Liquefied Natural Gas: Target Asia

A Canadian liquefied natural gas terminal targets Asian demand

Apache’s Timothy O. Wall has a tough job: selling customers on a product that’s yet to be produced at prices that might never prove to be economical. Wall, who runs the Canadian division of Apache, the largest U.S. independent oil and gas company, is courting Asian natural gas importers such as Korea Gas, hoping they will buy a liquid form of the fuel from a $3.5 billion terminal planned for Kitimat, B.C. That entails getting customers to sign 20-year purchase contracts for liquefied natural gas, or LNG, processed at the planned complex on Canada’s northwest coast. If successful, the project could open up lucrative new markets for Apache and partners Encana and EOG Resources as they prepare to build North America’s first plant designed to super-chill and export gas in huge metal canisters. “The Kitimat facility and ones like it will allow you to export natural gas to markets you’ve never been able to access,” Wall says. “What we’re doing is trying to achieve a structural change in the industry.”

U.S. and Canadian gas producers are hoping LNG exports will help boost prices at home. North American prices are about half what they were in 2008, largely the result of a boom in extracting gas from shale rock formations. That glut has slashed prices for U.S. supplies to less than one-third those paid by utilities and chemical makers in nations such as Japan. The investors in North American facilities such as Kitimat are betting they can profit from that price arbitrage by transporting their cheap gas to energy-hungry Asian markets.

At stake is whether Canada and the U.S. will participate in a fast-growing global market for a fuel that emits less carbon dioxide than coal and is being promoted as a transitional step to the wide-scale use of renewable power. Diversifying into markets that pay more than North American prices is essential, says John Manzoni, chief executive officer of Canadian oil and gas producer Talisman Energy. “It’s extremely important for Canada to have export markets for gas other than shipping it south,” he says.

The potential for profiting from LNG has soared in recent years because of the growing gas needs in China and other Asian countries, where demand is outstripping supplies. China’s consumption has risen by more than 20 percent annually since 2004, and the country will be Asia’s largest gas consumer by 2015, according to the International Energy Agency. As a result, gas prices in Asia are as high as $13 per million British thermal units, compared with about $4 on the New York Mercantile Exchange. Higher revenue would more than offset the cost of chilling and shipping the fuel.

Still, North American gas producers face fierce competition, likely only to get tougher by 2015, the scheduled completion date for the Kitimat terminal and its connecting pipelines. Qatar and Australia, which both have thriving LNG export businesses, are expanding. Qatar recently opened the largest export plant in the world, and Chevron, Royal Dutch Shell, BG Group, and ConocoPhillips are building LNG projects in Australia, where about A$200 billion ($216 billion) of LNG ventures have been proposed.

Moreover, Kitimat may be followed by other LNG plants in Canada and the U.S. built to service foreign markets. That would further boost North American demand and raise gas prices. Houston-based Cheniere Energy, which is 4.4 percent owned by Blackstone Group, plans to use its Sabine Pass terminal on Louisiana’s Gulf Coast as an LNG gateway. Cheniere is among companies that built U.S. gas import terminals during the past decade that then languished as new drilling techniques unlocked domestic supplies, pushing gas prices too low to justify costlier imports. The company has lost money for 13 consecutive years and in May warned it may have to sell assets and restructure debt to avoid running out of cash. Later that month, however, Cheniere won approval from the Energy Dept. to increase the volume of gas it can export via the Sabine Pass facility to countries that have trade agreements with the U.S. Cheniere still needs Federal Energy Regulatory Commission approval to build a $6.4 billion facility at the site that can liquefy gas for export by tankers. It also needs financing for the project.

Kitimat’s relative proximity to Asian markets—about 1,000 nautical miles closer to Shanghai than is the port of Doha, Qatar—and its access to the huge gas reserves of Western Canada mean the project has the best chances of any LNG project proposed in North America, says Apache’s Wall. The venture’s tight integration, from production wells to pipelines to export terminal, all under common ownership, means it could be more efficient to operate as well. “If I look down the road 10 or 20 years,” Wall says, “we could definitely be competing with some of the largest suppliers of LNG.”


    The bottom line: Apache and its partners want to build a $3 billion LNG terminal in British Columbia. Uncertain gas prices make the venture risky.

    Before it's here, it's on the Bloomberg Terminal.