Wednesday, October 9, 2013

LNG and BC - maybe

I am not opposed to companies to try and develop LNG terminals in BC but I am not convinced that this will be a long term boom for BC.   Given how long it will be before any LNG in BC would come online, I think it would be prudent to be cautious about it.  

At the moment it seems very unlikely that any LNG plants will be open on the North Coast in BC before 2018 which means there needs to be some market certainty at least five years out.    Since the large investment for an LNG plant needs a large capital investment, there needs to be some sense of market certainty for a decade after a plant opens.   This means for BC LNG projects to go forward, the proponent has to believe that the market for LNG will still be decent enough in 2028.

LNG will work best long term when selling into markets that are not connected to a large natural gas pipeline grid.  The cost to create LNG, transport it and regassify it makes it almost impossible to compete on price with piped natural gas.   In most cases only islands such as Japan and Taiwan can provide stable long term markets for LNG.

Currently 2/3s of LNG in the world goes to Japan, South Korea, China and Taiwan.   Unless they are connected to the Russian natural gas pipeline network they are likely to be the most significant customers for LNG i n2028.  

China is expected to be a major market for growth in LNG.  The country has a rising demand for natural gas which is expected to more than double by 2020.  At the same it also sits on the largest gas reserves in the world though getting at that gas may take some time because it may not be economically viable at the moment.  China sits next door to Russia, a country working hard to develop their natural gas and the cost of building pipelines is cheap enough to make connections into China an inevitability.   The final factor for the Chinese market is an economic downturn.   In the next 15 years it is very likely that China will see at least one major economic downturn and given the lack of good government in the country the next Chinese recession could become a lost decade.

With these various factors at play in China their demand for LNG is virtually impossible to estimate accurately five to ten years down the road.   It is the demand in China that will most dramatically impact LNG demand for the next fifteen years.    Only if all the assumptions play out to the benefit will of more LNG demand will the prices remain high enough for LNG expansion to be globally viable in 2020.

BC does have some advantages over some LNG producers - distance to Asia and a cooler climate.

The distance from the North Coast to Asia is shorter than LNG from the Middle East or anywhere in the US.  Shorter distances reduce the cost of shipping and since fuel represents about 75% of the cost of operating tankers it is a measurable advantage.   BC is part of the larger North American pipeline grid which means the North Coast is the best location for all North American LNG headed to east Asia

It makes long term sense for US LNG exporters to use the North Coast for access to the Asian market.   The constraint here is US regulation of natural gas exports.  It also means that the North Coast terminals really do not need to rely on BC as a source for natural gas as they could buy it from anywhere else in North America.

The North Coast is not closer to the east Asian markets than a number of other major LNG players.  As an example, Australia is 1,100 to 4,200 kilometers closer to the four major east Asian markets than the North Coast is.  Australia is only 5,000 km from Taiwan and up to 5,800 from Japan.   The North Coast is 9,200 km from Taiwan and about 7,000 km from Japan.

Both Australia and the North Coast are much further from these markets than the new Russian LNG projects on Sakhalin Island and in Vladivostok as well as the LNG terminals in Sarawak and Brunei on Borneo.

With several pipelines feeding into Vladivostok it becomes very easy to build a new pipeline connection into north east China instead of building more Russian LNG capacity.   There is too much money to be made from that pipeline for it not to happen by 2020.

The North Coast is cooler than the other major LNG terminals locations.   The major cost for LNG is cooling it to -162 degrees.    The average temperature for the Australian LNG terminals is about 27 degrees.   On the North Coast it is about 6 degrees.   That is a 21 degree advantage, or about 12.5% closer to the target temperature.  More energy is needed in Australia, Qatar and Malaysia to make LNG than on the North Coast.

The North Coast temperature advantage over the proposed terminals on the Oregon coast are much smaller, but the North Coast is significantly closer to Asia.   The North Coast has no temperature advantage over the Russian Far East.

The temperature advantage depends on the cost of the energy.  A way to overcome the temperature premium would be to make the price for the energy to create the LNG lower.    This seems to be what Qatar does and it is a subsidy that should not be allowed but is not likely to be stopped because of abundant cheap natural gas near equatorial LNG terminal..   One of my fears is that LNG producers will be able to buy energy in BC at a discount as an incentive.

It seems that the price will remain high enough in Japan and South Korea for the next couple of years to make LNG plants on the North Coast operationally viable if they were operating now.   The best estimates I have see for the break even price for North Coast LNG is about $7 to $9 above the Henry Hub spot price per million btu.  The currently translates into $10 to $15 per million btu cost to deliver to east Asia.   The price for natural gas in Japan has been above that level since early 2011.  

IMF long term estimates have the Japanese price remaining high enough to make BC LNG terminals through to the end of their projection in 2018.   The World Bank projection has the Japanese price potentially becoming too low by 2018 and continuing to fall through to the end of their projection in 2020.   I would take both projections with a grain of salt because there too many unknown variables.   The single biggest reason for the high global LNG prices for the last couple of years has been because of the earthquake in Japan.   You can not predict that.   No one predicted the shale gas boom either till it was in full swing.

If we are to have LNG terminals in North America and the largest markets for LNG are in east Asia, the North Coast of BC makes the most sense but they only make sense as long as their is enough of a premium for LNG in the markets that need it.

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