Hitting LNG milestone might have come too soon to reap maximum market benefitIn race to service global natural gas market, BC LNG is the first proponent to sign a major supply contract, but some fear it sets the bar too low
Three significant milestones in the development of B.C.'s nascent liquefied natural gas industry were marked last week with the inking of the first supply contract between a B.C. LNG producer and a shipper, as well as new regulations for industrial development on Indian reserves and federal approval of the LNG plant near Kitimat (see sidebar).
Last week BC LNG Export Co-Operative signed an agreement to supply 700,000 metric tonnes of LNG annually to Bermuda-based Golar LNG Ltd.
"Any project that moves forward is a big milestone for all of us," said Zoher Meratla, an LNG expert at CDS Research Ltd. "I think we should all be pleased and congratulate these people, if they really moved it forward. But we need to hold our breath until we see the financial investment decision."
Meratla fears the contract BC LNG signed might set the bar too low by basing it on depressed North American gas prices.
Canada is in a race with other countries to secure long-term LNG supply contracts signed. None of the multibillion-dollar projects can proceed until those agreements are in place.
Typically, the prices paid are based on world oil prices. The spot price for LNG in Asia is around $17.35 per million British thermal units (MMBtu). But with the benchmark Henry Hub gas prices in the U.S. hovering in the US$3.50 per MMBtu range, some Asian customers appear to be holding out for better deals, with prices pegged to North American gas prices. The deal BC LNG has struck with Golar is based on the lower North American gas prices, which Meratla fears could set a bad precedent.
"In the ideal world, all the LNG exporters from B.C. will get together and establish a common position with respect to pricing," he said. "They don't want to create a situation where they undercut each other to the point where the economics of the project could be compromised."
But Colin Coe, senior commercial adviser for Oregon LNG, said price-fixing by the major energy companies is neither likely nor desirable. Moreover, he said the BC LNG project is so small, he doubts it will affect price negotiations on the larger projects.
There is a glut of natural gas in North America, so it's not surprising customers abroad will expect lower prices from Canadian LNG producers.
"These are the kind of pressures that we expected would come," said Geoff Morrison, manager of B.C. operations for the Canadian Association of Petroleum Producers. "Any agreement that demonstrates an ability to get additional product to a new market is a good signal, so by and large this is positive."
Kitimat LNG plant clears regulatory hurdle
BC LNG's $400 million Douglas Channel project in Kitimat – a joint venture involving the Haisla First Nation and Houston-based LNG Partners – is tiny compared with the $12 billion Kitimat LNG project or the $$9 billion to $11 billion Pacific Northwest LNG project in Prince Rupert.
BC LNG would get its gas from the existing Pacific Northern Gas Ltd. pipeline, which reduces the project's capital costs but also limits the amount of gas it can process and sell to niche markets. The plant would produce only enough liquefied natural gas to fill one tanker per month.
By contrast, projects like Kitimat LNG would produce enough LNG to fill a tanker every three or four days.
So far, Apache Corp. (Nasdaq:APA) and Chevron Canada (NYSE: CVX) have not yet signed any long-term supply contracts for the Kitimat LNG project. But the project did clear a major hurdle last week when Ottawa granted it approval and new regulations that allow for commercial and industrial development on reserves. The Kitimat LNG project is being built on the Haisla's reserve No. 6.
The Haisla are full partners in the BC LNG project and key players in the Kitimat LNG project.