Will LNG Save Alberta Gas?

September 20th, 2015
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My “Letter from Calgary” column from the mid-November 2013 issue of the Investment Executive newspaper:

The low price of natural gas is having a dire impact on Alberta. The introduction of LNG plants may change that

To those familiar with the jargon of natural gas pricing, the investment research report’s statement was jolting: “AECO Price Range Bound From $2-$4/GJ Until LNG in 2020.”

It needs a little unpacking, but what Dundee Capital Markets Inc.’s autumn natural gas update says is that for the next seven years, Alberta’s natural gas price will be confined within a range that ordinary English would describe as catastrophic at the low end and just high enough for producers to stay alive at the high end. The only out that Dundee sees will be liquefied natural gas (LNG) export projects coming onstream on British Columbia’s West Coast, expected in about 2020.

In the meantime, it’s a dire scenario for natural gas producers, service companies, investors, corporate-finance people and fund portfolio managers — although nice for consumers. It’s hard to overstate the devastating effect that four years of low gas prices have had on Calgary’s corporate culture. What 20 years ago was a thriving and unique culture of 800 publicly traded oil and natural gas producers, and many more privately owned ones, has narrowed dramatically. Today, there’s an oilsands sector dominated by foreign giants, a relatively small class of intermediate- to senior-sized independent producers, and a battered and shrinking junior sector.

U.S. natural gas prices, minus the pipeline shipping tolls, roughly define the Alberta price. Pipeline tolls are rising as export shipments shrink, and are currently more than $1.40 per gigajoule (GJ) to get Alberta gas as far as Ontario. With U.S. natural gas prices at barely $4 per GJ and massive new shale-gas supplies being tied in from fields that are very close to consuming markets in several cases — such as the Marcellus shale formation in Pennsylvania and West Virginia — Canadian natural gas has multiple disadvantages.

Canada’s gas-producing sector is desperate for a new market outlet. Exporting Canadian gas worldwide via LNG, considered a wild dream just a few years ago, has become a mainstream idea. In numerous international markets, natural gas consumption is on a long-term growth track. Gas pricing is a stunning $18-$20 per GJ in markets such as Japan, and around $14 per GJ in several other Asian markets.

In the past several years, more than half a dozen LNG projects have been proposed for B.C.’s West Coast. Most are in the Prince Rupert/Kitimat area, due west of the main gas-producing region in Alberta and northeastern B.C. LNG plants typically are gigantic. A single facility might export one billion cubic feet per day — or 10% of current Canadian production in one fell swoop.

The most advanced project is being driven by Petroliam Nasional Bhd (Petronas), Malaysia’s state oil company and one of the world’s more experienced LNG operators. Because LNG plants come onstream in such large increments, the operators must secure large, long-term sales contracts to justify the investment — and Petronas is a skilled player in Asia’s consuming markets.

On the upstream end, the impact of even one LNG plant in a producing basin such as Western Canada will be dramatic.

Thousands of new gas wells will need to be drilled. The diversion of supply to the West Coast, away from Alberta’s inland pipeline and storage hub, could be enough to lift that AECO price at last. IE

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By George Koch