Canadian producers unite in LNG export effort

It worked almost a quarter-century ago for several Western Canadian natural gas producers who were tired of not having enough access to markets when they joined together to build a $3.1 billion pipeline to reach U.S. buyers.

Maybe it will work again, though this time the producers are looking overseas.

“We as a group are very keen to see LNG off the West Coast,” said Darren Gee, president and CEO of Calgary-based Peyto Exploration and Development, which touts itself as Canada’s fifth-largest gas producer.

Frustrated over low prices for their gas, exasperated over delays in new access to world markets and irritated that oil and gas majors seem in charge, Peyto and nine other companies announced in February that they will work together to see if they can get a second liquefied natural gas export terminal built on Canada’s West Coast.

The group is “a collaboration amongst competing producers” that between them supply 20 percent of Canada’s gas and 40 percent of gas liquids such as propane, butane and ethane, said Greg Kist, former president of the canceled Pacific NorthWest LNG project in Prince Rupert, British Columbia, and who is working as a consultant to the group of 10 producers.

“The producers want to deal with the challenge we have today with weak prices,” Kist said, as reported in Canada’s Financial Post on Feb. 20.

The producers’ options include reviving Pacific NorthWest LNG or finding another project to adopt among the several unsuccessful West Coast LNG ventures. Of the more than a dozen proposals, the only large-scale project to go ahead so far is the Shell-led LNG Canada venture, which started site work in late 2018 in Kitimat, B.C., with a start-up planned by 2024.

The 10 producers see a more profitable future selling their gas into overseas markets.

Facing growing competition from U.S. shale gas producers in their traditional markets of eastern and mid-Atlantic U.S. and Canada, Western Canadian producers are suffering steep discounts relative to U.S. benchmark natural gas prices. Alberta’s AECO hub spot-market prices have been trading more than $1 per thousand cubic feet less than U.S. prices in February — about a one-third discount.

At that discount, the markdown could cost Canadian producers almost $6 billion (Canadian) in lost revenue for a full year, Advantage Oil and Gas CEO Andy Mah told the Financial Post in December. Advantage is one of the companies that have joined forces to try putting together a second large-volume LNG project on the West Coast.

The consortium hopes to have a project operating by 2026, though that would require permitting, assembling investors and customers and financing and then making a final investment decision in the next couple of years.

The companies are predominantly players in the Montney shale in northeastern British Columbia and northwestern Alberta. Canada’s National Energy Board estimates the Montney’s potential reserves at 449 trillion cubic feet of marketable gas and 14.5 billion barrels of natural gas liquids.

The players are looking at “controlling their own destiny” rather than relying on super majors like Shell and Chevron to build export projects, said Cameron Gingrich, director of gas services at Solomon Associates, a global energy consulting firm with offices in Calgary.

“It’s great that it’s finally getting some traction,” Gingrich told the National Post.

“The thing about energy (projects) is they are very large projects that require a lot of capital investment and infrastructure,” said Alan Boras, director of communications and stakeholder relations for Calgary-based Seven Generations Energy, a member of the consortium.

“If you think about an LNG project, you need to have reserves in sizable amounts. You need transportation to a port and you need a liquefaction plant. And you need tankers and you need buyers,” Boras was quoted in the Financial Post on Feb. 20. “All of those pieces are very large and it takes a lot of coordination to bring them together.”

The companies banding together to get their gas to market is similar to an initiative that started in the late 1980s and succeeded in building one of the longest and most expensive gas pipelines ever constructed at that time. The Alliance Pipeline went into service in 2000: 1,875 miles of 36-inch-diameter steel pipe from northeastern British Columbia straight to a connection point and a new gas liquids processing plant about 50 miles southwest of Chicago.

The motivation then, as it is now, was money; the producers wanted better prices for their gas. They were frustrated that inadequate pipeline takeaway capacity forced the companies to compete with one another by dropping their price.

“They believed the price they were getting for their gas at the wellhead was too low,” according to a 2011 report by the federal coordinator’s office for Alaska natural gas pipeline projects. “There wasn’t enough pipeline capacity to move the plentiful and growing production of Western Canada to higher-priced U.S. markets. They were stuck too often with the low prices of the glutted local market.”

In 1992, two industry friends — a producer and a marketer — were talking in a Calgary pub, bemoaning the low prices caused by a lack of pipelines to U.S. markets. The marketer sketched out the pipeline route on a bar napkin. By 1995, there were 22 gas producers and marketers on board to take matters into their own pipeline.

In spring 1998, a syndicate of 42 international banks agreed to lend money for construction.

By the time Alliance started service in 2000, the ownership roster was down five companies, all of them in the pipeline business.

“The gas producers that founded Alliance got out of the pipeline ownership business quickly, most selling their shares before construction started and retreating to their comfort zones,” the history report said.

Alliance is now jointly owned by two Calgary-based pipeline companies: Enbridge and Pembina Pipeline. Its capacity of 1.6 billion cubic feet per day is fully subscribed by shippers.

“That’s been very good for Canada,” Boras said of Alliance.

His company, Seven Generations, is a shipper on the line.

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

02/27/2019 - 10:46am