BMI View: A combination of a surfeit of natural gas in the US market, large shale and tight gas reserves in north-east British Columbia (BC) and soaring gas import demand in Asia has opened the door to large-scale exports from western Canada. Apache's Kitimat LNG project will be the first, but we see enough potential resources and demand for an additional one or two LNG projects.
Anglo-Dutch major Royal Dutch Shell has thrown its hat into the ring as the race to export liquefied natural gas (LNG) from Canada's Pacific Coast to energy-hungry Asian markets heats up. The company announced on October 20 that it had purchased a marine terminal at Kitimat on the BC coast - which it is considering using as a site to build an LNG export plant. Shell's partners in the site acquisition were potential Asian LNG customers China National Petroleum Corporation (CNPC), Korea Gas (Kogas) and Japan's Mitsubishi.
Shell's tentative steps into the BC LNG export market make it the third proposed project in the region. The leader of the pack is Kitimat LNG, a joint venture (JV) between independent gas producers Encana, Apache and EOG Resources. That project received a boost on October 13 when it became the first to receive an LNG export licence from Canada's National Energy Board, paving the way, in our view, for a final investment decision on the CAD5bn (US$4.9bn) project in early 2012.
For several years, Kitimat was the only game in town. However, exploration and development work across the region in 2010 and 2011 has seen gas resource estimates soar. In May 2011, the NEB released a report on the Horn River Basin shale play in north-east BC in which the 'most realistic scenario' estimated the basin's marketable shale gas reserves at 2.2trn cubic metres (tcm), including nearly 85bn cubic metres (bcm) of discovered reserves and a further 2.12tcm of 'undiscovered' resources. That figure was more than double previous estimates and highlighted the region's resource potential.
It also raised questions about the final destination for all that gas. Early moves by players such as ExxonMobil, Nexen, Devon Energy, Encana, EOG Resources and Apache to snap up acreage in shale plays in the region were focused on transporting gas back to the energy-hungry US market. The shale gas boom in the Lower 48, however, meant that gas from the remote north-east BC region would have trouble competing economically with new gas resources nearer the US' major consuming markets. All eyes have since turned east, to the Asia-Pacific LNG market - the most lucrative in the world.
In June 2011, Malaysian state-run company Petronas struck a CAD1.07bn JV agreement with Canadian independent Progress Energy Resources to develop shale acreage in the Montney tight gas play in north-east BC. In addition to developing Progress' shale acreage, the companies agreed to study the feasibility of building an LNG export facility on the west coast of Canada, making it the Kitimat's first competitor.
Now Shell has entered the race. We believe Shell is in a stronger position to push forward with BC's second LNG export project, although there could be scope to combine the Petronas and Shell projects. Shell has a strong acreage position in the Montney tight gas basin and has been one of the area's most active drillers. Moreover, the involvement of potential buyers Kogas, CNPC and Mitsubishi in the project, combined with Shell's strong financial resources and proven LNG project development expertise, means that development could move ahead fairly rapidly.
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(Originally published in the November 1, 2011, edition of BMI Americas Oil and Gas Insights.)