The crowded Canadian LNG dance floor is starting to throb with action.
A flurry of deals and announcements have surfaced in the past month, some of them prompted by a prevailing industry view that shale gas prices have bottomed out, giving some encouragement to LNG proponents, and others driven by the fear that Australia is quickly outpacing the Canadian proposals.
Activity is also being spurred on by growing talk of possible cost inflation, which could see British Columbia’s hopes of liquefying 6 billion cubic feet per day shrink to 2 billion to 4 billion cubic feet per day as the price of materials and limited labor soars.
And the more haste the players demonstrate the better their chances, as several speakers told a Canadian Energy Research Institute conference in Calgary March 11 and 12.
Seen as Canada’s chief rival in the LNG race to Asia, Australia has three LNG projects in operation, making it the world’s fourth largest exporter, with several more in the works.
“There is no catching Australia, which is in full construction mode,” said Gary Wellinger, vice president of strategic development with Spectra Energy Transmission.
The United States, which has import gasification and pipelines in place, is also widely viewed as more competitive than Canada, while Russia, East Africa (notably Mozambique) and the Middle East (notably Qatar) are in the hunt.
Sales contracts a challenge
The overriding challenge for proponents seems to be reflected by George Kirkland, executive vice president, upstream, for Chevron, now operator of the Kitimat LNG project in partnership with Apache.
He told an analyst meeting that Chevron would like to have up to 70 percent in long-term sales contracts locked up before making a final investment decision, pointing to Chevron’s Gorgon (targeted for startup in 2015) and Wheatstone projects in Australia as very good models.
Chevron Chairman and Chief Executive Officer John Watson said his company will strive for oil-linked pricing and will not make final decisions unless projects “have economics that support the costs that are going to be incurred.”
At best, Canada is two years from its first LNG shipments, with none of the major players having inked long-term contracts with Asian buyers.
“If we think world LNG markets are just waiting patiently for Western Canadian LNG projects, then we’re mistaken,” said Wellinger.
“We really have to raise our game to participate in the LNG business,” said Gerry Goobie, principal with Gas Progressing Management. “If we’re going to be successful we’ve got to get our product to market cheaper than the next guy.”
But he warned that the regulatory “dithering” that killed the Mackenzie Gas Project could do the same to LNG if Canada takes forever to issue approvals.
Progress moving forward
The most public showing of ambition followed completion of the C$6 billion takeover of Progress Energy by Malaysia’s Petronas, giving a sharp jolt to the Pacific Northwest LNG project.
“We are moving forward with LNG offtake customers,” said Michael Culbert, who remains chief executive officer of Progress now that it is a Petronas subsidiary.
“We think that by the end of this year, we will have those all satisfied. In addition, Petronas will take a certain portion of the LNG ... to serve their customer base as well.
“With them underwriting probably as much as 50 percent of the LNG project, we feel well positioned compared to some of our competitors,” he said.
In addition, Progress plans to triple its rig count in the British Columbia Montney play this year, as it targets initial shipments by 2018, assuming a final investment decision by the end of 2014 to spend C$9 billion-C$11 billion on two plants of 6 million metric tons each.
Culbert said most of the 150 wells Progress plans to drill this year are designed to “prove up reserves, prove up the contingent resource and then, ultimately, we’ll go back in and develop that resource for production.”
To that end, Progress has doubled its rig count in the past three months to 16 and plans to be at 25 by year-end, while increasing its production to 80,000 barrels of oil equivalent per day from 50,000 boe per day.
Each horizontal Montney well, completed with eight or nine hydraulic fractures, costs about C8 million, Culbert said.
Japex takes stake
Japan Petroleum Exploration has injected added hope into the Pacific Northwest project by taking a 10 percent stake in the venture.
The Japanese company also expects to qualify for an equity share of LNG from the project totaling 1.2 million metric tons per year.
“Japex believes that importing natural gas as LNG from Canada, which has ample reserves, will help diversify Japan’s LNG imports,” the company said in a statement.
Japex managing director Mitsuru Saito said his company is weighing a mix of price-setting benchmarks to achieve stable but less costly LNG prices, but declined to set a price target.
The newly formed partnership of AltaGas-Idemitsu, aiming to start exports by 2017, has prompted the Japanese partner to acquire stakes in Canadian gas plays to ensure price-competitive LNG imports.
Idemitsu President-elect Takashi Tsukioka said earlier in March that “if there are good stakes in gas fields, we would like to find them in Canada, hoping to bring LNG that is as cheap as possible to Japan.”
Final Shell investment decision
Two other Canadian LNG developments far removed from the British Columbia coast have also taken place.
Royal Dutch Shell announced it has taken a final investment decision on two small-scale liquefaction projects to supply LNG as a fuel for heavy trucks and large ships in the United States and Canada.
It said the units will be built in Ontario and Louisiana, with each capable of producing about 250,000 metric tons per year of LNG.
Shell said the units will give a lift to demand for struggling gas production by forming the basis of new LNG transport corridors in the Great Lakes and Gulf Coast region, taking advantage of low-cost shale gas.
“Natural gas is an abundant and cleaner-burning energy source in North America and Shell is leveraging its LNG expertise and integrated strength to make LNG a viable fuel option for the commercial market,” said Marvin Odum, the president of Shell Oil Co., the U.S. division of Royal Dutch Shell.
The Canadian plant will supply LNG fuel to all five Great Lakes that border US states and Canadian provinces and the St. Lawrence Seaway.
Shell said it plans to increase LNG-for-transport projects to more than 5 million metric tons a year over the next decade, with about half being supplied to the trucking industry in Canada and the U.S. and the rest to shipping in the U.S. and Northwest Europe.
Shell said it expects Ohio-based Interlake Steamship Co., which runs 10 vessels, to be its first marine customer.
The St. Lawrence Seaway has never seen an LNG-fueled ship, but a spokesman for the seaway management said LNG is no more of a risk than any conventional fuels.
Pieridae moving ahead
Meanwhile, Pieridae Energy Canada has registered its Goldboro LNG project with the Nova Scotia government as it prepares to file for an environmental assessment, while partners Contact Exploration and Pieridae Energy are creating a new natural gas-focused exploration and production entity to develop gas for the project.
Pieridae Production Limited Partnership, PPLP, will source, develop and produce gas to supply a significant portion of feedstock for the Goldboro terminal, which is expected to export about 10 million metric tons per year and have onsite storage of 690,000 cubic meters.
Pieridae President Alfred Sorensen said he expects to be fully contracted by the end of June, with the major emphasis on Europe and “significant interest” from India.
The initial assets acquired by PPLP include about 50,000 acres of prospective gas lands in New Brunswick, initially held by Contact, which has received an initial cash payment of C$1.3 million from Pieridae.
An independent study in 2010 by GLJ Petroleum Consultants gave a best estimate of prospective resources on the PPLP lands of 2.138 trillion cubic feet based on a 20 percent recovery factor of the undiscovered petroleum-initially-in-place of 10.897 tcf gross. The study concluded that recovery factors should range between 10 percent and 30 percent for such resources.
