Wednesday, May 30, 2012

Shell launches LNG plans; Lifts curtain on largest of Canada’s ventures, warning there is no time to lose

Gary Park
For Petroleum News


Royal Dutch Shell is leading three Asian firms in rolling out plans for by far the largest of the projects to export LNG from British Columbia.

The newly titled LNG Canada venture, carrying an estimated cost of C$12.3 billion, is tentatively scheduled for startup late this decade, with initial capacity of 12 million metric tons a year of capacity.

That target easily outstrips the Apache-operated Kitimat LNG project at 5 million metric tons a year and the BC LNG Export Cooperative at 1.8 million metric tons a year — the only two proposals that currently have 20-year export permits from Canada’s National Energy Board.

With Korea Gas Corp. (Kogas), Mitsubishi and PetroChina each holding 20 percent stakes, LNG Canada is now in the final stages of engineering work, preparing for environmental assessments and consulting with various stakeholders.

The plans set the stage for the British Columbia government of Premier Christy Clark to have three LNG export operations up and running by 2020.

What isn’t clear is whether growing opposition from environmentalists and First Nations to proposals by Enbridge and Kinder Morgan to ship Alberta oil sands crude from the British Columbia coast to Asia will start spilling over to the LNG sector.

But the Canadian government has promised to streamline its environmental reviews to end what it regards as unnecessary opposition to its efforts to diversify oil and gas markets beyond the United States.



Shell: LNG complex

Lorraine Mitchelmore, president of Shell’s Canadian operations, said LNG is a very complex undertaking requiring a multitude of permits and faces considerable uncertainty.
“It’s going to take a lot to bring that to the final investment decision,” she said.

Mitchelmore warned that delays in proceeding with LNG Canada could put at risk the British Columbia government’s chances of collecting C$600 billion in royalties over the next 25 years if it can arrange buyers for its vast shale gas resources.

She said the 12 million metric tons a year of LNG currently planned for LNG Canada represents about 15 percent of Japan’s market, “which is the largest market in the world.”

“We sit in a magnificent position. … We are now on the doorstep of the fastest-growing market in Asia,” she said, noting that the Asian region could add another 80 million metric tons a year of LNG demand by 2020.

Mitchelmore said Shell does not believe that even China, which owns huge gas resources, will be able to develop those supplies fast enough to meet its demand.

But she conceded that although Canada currently has a “unique opportunity,” the longer-term picture is fuzzy.

“We understand our competition now and we understand that we have a very competitive supply,” Mitchelmore said. “But we need to make it happen.”

Manley: Agreements needed

Joining the chorus of industry and political leaders raising concerns about the barriers standing in the way of Canadian LNG development, former deputy Prime Minister John Manley, now head of the Canadian Council of Chief Executives, said there is a danger that Canadians feel too smug about their ability to open up new export markets.
“We just feel way too good about ourselves,” he told a Calgary audience. “I don’t think we have a sense of urgency about seizing the opportunities that global dynamics are presenting to us and I think our greatest enemy now is not the European financial crisis of the U.S. deficit. It’s hubris, complacency.”

Manley said Canada should start to view itself as a Pacific nation and start negotiating trade and economic agreement that will help crack Asian markets.

The eagerness among the Asian partners to move ahead with LNG Canada was underscored by Kogas which said it has secured 2.4 million metric tons a year of the project’s capacity.

Kwon Yong-Shik, in charge of LNG supplies at Kogas, said LNG Canada is designed to “ensure stable supplies and diversify import sources for South Korea which has heavily depended on the Middle East.”

“We hope the joint project will pave the way for Kogas to have an independent LNG project in Canada,” he said.

Report urges diversification

A May 10 report by the accounting and consulting firm of Ernst & Young said Canada, faced with low gas prices and a shrinking U.S. export market, urgently needs to diversify its sales outlets.
“We really don’t think that Canada has a choice,” said Lance Mortlock, senior manager of the firm’s oil and gas advisory practice. “The opportunity window will be open for a finite period of time.”

Ernst & Young forecast that Canada could have about 12 million metric tons a year of LNG export capacity in place by 2015, depending on whether U.S. Gulf Coast proponents and other worldwide competitors gain an edge.

It also estimated that Canada will need to overcome environmental and First Nations’ concerns and invest C$50 billion in LNG infrastructure over the next decade to answer the “powerful threats” posed by rival supply sources.

Spectra Energy said in a statement earlier in May that it is poised to invest an additional C$4 billion-C$6 billion in British Columbia beyond 2015 in pipelines for anticipated LNG export facilities and to unlock development of the Montney, Horn River and other resource areas.

Currently working on a C$1.5 billion expansion program in British Columbia over the 2009-13 period, Spectra is eager to expand its horizon beyond domestic needs to ensure diverse and stable supplies for Asia, said Doug Bloom, president of the company’s Western Canadian operations.