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- Russia-China deal shrinks the LNG market
- UX – Canada Solves Demand
- Canada is a preferred partner in Asia and is shipping LNG sooner than the U.S.
- Asia wants Canada LNG now
Asia NegUX – Asia Demand LowNo demand – domestic sources, newly discovered reserves in other countries, increased exporters, price changes all trumpEbinger 12 Senior fellow and Director of the Energy Security Initiative at Brookings, Charles, “Liquid Markets: Assessing the Case for US Exports of Liquefied Natural Gas,” 5-2-12, http://www.brookings.edu/~/media/events/2012/5/02%20lng%20exports/20120502_lng_exports However, challenges and uncertainties re- main on both the demand and supply side. The development of indigenous unconventional gas in China or India may occur at a faster rate than currently forecast, dampening demand for LNG imports to the region. A change in sentiment in Japan may see nuclear power restarted at a great- er rate than currently anticipated; alternately, a greater-than-expected penetration of coal in the Japanese electricity sector would suppress gas demand. A change in the cost of Australian LNG production or a reversal of the Qatari moratori- um on gas development could disrupt the current supply projections, as could the discovery of new conventional or unconventional resources. For instance, on December 29, 2010, Noble Energy, a U.S. oil and gas exploration company, discovered between 14 and 20 tcf of gas in Israel’s offshore Leviathan gas field. Since then, other nations on the Eastern Mediterranean are exploring for potentially similarly large gas fields. A number of large natural gas discoveries in Mozambique have also prompted early interest in building sig- nificant liquefaction capacity in the Southeastern African nation. The high quality (low sulfur and carbon-dioxide content) and liquid-rich nature of Mozambican gas may make this resource a sig- nificant competitor in global LNG markets in the medium term. Russia-China deal shrinks the LNG marketMartin, 14 (Richard Martin, Forbes, 5/30/14, “Russia-China Gas Deal Narrows Window for U.S. Exports”, http://www.forbes.com/sites/pikeresearch/2014/05/30/russia-china-gas-deal-narrows-window-for-u-s-exports/, LL) Russia and China’s grand bargain on energy, a 30-year, $400 billion deal to pipe natural gas from Russia’s Far East to China, has prompted much commentary on the agreement’s potential to reshape global energy markets and tilt the balance of influence in Ukraine and, more broadly, in Europe. The deal has “upped the ante for Europeans to diversify their gas imports away from Russia,” said Erica Downs of the Brookings Institution; it means producers of liquefied natural gas (LNG) “may face more competitive markets in Japan and South Korea, which together bought more than half of the world’s supply in 2013,” wrote Chou Hui Hong, a Singapore-based reporter for Bloomberg News; “the implications are potentially huge for Russia, for China and much of Asia, and also for Europe,” declared Keith Johnson, covering all the bases in Foreign Policy.¶ All the bases, that is, except one: the United States. The shale gas revolution in the States has led natural gas producers to envision an export boom in which U.S. companies become key suppliers to East Asia while countering Russian influence by shipping large amounts of LNG to Europe. President Obama said in 2012 that the U.S. is becoming “the Saudia Arabia of natural gas.”¶ Better Hurry¶ Indeed, U.S. petroleum exports reached 3.5 million barrels a day in 2013, roughly double the level of 5 years ago, according to the Energy Information Administration. Proponents of increased LNG exports argue that the gas export boom will bring in billions in profits for American companies, create thousands of high-paying jobs, and reduce the influence of undesirable LNG suppliers, i.e., Vladimir Putin’s Russia.¶ All of that is, potentially, true. But there are signals that, even before the Russo-Chinese gas deal, natural gas advocates were overstating the potential market. And with China building pipelines to ship LNG across Central Asia, the market opportunity is dwindling fast.¶ The United States has been slow off the mark in building export capacity. Thirty-one applications for LNG export licenses have been approved since 2011; only seven have been approved, six conditionally.¶ In 2012, on assignment for Fortune, I visited the Sabine Pass natural gas terminal on Texas’ Gulf Coast. Built by Cheniere Energy LNG -0.09% in the 2000s as an import facility, the port had been retooled to load LNG on big tankers for export to Europe and Asia. Cheniere is the only producer that has won full DOE approval to export gas; and the window for an export boom may already be closing.¶ The Shrinking Spread¶ U.S. profits in international gas markets will depend largely on the wide spread between the cost of producing natural gas in this country and the prices that countries like Japan, South Korea, and Germany are accustomed to paying. As Karim Rahemtulla, the chief investment strategist at Oil & Energy Daily, points out, that spread narrows rapidly once you liquefy the gas and ship it, via tanker, overseas.¶ Competition in the international gas markets is bound to heat up, and the United States may have already missed its opportunity for an LNG export bonanza. UX – Canada Solves DemandCanada solves better – shorter travel distance, more terminalsEbinger 12 Senior fellow and Director of the Energy Security Initiative at Brookings, Charles, “Liquid Markets: Assessing the Case for US Exports of Liquefied Natural Gas,” 5-2-12, http://www.brookings.edu/~/media/events/2012/5/02%20lng%20exports/20120502_lng_exports Finally, the expansion of LNG export capacity from Alaska and the development of LNG ex- port capacity in Western Canada may provide a source of strong competition for U.S. Gulf-coast origin LNG. Although Alaska’s Kenai LNG export facility, which has been exporting small quanti- ties of LNG to Northeast Asia for over 40 years, has been idled temporarily, some companies have demonstrated interest in large-scale exports of LNG from Alaska to East Asia. On March 30, 2012, ExxonMobil, along with its project partners BP and ConocoPhillips, settled a dispute with the Government of Alaska to develop its gas resources at Prudhoe Bay. The gas from this field is expected to travel from Alaska’s North Slope to Valdez on Alaska’s southern coast, where it will be liquefied and exported.67 According to FERC, there are currently three Canadian export facili- ties under consideration in British Columbia: a proposed 1.4 bcf/day terminal at Kitimat (initial production would start at 0.7 bcf/day), which re- ceived a 20-year export license in October 2011; a proposed 0.25 bcf/day facility at Douglas Island; and a potential 1 bcf/day facility at Prince Rupert Island. Given the lower transportation costs (as a result of the shorter distance), Alaskan and West Canadian exports may prove to be a source of strong competition at the margin for U.S. LNG in the Pacific Basin.
(“Canada Seen Beating U.S. in $150 Billion Asia LNG Race“ Joe Carroll and Rebecca Penty, Apr 3, 2013 1:35 PM CT http://www.bloomberg.com/news/2013-04-02/canada-seen-beating-u-s-in-150-billion-asia-lng-race.html, chase) Canada is pulling ahead of the U.S. in a contest to be the first exporter of liquefied natural gas from the North American shale bonanza to Asia’s $150 billion LNG market.¶ An LNG terminal being built at a cove north of Vancouver financed by a Houston private-equity firm is scheduled to begin shipping the fuel across the Pacific Ocean in mid-2015, eight months before the first continental U.S. plant is slated to start. Canada’s government has approved twice as much LNG export capacity as its southerly neighbor, evincing a friendlier attitude toward selling domestic gas to the highest bidder and positioning the nation as the go-to source of gas in North America for overseas buyers.¶ International energy giants from Exxon Mobil Corp (XOM). to Malaysia’s Petroliam Nasional Bhd (PET) are considering terminal projects in western Canada to supply Asian utilities and factories that are paying more than four times the price of U.S. markets. Chevron Corp (CVX). said it’s focusing all of its North American LNG efforts north of the U.S. border because of the more favorable regulatory climate and closer proximity to Asia, making exports more profitable for producers.¶ “The smart money is going to Canada” to export LNG, said Michelle Foss, chief energy economist at the Center for Energy Economics at the University of Texas’ Bureau of Economic Geology. “They don’t have any objections to exporting gas and it’s closer to Asia, which cuts down on shipping costs.”¶ Project Risks¶ Taking gas from the vast fields dotting Alberta and British Columbia and super-chilling it to a liquid for ocean-going tankers has price risks. LNG terminals can cost tens of billions of dollars to construct and take decades to pay returns. That can make a facility obsolete should internal North American demand and prices escalate to where domestic sales become more profitable than exports, Foss said.¶ In addition, Canadian LNG developers counting on the tradition of basing sales on world oil prices could be undercut by Louisiana and Texas-based producers planning to link contracts to lower-cost Gulf Coast gas markets, said Dale Nijoka, global oil and gas leader at Ernst & Young LLP.¶ Three gas export projects have received permission to ship LNG from Canada’s Pacific Coast to destinations such as Japan and China, compared to just one in the U.S., on the Gulf Coast, according to data compiled by Bloomberg. In the U.S., policymakers and industry leaders are divided over how tightly to control gas exports for fear of driving up domestic prices for the power-plant and furnace fuel.¶ Doubling Demand¶ “In the long term, Canada, which carries lower political risk, is probably more positively seen than the U.S. projects,” Asish Mohanty, senior LNG analyst at Wood Mackenzie Ltd. in Houston, said in a telephone interview. “The political risk of U.S. LNG is probably going to outweigh the benefits.”¶ Energy companies chill gas to -160 degrees Celsius (-256 Fahrenheit) to create a colorless liquid 1/600th of its original volume for long-distance shipment aboard tankers twice as long as Seattle’s Space Needle is high. Worldwide gas demand is expected to more than double by 2035 to 6.6 trillion cubic meters (233 trillion cubic feet) a year, according to the International Gas Union, a trade group based in Vevey, Switzerland and Oslo.¶ Global demand will begin to outpace LNG supplies around the end of this decade and may exceed production by 100 million metric tons (4.87 trillion cubic feet) annually by 2025, Chevron Chairman and Chief Executive Officer John S. Watson told analysts in New York last month.¶ ‘World Class’¶ Asia leads the world in the growth of demand for LNG as Pacific Rim economies expand power generation and energy-hungry manufacturing sectors, Watson said during the March 12 event.¶ Kurt Glaubitz, a Chevron spokesman, referred a further query about Canada’s LNG outlook to comments from Jay Johnson, Chevron president for Europe, Eurasia and the Middle East, at the same analyst meeting, when Johnson lauded Canada’s “world class” gas resources.¶ “With such a large resource base, these fields could readily support additional LNG trains,” Johnson said.¶ Aaron Stryk, a spokesman for Exxon, declined to comment for this story.¶ “Petronas looks towards Canada’s stable fiscal and regulatory regime as a positive environment for investments of this magnitude,” as well as the country’s “vast” gas supply and short shipping times to Asia, Michael Culbert, chief executive officer of the company’s Canadian unit, said yesterday in an e-mail.¶ The Asia-Oceania region, excluding Australia, imported 8.847 trillion cubic feet of gas in 2011, the most recent year for which data was available, according to the U.S. Energy Department in Washington. At the $16.50 per million British thermal units that Japanese importers are paying for some supplies, that regional gas market has an annual value of $150 billion.¶ Market Reversal¶ As recently as five years ago, explorers and investors from ConocoPhillips to billionaire investor George Kaiser were predicting the U.S. would need to import LNG to meet domestic demand as output stagnated from its aging fields. Dow Chemical Co (DOW)., Chevron and Total SA (FP) were among the heavyweights that signed long-term contracts for LNG import capacity along the Gulf Coast.¶ At the same time, a then-little-noticed revolution in drilling and hydraulic fracturing was under way that subsequently vaulted North American gas production to a record high, saturating local markets, collapsing prices and prompting would-be importers to look overseas for an outlet for swelling fuel supplies.¶ U.S. Delays¶ After issuing the first permit to export continental U.S. gas to nations without free-trade agreements almost two years ago, the federal government suspended reviews of all other applications so it could study the potential impacts of overseas sales on domestic energy prices. There are now 19 proposed U.S. LNG projects awaiting export permits, with the longest on hold for 28 months.¶ In contrast, Canada, which has seen a similar surge in gas production, issued its third LNG export license in February for a project led by Royal Dutch Shell Plc (RDSA) in British Columbia. All together, the trio of approved Canadian projects will have the capacity to ship 4.66 billion cubic feet of gas a day, more than double the 2.2 billion cubic feet of capacity that has been permitted in the U.S., according to data compiled by Bloomberg.¶ Asian energy consumption trends will determine the number of LNG terminals that get built in Canada, where the gas endowment is so large the government has little reason to restrict exports, Joe Oliver, the nation’s natural resources minister, said in an interview in Vancouver.¶ Abundant Supply¶ “We have so much gas in relation to what we need. There are estimates that we’ve got between 100 and 200 years of domestic supply,” Oliver said, pointing five export projects that may move ahead. “If they all do, it’s still considerably less than the amount that would start to impinge on our domestic needs over the long term.”¶ Douglas Channel Energy Partnership plans to begin shipping as much as 700,000 tons of LNG annually from a floating plant near Kitimat, British Columbia, in mid-2015. The project is a joint venture of the Haisla Nation aboriginal community and LNG Partners, a Houston-based buyout firm led by Thomas and Glenn Tatham.¶ Thomas Tatham is the former chairman and CEO of Deeptech International Inc., an offshore energy explorer that also operated what once was the largest network of Gulf of Mexico gas pipelines. Deeptech sold to El Paso Energy Corp., now part of Kinder Morgan Inc., for $298 million in 1998, according to data compiled by Bloomberg. Tatham did not respond to an e-mail seeking comment.¶ Cheniere Timing¶ Douglas Channel’s closest U.S. competitor, Cheniere Energy Inc., won’t be finished building its first LNG export module until February 2016, according to a March 20 filing by the Houston-based company with the Federal Energy Regulatory Commission in Washington.¶ “The race is on and governments need to recognize that and take some steps but industry, really, at the end of the day, is going to drive this,” Jim Prentice, senior executive vice president and vice chairman at Canadian Imperial Bank of Commerce, said in an interview in Vancouver.¶ Watson, whose San Ramon, California-based company is building $85 billion in Australian LNG export terminals and plans to begin shipping LNG from Angola by July, said Canada is a better place than the Gulf Coast to liquefy and ship the fuel. He cited western Canada’s relative nearness to Asian markets and a political environment where objections to gas exports are largely absent.¶ Chevron Focus¶ “One of the things attracting us to Canada is that it’s already a natural resources exporting country,” Watson said during a meeting with reporters after his presentation to analysts. “We’ve decided that Canada is going to be the focus of our North American LNG efforts.”¶ Chevron agreed in December to buy a 50 percent stake in the Kitimat LNG project near the Douglas Channel project. The Horn River and Liard gas fields that will supply Kitimat may hold more than 50 trillion cubic feet of gas, Watson said, or enough to supply South Korea’s current level of imports for 29 years.¶ BG Group Plc (BG/), a U.K.-based producer of LNG from the Middle East and Caribbean, has proposed a gas-export project for Prince Rupert, British Columbia. Exxon, the world’s largest energy company by market value, also has said it’s considering LNG exports from the same area. Partnerships between AltaGas Ltd (ALA). and Idemitsu Kosan Co (5019)., as well as Cnooc Ltd (883). and Inpex Corp. are also studying projects.¶ Pricing Contracts¶ A key element of making Canadian LNG profitable will be multi-decade contracts indexed to world crude prices rather than North American gas, Watson said. Oil-linked prices are the only way to ensure enough cash flow to justify the expense and time involved in constructing LNG complexes that cost tens of billions of dollars, he said.¶ The LNG industry has used crude-linked prices since its inception a half-century ago in Algeria, Ernst & Young’s Nijoka said. Unlike gas, oil was a globally-traded commodity with transparent price-discovery mechanisms anyone could monitor anywhere in the world, he said.¶ Cheniere has bucked the rest of the LNG industry by basing contracts on the U.S. benchmark price from the Henry Hub pipeline nexus in Erath, Louisiana. The Henry Hub price has averaged $3.46 per million British thermal units this year, one- fifth the rate Japanese utilities pay for LNG imports from major sources such as Qatar and Indonesia, according to data compiled by Bloomberg.¶ Holding Out¶ Gas buyers in Asia and elsewhere probably will migrate to more Henry Hub-based pricing as existing long-term, oil-indexed contracts expire, Nijoka said. Energy producers will resist as long as they can to protect profits, he said.¶ “These companies like the idea of oil-based pricing because it gives them a lot more money, but the Asian buyers are pretty shrewd,” Nijoka said.¶ Despite the steep discount of U.S. gas to international prices, many Asian LNG importers may prefer to retain crude- linked contracts to avoid the volatility of domestic U.S. energy markets that can be roiled by hurricanes, winter storms and heat waves, said Betsy Spomer, senior vice president of business development at BG Group (BG/).¶ “Oil, as an index, has been robust for a long time, primarily because it’s a truly global commodity that is transparent and can’t be manipulated,” Spomer said at an LNG conference in Vancouver earlier this year. “You can’t find a coal index that has the same characteristics, and does Henry Hub really make sense in Tokyo?” Asia wants Canada LNG nowShih 2014 (Toh Han Shih: a Singaporean with a Master of Economics degree from the University of Hong Kong, January 23, 2014, “Canadian exports of LNG to Asia seen as enormous opportunity” http://www.scmp.com/business/commodities/article/1411567/canadian-exports-lng-asia-seen-enormous-opportunity) The huge price differential between Canada and Asia presents opportunities for Canadian exports of liquefied natural gas (LNG), speakers at the Asian Financial Forum in Hong Kong said.¶ "If Canada exports LNG to Asia, the potential for arbitrage is enormous. The price of gas and oil in Asia is significantly higher than Canada. It's an incredible opportunity for banks," said Kevin Lynch, vice-chairman of BMO Financial Group, a North American financial services firm.¶ Last year, the natural gas price in North America was US$3.71 per million British thermal units (Btu), much cheaper than the natural gas price of US$16.45 per million Btu in South Korea and Japan, Lynch cited.¶ The arbitrage opportunities for oil and gas traders leveraging the huge price gap between the two continents would be very lucrative for energy market players around the world.¶ A Credit Suisse report last year said Asian buyers were paying about US$15 per million Btu on long-term supply contracts with prices partially linked to that of crude oil. After deducting procurement, liquefaction and shipping costs, buyers are paying an "Asian premium" of about US$4 per million Btu, it said.¶ On July 10 last year, the Chinese government raised the price of natural gas on the mainland to 1.95 yuan (HK$2.48) per cubic metre or US$8.56 per million Btu, reported Xinhua.¶ From now until 2035, China's energy demand will soar 60 per cent and surpass US demand, Lynch predicted.¶ At present, there is no Canadian export of LNG to China, said Robert Kwauk, chief Beijing representative of Blake, Cassels & Graydon, a Canadian law firm. Kwauk estimated Canada will begin exporting LNG to China in five years.¶ Chinese state-owned oil companies including Sinopec, CNOOC and PetroChina are interested in building LNG pipes and gas liquefaction facilities in Canada, said Stephen Wortley, the Hong Kong chairman of Canadian law firm McMillan. Canada will require financing of US$500 billion to transport LNG to the country's west coast, where they will be shipped to Asia.¶ "Putting pipes in place is one of the largest potential projects in the world," Lynch said.¶ Plans to build LNG pipelines in Canada for export to Asia have already drawn opposition, similar to the Keystone pipeline controversy in the US which would link Alberta's tar sands to refineries on the Texas Gulf Coast.¶ In November last year, a protest by dozens of environmental groups took place in Vancouver against the Northern Gateway pipeline proposed by Enbridge, a Canadian energy firm, reported The Globe and Mail.¶ The protesters raised the prospect of oil spills from tankers possibly posing an environmental hazard. The 1,200-kilometre pipeline would carry 550,000 barrels of heavy oil a day from Alberta to a port in Kitimat for shipment to Asia. The Canadian government is expected to make its final decision on whether to approve the Northern Gateway pipeline by July, according to Enbridge's website.¶ At this time, there are eight to 11 LNG projects planned in Canada's west coast for exports of LNG to Asia including China, said Kwauk.¶ On November 13 last year, CNOOC announced its wholly owned subsidiary Nexen entered into an exclusive agreement with the government of British Columbia, Canada, to examine the viability of constructing an LNG plant and export terminal at Grassy Point in British Columbia.¶ "LNG export is the most attractive option for maximising the value of our Canadian shale gas business," said Li Fanrong, chief executive of CNOOC.¶ In May 2012, PetroChina, Shell, Korea Gas and Mitsubishi announced they would jointly develop an LNG export facility near Kitimat, British Columbia. 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