China has a massive growing demand for natural gas; Russia has vast gas reserves.
The fact China has inked no long-term gas supply contracts with its neighbour is worth noting by oil and gas executives who want to build liquefied natural gas plants, a British energy expert suggested last week.
Russia has cut itself off from its most logical gas customer for the same reasons that LNG projects proposed for B.C. are at something of a standstill: they're insisting Asian customers pay gas prices that are indexed to oil prices.
"The Russians have been sticking doggedly to the aspiration of having an oil-indexed price," Peter Hughes, a London-based energy consultant, said during a panel discussion at the Pacific Energy Summit in Vancouver last week.
Japanese customers and the companies that want to build LNG plants in B.C. are in a similar standoff.
Export licences have been granted for two West Coast LNG plants, and three others are proposed, but the multibillion-dollar projects can't proceed until the LNG pricing mechanism question is resolved and 20-year contracts are signed.
The biggest potential markets for B.C. LNG now is not China, but Japan, which has few energy resources and is in the midst of an energy crisis now that all but two of its 50 nuclear power plants have been shut down in the wake of the 2011 earthquake and meltdown of the Fukushima nuclear power plant.
Japan already accounts for more than 40% of the global LNG trade, Tadashi Maeda, head of corporate planning for the Japan Bank of International Co-operation, told the panel.
In the past, security of supply outweighed cost considerations, so Japanese buyers – mostly power utilities – have been willing to pay $17 to $19 mmBtu for LNG and pass on the cost to consumers.
But with North America now awash in cheap gas (spot prices here are still below $4 mmBtu), Japan is digging in its heels and insisting on a new pricing mechanism that would delink gas from oil prices.
"There's no adjustment between $3 and $18," Maeda said. "We need some mechanism to make the adjustment in the market formula."
Chevron Corp. (NYSE:CVX) – which holds a 50% stake in Kitimat LNG project – has publically stated that delinked pricing is a non-starter.
"There is a bit of a standoff at the moment," Hughes said.
For now, Australia and other producers in the region are meeting Japan's immediate needs.
Hughes said the competition is for the next generation of 20-year contracts. Canada will be competing with East Africa, Australia and possibly U.S. Gulf Coast producers, although the U.S. – keen to become energy self-sufficient – is still debating whether it even wants to become an LNG exporter.
"I frankly think we should," Rep. Charles Boustany (R-LA) said.
Construction of the new Sabine Pass LNG terminal in Louisiana is underway, and there are 16 other applications pending for new LNG export terminals in the U.S., though Boustany said realistically only four or five would likely be built.
Cheniere Energy Partners – the Sabine Pass LNG's developer – has signed the first long-term contract that is not linked to oil prices, and de-indexed pricing mechanisms are also developing in Europe.
"A lot of the answers [are] about moving to a model where competing supplies have to compete on the basis of their cost structures…without just adhering rigidly to an oil indexing mechanism that is no longer of interest to buyers," Hughes said.
While the wrangling over a mutually agreeable price mechanism is delaying the industry from moving ahead in B.C., the good new is that the long-term demand for LNG in Asia is expected to be so huge, experts say B.C. need not worry about losing the race with other producing nations.
Asked if B.C. is at risk of losing market share in Asia to competitors like Australia, Hughes said: "I don't think so. The demand outlook for LNG is very strong indeed, so it's going to need a lot of incremental supply." •
Other Asian energy options from Canada abound
Natural gas isn't the only energy commodity that Canada has in abundance that Asia wants.
It already exports coal to Asia, which accounts for 30% of the world's coal consumption, and Canada is also the world's second largest uranium producer. It also has nuclear power expertise and technology, which will be used in a recently forged partnership with India.
And it's the world's third largest producer of hydro power, so it also has expertise and technology in hydro power development that's likewise in demand in Asia.
And, of course, there's Alberta oil.
"If there's a type of energy you're interested in, we've got it," International Trade Minister Ed Fast said at the opening of the two-day Pacific Energy Summit April 3.
It was the first time the summit has been held in Canada, which, thanks to B.C., is well positioned to serve the Asian market.
But whether B.C. becomes a major export hub for oil remains to be seen.
The Northern Gateway pipeline has generated massive opposition in the province. A joint review panel will make its recommendation to the federal government by the end of this year.
The Stephen Harper government supports the pipeline proposal, even if B.C. doesn't.
"I'm prepared to wait for the regulatory process to be completed on the Northern Gateway pipeline," Fast said, "but whatever process it is, and whatever infrastructure it is, we're going to have to have it in place, otherwise we're going to undermine Canada's long-term prosperity."
Asked if his government might approve the pipeline, even if the joint review panel recommends against it, Fast said: "We have made it very clear that we are going to respect the rule of law. We respect the process that's in place.
"That's not the only project that is underway."
He referred to a proposed twinning of the Kinder Morgan (NYSE:KMI) Trans Mountain pipeline between Alberta and Burnaby.
And just last week, TransCanada Corp. (TSX:TRP) announced an alternative to the Northern Gateway proposal that would send Alberta and Saskatchewan oil east, not west.
It would convert 3,000 kilometres of existing natural gas pipelines running from Alberta and Saskatchewan to Quebec, and 1,400 kilometres of new pipeline from Quebec into Saint John. It would transport 500,000 and 850,000 barrels of oil per day.
But that plan puts it on the wrong side of the globe for Asian markets.
