Like bringing coal to Newcastle
LNG receiving terminal proposed for Kitimat, B.C., where only eight years ago the proposal was to build an LNG export terminal, shipping to Asia
Occasionally, a sea change occurs in global markets that alters the dynamics of a particular business forever. A growing body of evidence suggests that North America’s supply-dominated natural gas business is about to go through just such a process.
The announcement last month that Calgary-based Galveston Energy hopes to build a liquefied natural gas facility at Kitimat brings British Columbia solidly into this unfolding environment. Galveston wants to import LNG, not export it, and its proposal is one of about 35 similar projects in various stages of development throughout North America.
Only eight years ago, Kitimat was looking at a similar type of project — but the gas was going to move in the other direction, from British Columbia and Alberta to markets in Asia. In a variation of the old British joke about bringing coal to Newcastle (home of the UK’s coal mines), North America will now see growing levels of gas imports.
It will be a decade or more before the implications of this trend are fully felt, but Canada, and particularly British Columbia, will not escape the effects of this change. In the last year, LNG imports in the United States doubled. LNG is expected to comprise about 20 percent of the North American market by the year 2020. It will surpass Canada’s current 15 percent share of the U.S. market by 2015. While only a handful of those 35 projects now on the drawing board will likely proceed, the trend is obvious.
U.S. gas shortfall equals entire supply for Japan
At the Offshore Oil Technology Conference in Houston, Marathon Oil’s Steve Lowden told delegates that the projected U.S. gas supply shortfall equals the entire supply for Japan, currently the world’s largest importer of LNG. According to the Oil & Gas Journal, the world’s five major oil companies have committed to spending $50 billion over the next five years to move LNG.
Ultimately, LNG will drive prices in the North American domestic market, and that could impact British Columbia’s natural gas producers and provincial gas royalties. Coincidentally, that 20 percent LNG market share is predicted to take hold just about when the first production from the province’s offshore wells might be getting started.
The North American natural gas market has been a contained unit, virtually impervious to global energy trends. While natural gas prices were tied to global oil prices (much to the chagrin of domestic producers in the 1990s) there was never any worry about serious competition from offshore supplies.
But a combination of rising prices and falling North American supply have rekindled interest in LNG. Driving that interest is the fact that while natural gas is now in short supply in North America, global gas reserves are estimated at a mind-boggling 4,500 trillion cubic feet (British Columbia has a potential of 50 tcf in conventional gas). Most of that gas currently has nowhere to go.
And adding to the impetus is a significant reduction in LNG costs. The cost of building just the natural gas liquefaction plant has declined by 60 percent since 1989.
“The cost of moving gas has dropped by half,” says Tom Dawson, Galveston’s marketing vice president. “Everything from building ships, to liquefying the gas, to regasifying it. Technology has really made a huge impact.”
El Paso regasifying onboard ship
Case in point: El Paso Natural Gas is currently building a new import terminal in the Gulf of Mexico that uses a patented Energy Bridge system. The LNG is regasified on the ship and pumped through an offshore dock into a pipeline, eliminating the need for a conventional land-based terminal.
According to Dawson, it costs $30 million to convert an LNG ship to use this system, as opposed to $200 million to construct an onshore regasification plant. In another technological development, a utility in Atlanta, Ga., just completed a successful test on regasifying the LNG by using sea water in a new heat exchanger to warm it up (LNG is stored at minus 260 degrees Fahrenheit.)
“We’re looking at another 25 percent cost reduction over the next 10 years,” Dawson says. “Technology has really gotten a hold of the LNG market.” As a result of all this, LNG prices at North American ports are expected to range from US$2.50 per thousand cubic feet to about $3.50.
LNG as competition for unconventional gas?
And that raises the prospect that LNG could provide price competition for domestic producers, particularly those now trying to develop high-cost unconventional natural gas in places like EnCana’s Greater Sierra play, or the Cutbank Ridge play near Tumbler Ridge.
Greg Stringham, executive vice president with the Canadian Association of Petroleum producers, is not concerned.
“We think we will need all of it,” he said. “We’ll need LNG, northern gas, tight gas, Alaska gas, and coalbed methane. We still think we can compete with LNG through about a 50 to 90 cent cost advantage.”
Stringham concedes that technology could bring the LNG cost lower, “but technology works for all of it — technology could also lower costs for coalbed methane.”
Regardless, LNG has arrived on the scene, introducing the biggest change in the North American gas market in decades. It has the potential, in the longer term, to turn natural gas into a global commodity on the same scale as crude oil.
Given the enormous gas supplies in remote locations all over the world, that can’t help but provide growing competition in North America.