An excess of natural gas

Getting natural gas to Asia a problem.

 
(Photo: David Jones/Getty)
(Photo: David Jones/Getty)

 

As they contend with plummeting demand in the United States, the sustaining hope for many in the natural gas business these days is the export of liquefied natural gas (LNG).

While rival suppliers, most notably Australia, are jumping into the LNG game, the demand in Asia is rising faster than the supply. China has more than quintupled its natural gas consumption since 2000, according to research firm GlobalData, and though the country has huge shale gas reserves of its own, production can’t keep up. Its LNG importing capacity is projected to grow from around one trillion cubic feet per day in 2011 to 2.8 trillion in 2016. The Asian market, in other words, is more than big enough to replace the evaporating U.S. market.

At first blush, the business case for exporting LNG from B.C. to Asia looks hugely compelling. However, it takes massive capital expenditures to build the facilities to freeze natural gas down to –160°C and load it onto pressurized tankers, more than any producer can afford on its own. The largest facility, planned for Kitimat and led by Royal Dutch Shell in partnership with Mitsubishi, Korea Gas Co. and PetroChina, is expected to cost $12 billion.

To obtain financing for such a project, proponents need to nail down long-term supply contracts with Asian utilities. But customers have been unwilling to sign on the dotted line for two key reasons. The first is price. The proponents designed their plants assuming they could use a formula tied to world oil prices, but the buyers are demanding one tied to cheap North American gas prices.

The second stumbling block surrounds security of supply. Asian utilities want to know they’ll get the gas the day the contract comes into effect. This explains why, for more than a year, the proponents of Canada’s most advanced LNG proposal, Kitimat LNG, were unable to conclude a deal, and why, in late December, Chevron bought two of them out and became the project operator. The U.S. multinational already has LNG plants operating around the world. If the Kitimat plant is not running on time, customers may feel reassured Chevron can supply them from somewhere else.

While Chevron’s takeover and BC LNG’s contract move Canada closer to having an LNG industry, their experience suggests not all proposed LNG plants will get built in the first place, those that do will likely take longer than expected, and there will be hard bargaining between the suppliers in Canada and the buyers in Asia.

With reporting by Joe Castaldo.

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