LNG light at end of tunnel for Canada’s gas producers

Building on a decade of challenges, Western Canada’s gas producers continue facing low prices, intense competition from U.S. producers for markets, and a lack of market access.

As a result, the industry continues to shrink, Darren Gee, CEO and president of Peyto Exploration & Development, told a panel at the Global Petroleum Show earlier this year.

Gee pointed out that production in Western Canada declined from about 18 bcf/d to 16 bcf/d in the last 10 years, with prices collapsing as well.

“The price doesn’t need to be $10 … but now it’s selling for 65 cents,” he said, adding that it’s virtually impossible for gas production to be profitable at those prices.

LNG developers, however, are optimistic things are about to turn around in the near future.

“We’ll be celebrating the success of LNG Canada,” said Stefan Vos De Wael, general manager, commercial with Royal Dutch Shell plc, lead developer of LNG Canada, replying to a question about where the sector would be in five years.

“We’ll see LNG projects on the west and east of Canada and we’ll be serving the shipping and trucking markets,” added Alfred Sorensen, CEO and president of Pieridae Energy Limited, which is planning to build a $10-billion LNG project near Goldboro in Nova Scotia.

The panel members agreed that it’s crucial for producers to have access to export markets outside of Canada and the U.S.

“The price of gas has to go up,” said Sorensen. “The commodity is being produced at a loss.”

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He said capital would not return to the Canadian gas sector until producers can access export markets. That will happen, the panelists agreed, because of world population growth, up from about six about billion people now to 10 billion by the 2050s, the growth of the middle class globally, and the resultant energy demand growth. In addition, because natural gas produces about half GHG emissions of other fossil fuels, use of the commodity is expected to grow far more than coal or oil over the next several decades.

However, it is a sector that in Canada has seen painfully slow growth, said Sorensen.

A decade ago there were more than 20 LNG export projects proposed for Canada’s West Coast but developers have dropped plans for most of those, with the exception of Shell’s project, Chevron’s proposed Kitimat LNG project, and the smaller Woodfibre LNG project facility, planned for the Squamish, B.C. area.

A final investment decision on Woodfibre is expected by the end of the summer.

Vos De Wael and Sorensen said the market for LNG is growing, beyond Asia’s traditional markets. “We see new markets in Southeast Asia, including India, Pakistan and Thailand,” he noted.

In addition, he and Sorensen said the European market is growing, because countries like Germany don’t want to be over-reliant on Russia for their gas supplies. They said demand for gas will also grow in the marine fuel market because stiff new standards for marine fuel use will force shipping firms to switch from diesel and other fuels to greener options.

Finally, they said there is also a potential for growing demand in the trucking market, as the demand for cleaner fuels grows.

Sorensen added that technological improvements are helping to grow the market, particularly in countries like Pakistan. He said the cost of building re-gasification capacity has declined significantly because of the emergence of floating facilities that can be built for $250 million, down from $1 billion or more for a land-based plant.

For Canada’s gas producers, LNG means having access to a market of “five billion people” instead of a few hundred million in North America, Sorensen said. However, he added that governments and Canadians need to support LNG development to help proponents attract outside capital.

He said the departure of U.S.-based majors and international companies like Shell from being heavily invested in the oilsands sector should be a lesson for Canada, as the LNG sector needs to attract domestic and foreign investment in order to grow.

The panel members agreed that Canadian LNG developers have many advantages, including access to large and low cost gas supplies, faster access to Asian and other markets than U.S. Gulf Coast LNG plants, and the lowest-emission LNG in the world in B.C., where most of the province’s power is generated by hydro.

Meanwhile, the head of Peyto Exploration & Development Corp. noted that producers would need to up their game, if the predictions from the industry leaders come true.

“We better get busy then if we are going to supply five bcf/d of gas in the next five years,” he said.

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