Encana Corp. makes inroads into Far East markets
Recent deals pave the way for LNG and technology exports to Asia
Illustration by Dushan Milic
Encana Corporation’s mid March announcement that it had bought a 30 per cent interest in a West Coast liquefied natural gas (LNG) project – coupled with it finalizing a $5.4 billion deal in February with PetroChina Ltd. that will see the petroleum giant acquire a 50 per cent interest in Encana’s Cutbank Ridge business assets in British Columbia and Alberta – undoubtedly elicited a joyous reaction on a few fronts.
For Encana, the deals – pending approval − provided the Calgary-based natural gas producer with a significant infusion of capital and a stake in a project that could get its B.C. gas assets to new markets. But it also came as good news for Encana’s partners in the proposed LNG terminal in Kitimat, B.C., and was no doubt welcomed by a Chinese government looking to develop expertise in unconventional gas extraction technology.
The proponents of the LNG scheme, which also include operator Apache Canada Ltd. and EOG Resources Canada Inc., are proposing to ship up to 468 billion cubic feet of LNG to markets in the Pacific Rim. The plan is to have the LNG terminal and associated pipelines, which is estimated to cost $4.5 billion, operating by 2015.
The fly in the ointment for the multibillion-dollar export scheme is that the partners have yet to secure sales contracts with any customers, which would ensure there would be a payoff for the LNG produced at the terminal. And to get long-term sales contracts from Asian customers, Apache Canada, EOG Resources and, now, Encana, say they need the National Energy Board (NEB) to grant them a 20-year export license to ship the LNG.
Beijing is looking for technical expertise to unlock homegrown resources in North American deals
Of course, supplies also need to be secured for the terminal and with current production of 255 million cubic feet equivalent per day from Cutbank Ridge and about 1 trillion cubic feet of reserves there, that gas could find a home at a Kitimat LNG facility.
In a February teleconference with investors and analysts, Encana president and CEO Randy Eresman made it clear that exporting gas produced from Cutbank Ridge to Asia via a new marine outlet was not discussed as the PetroChina deal was consummated. But he made it clear Encana was open to the possibility. “We are very interested in the expansion or creation of an LNG export market from North America and we do think it makes a tremendous amount of sense for that market to be linked to the Asian market from a proximity point of view,” Eresman says.
Finding a market willing to pay top dollar for Cutbank Ridge natural gas, and the 14.3 trillion cubic feet in gas reserves Encana has in its corporate portfolio, had to be a driving force behind the PetroChina deal, says Bill Gwozd, vice-president of gas services for energy consulting firm Ziff Energy Group. Advances in horizontal drilling and multi-stage fracturing techniques have unlocked vast supplies of shale gas in the United States. This new supply has flooded North American markets and dampened natural gas prices.
The cash infusion from PetroChina gives the partners the capital to increase production from Cutbank Ridge. But Gwozd says with the cost of producing tight gas in North America averaging about US$6 per thousand cubic feet (mcf), selling it in North American where the commodity has been trading in the sub-US$4.50 per mcf range doesn’t make sense. It’s a different story in Asia, however, where natural gas is traded based on the price of oil. As a result, producers can get prices such as US$15 per mcf for natural gas in markets like China and Japan.
For that reason Gwozd says Encana has to be thinking about exporting LNG to the Pacific and to get it there it will need terminals built on the West Coast. “Encana has become a pure gas manufacturer. They are big and they are good. They’ve found their niche market and they are going after it,” Gwozd says. The strong signals Encana is sending that it wants to ship gas produced at Cutbank Ridge and other plays by the tanker-load to energy-hungry Asian markets certainly bolsters the case for the NEB to approve the Kitimat terminal and a 20-year export license. And with that export license, long-term sales contracts with Asian customers should follow.
In China, the deal has national implications. PetroChina is a state-owned company, after all, and China’s government has made the expansion of natural gas-fired power plants a priority. The U.S. government’s Energy Information Administration (EIA) forecasts the country’s annual natural gas consumption growing from just over three to 9.7 trillion cubic feet between 2009 and 2035.
Securing natural gas produced from Canadian assets like Cutbank Ridge could be one source of supply. But teaming up with a company like Encana also allows PetroChina to learn the tricks of the unconventional gas trade from an experienced partner, says Lanny Pendill, a senior energy analyst with investment firm Edward Jones. Cutbank Ridge is a tight gas play and the knowledge PetroChina gathers from Encana there could help China unlock its potentially significant tight gas, shale gas and coalbed methane supplies. The EIA says China’s geology suggests the country has great unconventional resource potential and it expects unconventional sources to account for 56 per cent of domestic natural gas production by 2035.
“PetroChina wants to learn this technology and North American players like Encana are the experts in this field,” Pendill says. “Major players are exporting this technology to other parts of the world.”