Canadian Natural Gas Potential Gaining Recognition

- May 22nd, 2012

Canada’s natural gas sector is on the rise; however, for it to achieve its full potential an advancement of its gas transportation structure is needed.

Canadian Natural Gas Potential Gaining Recognition

The Canadian natural gas sector finally had something to smile about recently with the announcement that the billion dollar Pacific Trail Pipelines expansion project has been given official approval.

The proposed Pacific Trail Pipelines project, which is set to transport natural gas from Northeast British Columbia to the coast at Kitimat for export overseas, has been approved for a one-third expansion by the BC Environmental Assessment Office. In the approval document, BC Environment Assessment Executive Director Derek Sturko noted that the proposed capacity increase “does not hold the potential for any significant adverse effects.”

Last month the office confirmed that the project will see an increase in the size of the pipeline to a diameter of 42 inches from 36 inches – equating to an approximate 36 percent increase in overall capacity. The pipeline project is owned by a consortium made up of EOG Resources Inc. (NYSE:EOG), Apache Corp. (NYSE:APA), and Encana Corp. (TSX:ECA).

The partners also plan to build a $4.5-billion-plus liquefied natural gas (LNG) terminal at Kitimat capable of producing five million tonnes of LNG a year, with the potential to expand to ten million tonnes a year. First exports are anticipated for late 2015 to early 2016.

Natural gas race underway

Approval of the expansion is not the only development underway within the region. Last week Royal Duch Shell plc (NYSE:RDS.A) publicly announced plans for a 12-million-tonne-a-year LNG plant on the BC coast, with many viewing the move as confirmation that a race to develop a North American LNG industry capable of rivalling traditional natural gas giants, such as Australia and Qatar, is underway.

The announcement makes Shell and its partners the leading LNG developer in Canada in terms of size. Although Shell has not released any project costs, a recent news article in a Japanese publication pegged the investment at over $12 billion.

“We are sitting on the door-step of a very fast-growing market that actually wants to come to Canada because they see it as long-term stability and a secure source of supply,” said Shell Canada President Lorraine Mitchelmore. “We are now, for the first time in the natural gas industry, very competitive with other countries like Australia.”

Calls for more to be done

Despite these positive developments, Ernst & Young has released a report stating that Canada needs to aggressively speed up the development of LNG export projects if it plans to compete with emerging international players, estimating that over $50 billion will need to be spent on infrastructure over the coming decade.

According to Lance Mortlock, Senior Manager in the consultancy’s oil and gas advisory division, low natural gas prices across North America are being forecast for years to come, amounting to an erosion of Canada’s primary market south of the border, meaning that moving swiftly on gas exports across the Pacific is crucial.

“We really don’t think that Canada has a choice here,” he said. “The opportunity window will be open for a finite period of time. Certain companies are asking the question, ‘Canada has these resources, can they get those resources to the Asian market and can they do it quickly?’”

Ernst & Young has forecast that Canada could have approximately twelve million metric tonnes per annum (mmtpa) of LNG export capacity by 2015, but Mortlock cautioned that the figure depends on whether US Gulf Coast LNG proponents and other global competitors move in. The report added that Australia, Qatar, Malaysia, and Russia are all currently advancing their own domestic LNG projects and are tying in long-term supply deals that will quickly make them “powerful threats” to Canada’s LNG sector moving forward.

Logistical difficulties

Mortlock added that these estimations will remain theoretical unless the hundreds of kilometers of pipeline required to connect recoverable shale gas in Northeastern BC are laid. “Those pipelines need to go across pretty sensitive environmental lands so overcoming those challenges from an environmental perspective and First Nations perspective will be very important,” he noted.

TransCanada Corp. (TSX:TSP) Chief Executive Russ Girling underlined this issue when he commented that while gas gathering systems do exist and are being built to bring on volumes from BC shale plays, a lot still needs to be done and a “significant” amount of new pipe would need to be put down to the West Coast.

“There isn’t any pipe that exists today to move that gas in any material amounts to the West Coast, so we’d have to build that infrastructure,” Girling told reporters last month.

Outsider interest on the rise

The country’s gas potential is not something that is only being recognized domestically; there has been a notable increase in international investment interest across the Canadian sector. Asian firms including Mitsubishi Corp. (TSE:8058), PetroChina Company Ltd. (NYSE:PTR), and Korea Gas Corp. have seized the window of low gas prices and pledged billions of dollars in investments towards the development of Northeast BC’s shale deposits.

Analysts have suggested that the current lull in natural gas prices will further serve to entice foreign interest. On the back of abundant supplies, BC is selling at wellhead prices of $1.60 per thousand cubic feet, while in Asia customers are paying anywhere from US$14 to US$16 per thousand cubic feet.

The country’s stable political and economic climate, coupled with the fact that companies can own their reserves, means that the future of its natural gas sector could indeed be a bright one. However, such a development will require increased investment into the sector to ensure that Canada’s LNG remains cost-effective not only from the point of extraction, but across the entire supply chain.


Securities Disclosure: I, Adam Currie, hold no direct investment interest in any company mentioned in this article.

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