British Columbia's LNG industry to face stiff competition for Asian gas markets

Houston (Platts)--4Nov2013/541 pm EST/2241 GMT


Developers of proposed liquefied natural gas terminals on the west coast of Canada's British Columbia province will have to move quickly to secure supply contracts if they want to beat the competition to ship gas to Asian markets, the co-author of a study on the subject said Monday.

"That means they need to act aggressively, they need to compete effectively and they need to be in the market to lock down the contracts that will underpin their projects," said Len Coad, director of the Calgary-based Center for Natural Resource Policy.

The province's developing LNG industry "must move nimbly and quickly to beat out the competition and capture market share in Asia," according to the 21-page study, released last week by the Canada West Foundation.

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"As British Columbia's projects proceed, their target market will be Asia and they will face significant competition from existing and future suppliers of LNG, from pipeline gas and domestic production," Coad said.

The study found that British Columbia's LNG developers will have to work to catch up with competing existing and planned LNG export projects in other countries, all of which are striving to supply gas to feed the growing demand in Asia and particularly China.

"Between 2013 and 2025, Asian natural gas demand is projected to increase by 216 billion cubic meters per year. Traditional LNG suppliers to Asia currently have 96.9 Bcm/year of capacity under construction, 90.1 Bcm/year of capacity that has completed front-end engineering and design (FEED), and 81.9 Bcm/year of capacity that has been announced," the study found.

"If all of this proceeds, it adds up to 268.9 Bcm/year -- 52.9 Bcm/year more than anticipated market growth in Asia. The most advanced British Columbia projects are at the early FEED stages."

The study looked at seven proposed British Columbia projects, which have been proposed with a total liquefaction capacity of 87.4 million mt/year. The most advanced project, Train 1 of the Douglas Channel Energy partnership, is expected to come online in 2016 with a capacity of 900,000 mt/year.

The last projects scheduled to be built, the 30 million mt/year Imperial Oil and ExxonMobil Canada project and the 21.6 million mt/year Western Canada LNG project, are both expected to come online in 2021.

"On the market side we looked at potential market growth. The market is primarily into Japan and [South] Korea today, and China is the source of most of the growth in natural gas demand," Coad said.

But the researchers found that it is likely that China would fill some of its gas demand with pipeline imports from Russia.

"Then we layered on to that China's current five-year plan for developing their own shale gas resources, since they have the largest reserves of shale gas in the world," Coad said.

"If all of the supply projects that have been announced proceed and the market evolves as expected with an average of about 7% growth in China, if you add up all the supply growth against that demand, there will be at least two molecules of natural gas supply for every molecule that is required," he said.

One issue facing the province's growing LNG industry is how to price their product. The plentiful supply of North American shale gas gives Canadian LNG project developers a price advantage in Asian markets, where LNG is usually priced against the oil-based Japan Crude Cocktail benchmark.

"The same issue faces all North American gas suppliers to Asia and that is Henry Hub prices versus JCC prices. There's tremendous opportunity but there's a balance that needs to be found between those two price levels," Coad said.

For the Asian LNG buyers "it's to their advantage to use a North American price plus cost," he said. "It's to the North American suppliers' advantage to use a JCC price less cost. Somewhere in the middle is the balance that the market will find."

--Jim Magill, jim.magill@platts.com
--Edited by Irene Tang, irene.tang@platts.com

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