Apache Canada makes global push amid fierce competition

Cost inflation is no idle threat as LNG projects advance internationally

December 19, 2011

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Illustration by Kelly Sutherland

In the high-stakes rush to deliver gas to power markets in the Far East, confidence is king. Producers in Western Canada must win it from Asian gas users seeking assurances from unfamiliar suppliers that North America’s shale revolution is the real deal. Negotiators must likewise keep it as they barter with customers over “commercially sensitive” terms of long-term sales contracts for annual deliveries of millions of tonnes of liquefied natural gas (LNG). “It’s a kind of musical chairs going on between the sellers and the buyers,” observes Asish Mohanty, senior research analyst, global LNG, with Wood Mackenzie. “Everybody is very cautious that they don’t get caught out, but at the same time they’re watching the space and trying to see when the best point is to negotiate. There are quite a few variables that make it interesting.”

Among the biggest wild cards proponents of West Coast export projects must contend with is international competition. In the last five years alone, worldwide LNG production capacity has surged 40 per cent, the U.S. Energy Information Administration reports, from 176 million metric tons per year in 2005 to 260 million metric tons annually by the end of 2010.

It is a measure of how crowded the global LNG playing field has become that Canada’s National Energy Board (NEB) was summarily rebuffed this summer by the Canadian arm of Apache Corp. over demands that it divulge to the regulator the terms and provisions of its sales and purchase agreements for planned exports of chilled gas from the company’s $4.5-billion Kitimat LNG project.

The information is typically required by the board to gauge whether or not an export application is supported by a demonstrated commercial need. It also ensures proposed exports are sold under terms available to domestic gas purchasers. Implicit in the board’s approval of a 20-year export license for the massive liquefaction scheme this fall, however, is an acknowledgement that Canadian LNG forays are far from alone in eyeing lucrative markets in the Pacific Rim.

Such was the logic used by export proponents Apache Canada Ltd., EOG Resources Canada Inc. and Encana Corp. to justify breaking with NEB policy. In submissions to the board, the firms maintained that disclosing the terms and conditions of sales contracts with Asian gas users would place the Canadian LNG project at a competitive disadvantage to its international peers in a market that remains “illiquid” and characterized by opaque deal-making.

Enforcing the provision would prove “extremely detrimental” to ongoing negotiations and could undermine efforts to firm up long-term sales contracts with LNG buyers by creating a potential “price floor” for future sales, the companies said. “Canadian sellers cannot demand that potential buyers accept terms and conditions that no other seller would impose upon them,” Loyola Keough, partner with Bennett Jones LLP, told the board on behalf of EOG and Encana.

He did not name names. Nor did he have to. Apache will join producers from Qatar to Malaysia, Indonesia, Russia, Brunei and Australia in dispatching tankers to markets in Taiwan, China, South Korea and Japan. Globally, the International Energy Agency expects 96 billion cubic meters of liquefaction capacity to come online by 2017. Much of the supply will hit Asian markets as legacy sales contracts with traditional suppliers expire, the IEA notes. Kitimat is due to start pumping out five million tonnes of LNG by 2015, widely viewed as a market “sweet spot” because it beats a number of major Australian projects – among them Shell’s massive Prelude endeavor – into production. “It’s a bit of a race,” Mohanty at Wood Mackenzie says. “The general impression in the industry is that before these Australasian projects start up it’s going to be a sellers’ market.”

Building brand new liquefaction capacity is not entirely without risk. Proponents of the Kitimat proposal can spread costs thin by drawing production from gas properties in northeastern British Columbia’s prolific Horn River and Montney basins, and by transporting volumes to the coast along the proposed Pacific Trail Pipeline.

Yet inflation is no idle threat. Companies that specialize in engineering, procurement and construction of liquefaction facilities number fewer than 10 internationally, Mohanty says. He expects many of them will be kept busy by construction of several LNG projects underway in northwest Australia, including ongoing work at the massive Gorgon plant at Barrow Island. The Chevron-led venture is due to begin pumping out 15 million tonnes of LNG annually by 2014-15. “All of these are massive projects,” the analyst says. “What that means is order books are pretty full. There is a scarcity of resources in places like Australia right now.”

The shortfall could potentially squeeze Canadian LNG forays. “The fact that most of the B.C. facilities are going to be ‘green-field’ will not make it easy for them to meet a timeline compared to a lot of others,” Mohanty says, singling out Qatar as having the unique advantage of already producing 77 million tonnes of LNG every year. Even a modest de-bottlenecking at one of the country’s facilities would dump anywhere from 10 to 15 million tonnes of the stuff onto global markets. “If and when they do that, that LNG is going to be much more competitive to any of these new projects, because there is very little infrastructure they have to invest in.”

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