One Way or Another - Western Canadian Gas Producers Still Looking for a Way Out

The latest Energy Information Administration (EIA) April 2013 short term energy outlook forecasts US crude oil production to increase from an average of 6.5 MMb/d in 2012 to 7.9 MMb/d in 2014. Surging crude production needs to find routes to market – and often competes for pipeline space with growing Canadian imports. New crude pipelines are taking too long to build. At the same time many natural gas pipelines are flowing far beneath capacity because new gas production nearer to market makes them redundant. Converting these natural gas pipelines to crude oil use where geography allows is a potential win-win. Today we look at gas to crude pipeline conversion economics.

LNG Canada, the newly sanctioned liquefaction/LNG export project in British Columbia, is an entirely different animal than its operational and under-construction counterparts in the U.S. The Shell-led LNG Canada project is being developed without any of the long-term offtake contracts that financed Sabine Pass, Cove Point and the projects now being built along the Louisiana and Texas coasts, and it requires the construction of a new, long-haul pipeline — Coastal GasLink. What’s also different is that the BC project’s co-owners have been developing their own gas reserves to supply the project, though they may also turn to the broader Montney and Duvernay markets for the gas they will need. Today, we conclude a two-part series with a look at how the project expects to undercut its U.S. competitors.

Natural gas producers in Western Canada, with their share of U.S. and Eastern Canadian markets threatened by competition from producers in the Marcellus/Utica and other shale plays south of the international border, for years have seen prospective LNG exports to Asian markets as a panacea. But efforts to develop liquefaction “trains” and export terminals in British Columbia failed to advance earlier this decade — for starters, their economics weren’t nearly as favorable as those for U.S. projects like Sabine Pass LNG. Then, by 2016-17, global markets were awash in LNG as new Australian and U.S. liquefaction trains came online, and the BC LNG projects still alive were either delayed further or scrapped. Now, with LNG demand on the upswing and the need for additional LNG capacity in the early-to-mid 2020s apparent, the co-developers of LNG Canada — Shell, PetroChina, Korea Gas and Mitsubishi — have attracted a new and significant investor: Petronas, Malaysia’s state-owned oil and gas company and owner of Progress Energy Canada, which has vast gas reserves in Western Canada. Today, we continue our review of efforts to send natural gas and crude oil to Asian markets with a fresh look at the LNG project and TransCanada’s planned Coastal GasLink pipeline, which will deliver gas to it.