020s LNG demand

A lot has changed between 2013, when Russian gas producer Novatek and its French and Chinese partners decided to go ahead with the $27 billion Yamal LNG venture, and this month when a Shell-led consortium made the same decision for its $31 billion LNG Canada project in Kitimat, British Columbia.

Global LNG trade grew 30 percent over the five years; a dozen more countries are importing the fuel; and more LNG is being sold under spot and short-term deals as buyers take advantage of the highly competitive and changing marketplace.

The Canadian project could be the first of several in the next year or so as suppliers look to fill an anticipated supply gap in the 2020s and beyond. The world’s No. 1 LNG producer, Qatar, is expected to decide next year to go ahead with a 40 percent boost in its output capacity to 110 million tonnes a year.

“If you look at the demand curve and the supply coming on stream, there are simply not enough projects being sanctioned or under development to meet demand by 2023-24,” said Jessica Uhl, Shell’s chief financial officer.

“There needs to be 200 million tonnes annual LNG capacity authorized by 2025 to meet future demand,” Sanford C. Bernstein &Co. analysts said. “This is the start of a major LNG investment wave.”

Global liquefaction capacity was almost 370 million tonnes as of March, according to the International Gas Union, with an additional 60 million tonnes under construction.

New export projects are vying for approval in Russia, Mozambique and the United States, along with capacity expansion in Papua New Guinea.

But in September, China imposed a 10 percent tariff on LNG imports from the U.S. in retaliation for levies imposed by the Trump administration.

“This is not very good for American LNG projects working hard to take final investment,” said Morten Frisch, a U.K.-based gas-industry consultant.

Shell said construction of the LNG Canada project will start immediately, with production to begin before 2025. The first-phase capacity will be 13 million tonnes of LNG per year, with the potential to double the output. At 26 million tonnes, the plant would be about equal to the liquefaction capacity of Algeria, the world’s sixth-largest LNG exporter in 2017.

The odds that LNG Canada will proceed with the second phase “is all but an inevitability” due to the economies of scale, National Bank of Canada analysts reported earlier this year.

In addition to two liquefaction trains, LNG storage tanks and loading berths at the coastal site on a deep-water fjord, the project includes construction of a 416-mile pipeline from prolific shale gas fields in northeastern B.C., near the Alberta border.

LNG Canada has selected TransCanada to build, own and operate the 48-inch-diameter pipeline, which is estimated at $4.8 billion (U.S) with an initial capacity to move 2.1 billion cubic feet of gas per day and expansion potential to 5 bcf.

Permits are in place for the pipeline and contractors have been hired, a TransCanada spokeswoman said last week. The company has conditionally awarded $640 million in contracting and employment opportunities to northern B.C. Indigenous-owned businesses, and said it now has the support of all the elected Indigenous groups along the route.

LNG Canada “set a new standard” for respectful consultation with First Nations, said Brenda Duncan, the Haisla Nation’s deputy chief councillor.

“When LNG Canada first engaged with us, it was the first time ever that we were seen as partners. … We are now participants in our own economy,” she said.

LNG Canada and the Haisla reached a benefits agreement for the project, though terms have not been disclosed.

None of the LNG Canada partners have disclosed their gas supply costs, production costs or sales prices, although the Australian Financial Review reported last week that the project would be able to land cargoes in Asia at $7.10 (U.S.) per million Btu, quoting Sanford C. Bernstein &Co., a global money management and research firm.

The Wall Street Journal reported that Shell expects its investment to generate an internal rate of return of about 13 percent. LNG Canada was first announced in 2012 and had been scheduled for a final investment decision in 2016, but twice the partners pushed back the decision amid weak market conditions.

Shell holds a 40 percent stake, with Malaysia’s national oil-and-gas giant Petronas at 25 percent, Japan’s Mitsubishi and PetroChina each at 15 percent, and Korea Gas with 5 percent. Petronas joined the project in May.

The Malaysian company holds substantial gas reserves in Western Canada, which it had planned to use to supply its own LNG project, Pacific NorthWest LNG, near Prince Rupert, B.C., north of Kitimat, but Petronas abandoned that development in July 2017.

Western Canadian producers have been waiting for the country’s first LNG project to provide a market for their gas, which sells at a steep discount to U.S. production due to pipeline constraints and strong competition in Eastern Canada from U.S. shale gas output. Bank of America Merrill Lynch recently forecast the Western Canadian gas benchmark price could fall to $1 by 2020.

“Export projects don’t come soon enough,” the bank said.

The LNG Canada partners will each be responsible for their own gas supply and LNG sales, free to sell it however and to whomever they want, said Andy Calitz, CEO of the joint venture.

“What you are essentially seeing is speculative development … using a model that has not been traditionally the model for developing big LNG projects in the past,” said Jason Feer, head of business intelligence at Poten &Partners. “Most LNG projects that went to FID had pre-sold a significant percentage of their output via long-term contracts.”

In Kitimat, the celebrations Oct. 6 included a beer garden, concerts and fireworks.

“We have one more thing (to be thankful for) this Thanksgiving,” said Alan Yu, a resident of Fort St. John, B.C., in the gas-producing region. Canada celebrated Thanksgiving on Oct. 8.

Economists had their own take on the political celebrations in Canada.

“Politicians like to take credit for things that are good and they like to shift blame for things that go bad. An investment like this only happens if there’s commercial viability,” Kenneth Medlock, Rice University’s Baker Fellow in Energy and Resource Economics, was quoted by a Vancouver newspaper Oct. 3.

Larry Persily is a former Alaska journalist, state and federal official who has long tracked oil and gas markets and projects worldwide.

Updated: 
10/10/2018 - 11:26am

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