Taking up where we left off last week, what are the Americans doing that could upset British Columbia’s liquefied natural gas (LNG) cart?
Let’s first make clear that at this point the fly in the ointment is just one US project, Cheniere’s Sabine Pass LNG export complex in Louisiana.
It will be producing 9 million tonnes of LNG a year by 2016 – that’s not pie in the sky, you can take that the bank – and plans to ultimately boost production to 27 million tonnes.
And it already has 20-year contracts with five major customers to take up two-thirds of the eventual capacity.
That’s in stark contrast to Kitimat LNG, owned by Apache and Chevron, which is still trying to sign just one contract.
Cheniere calculates that based on a price of US$4 per million British Thermal Units at Henry Hub, the US benchmark for natural gas, it can deliver LNG to Asia at around $10.50 per mBTUs.
And it has been signing deals based on Henry Hub.
Janine McArdle, senior vice president of gas monetisation for Apache, has already made it clear that Kitimat LNG is a non-starter with prices based on the US benchmark.
So how is it that Cheniere can live with prices that Apache/Chevron cannot entertain?
They are very different animals.
Sabine Pass is what’s called a brown field project. It was originally built as an LNG import facility back in the days when imported natural gas was competitive with domestic US supply.
So, at the risk of oversimplification, all it has had to do is convert to export.
Unlike every green field project being talked about here in the Northwest, it doesn’t have to build a pipeline, a tank farm, a plant or a terminal. It even already has two tugs to guide the LNG tankers in and out.
In other words its capital costs are a fraction of those of proposals such as Kitimat LNG. Ipso facto, it can make the finances work at Henry Hub pricing.
But despite all of the above, there is no need for us to throw up our hands and give up on LNG in northwestern BC.
While the projected Sabine Pass production of 27 million tonnes a year is a lot – it’s more than the projected production of the Kitimat LNG and the Shell group’s Canada LNG plants put together – you need to stack that up against the total of Japanese LNG imports last year of more than 80 million tonnes.
Add in South Korea, India, Pakistan, Europe et al and demand for the foreseeable future will be way more than the likes of Sabine Pass can fill.
So I think it unlikely that oil-linked LNG contracts are going to vanish any time soon and therefore there should still be ample room for a couple of Northwest projects to proceed.
However, the US fly in the ointment has introduced an unwelcome wrinkle that has obviously delayed sales agreements as buyers understandably jockey for the best price they can get.
Now, to return to what I said last week about not envying Rich Coleman his job as BC’s new Minister of Natural Gas Development.
As I mentioned then, premier Christy Clark said his task was “ensure British Columbia seizes the economic opportunity of a lifetime, liquefied natural gas (etc, etc).”
The word “ensure” is silly in that it continues the pretence that the province has any influence over whether these projects go ahead.
As I have outlined in these two columns, there are many factors – and trust me, there are more than I have had space to cover – that are completely beyond the control of the province.
With the Canadian Football League season about to start, allow me the following: the province will be the pom-pom waving cheerleader on the sidelines but only the global economics quarterback can throw the touchdown pass.
And I remain hopeful he will.
Malcolm Baxter is a retired editor of The Northern Sentinel in Kitimat and now calls Terrace home.
