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Another B.C. company jumps on LNG bandwagon

Liquefied natural gas pipeline


The growing rush to export Canada's natural gas bounty to energy-hungry Asian markets has drawn another player to the northwestern shores of British Columbia.

Three months after a group of major western companies applied for the first domestic natural gas export licence, a partnership named BC LNG Export Co-operative LLC has asked the National Energy Board for approval to build a second export terminal in Kitimat, B.C.

The application comes as the Canadian oil patch manoeuvres to find better profits for the many trillions of cubic feet of gas it has uncovered in northeastern B.C. Those moves are also playing out against an expected surge in demand for natural gas, especially among Asian consumers that increasingly see it as a plentiful source of clean energy - and a promising alternative to nuclear power. The nuclear industry worldwide is facing new questions about safety due to the disaster in Japan.

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A second consortium now actively developing an LNG project is another confirmation of the potential the industry sees in shipping Canadian gas to Asia.

"Given all the unconventional gas that's likely to be developed in North America, you're looking at a pretty depressed gas sales price scenario in the B.C., Alberta area," said Tom Taitham, the managing director of BC LNG. "Asian markets are completely different. They're used to paying oil-equivalent prices which are much, much higher than we're used to here in North America."

The math works like this: Western Canadian gas currently fetches roughly $3.65 per million BTU. BC LNG estimates that it can pipe gas to the coast for 75 cents, liquefy it for $3 and ship it across the Pacific for $1 or less. Add up the costs, and Mr. Taitham believes gas can be delivered for less than $8.50 to Asia - where right now in Japan and South Korea, for example, it sells for roughly $11.

"If we were doing business today, that spread would be allocated back and shared amongst the buyers of the LNG and the sellers of the gas," Mr. Taitham said.

And the spread could broaden in the future, analysts believe, as growing overseas demand creates an increasingly tight LNG market.

The BC LNG proposal uses unproven technology and is being promoted by a partnership between the Haisla First Nation and a family-owned Texas company. LNG export terminals have also proven controversial around the world, stoking safety and environmental concerns - although, ironically, in British Columbia, where Greenpeace was born, they have provoked far less concern than plans to export oil through coastal waters. In fact, B.C. first nations have largely supported gas exports.

And BC LNG's plans have raised some eyebrows, given how different it is from other projects. BC LNG wants to build a modest facility when the rest of the industry has tended toward huge plants in a bid to achieve efficiencies of scale.

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Take Kitimat LNG, for example, a partnership between Apache Canada Ltd., Encana Corp. and EOG Resources Canada Inc. that hopes to make a construction decision later this year. It is working toward a $4.7-billion export terminal capable of processing 700 million cubic feet of gas a day. By contrast, BC LNG is applying to build a 125-million-cubic-feet-a-day terminal that would cost between $360-million and $450-million.

But while the small size is far cheaper - and could be built faster, perhaps as soon as 2013 - it could also pose difficulties in negotiating with overseas buyers who tend to prefer long-term contracts with established sellers.

"Does it provide the LNG buyers with the security of supply that they're looking for? That is the real question," said Rosemary Boulton, the former chief executive of Kitimat LNG.

The BC LNG model is far different from what Kitimat LNG has proposed. Instead of being owned by companies with major gas reserves, it would consist of an operating company that would liquefy gas, at a fee, for members of an export co-operative. Those members would include B.C. gas sellers and Asian buyers. Under the current structure of the co-operative, companies can buy in at a rate of $50,000 a year. Or they can receive free membership if they provide letters to the National Energy Board expressing intent to buy or sell gas through the terminal.

"Half a dozen producer members have indicated they want to participate and so have four LNG off-takers," Mr. Taitham said.

Mr. Taitham is also managing director with LNG Partners LLC, the family-owned Houston business that is the project's financial backer. The family made its money in building offshore Gulf Coast pipelines through Leviathan Gas Pipeline Partners LP, which was sold to El Paso Natural Gas Co. for $450-million (U.S.) in 1998.

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The idea for BC LNG has been around since 2008, but financing problems led to the project nearly being scuttled, after one of its key assets - an agreement to obtain capacity on existing natural gas pipelines - was handed to someone else. The company now says it has recovered that capacity, which will spare it the cost of building expensive new pipelines through B.C.'s mountains. However, its agreement, which expires in June if it is not renewed, gives it access to just 80 million cubic feet a day. That's a third less than the capacity it envisages.

Still, the company is laying plans to build its liquefaction plant on a barge, float it to Kitimat and then ground it on shore. It would use two LNG ships. Loading one would take the better part of a month; in that time, the other could make the three-week return transit to Asian markets. Using ships in that fashion would save BC LNG from having to build substantial LNG storage in an environmentally sensitive area.

Although the project would use existing liquefaction machinery, the entire barge-built idea is novel.

"This thing should be fun to get it off," Mr. Taitham said. "There's really nothing that's ever been done like this in the LNG industry."

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About the Author
Asia Bureau Chief

Nathan VanderKlippe is the Asia correspondent for The Globe and Mail. He was previously a print and television correspondent in Western Canada based in Calgary, Vancouver and Yellowknife, where he covered the energy industry, aboriginal issues and Canada’s north.He is the recipient of a National Magazine Award and a Best in Business award from the Society of American Business Editors and Writers. More

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