Canada’s LNG dreams are frustrated as global demand declines for the first time in eight years

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Marty Proctor and his team from Calgary’s natural gas producer, Seven Generations Energy Ltd., have been working for years to find an easier way to send their gas to more lucrative markets overseas.

The company is currently sending gas from wells near Grande Prairie, Alberta, 3,000 kilometers southeast of Chicago, before changing pipeline and traveling another 1,700 clicks to Louisiana, where it is refrigerated at -160 C in a liquefied natural gas facility along the Texas border. This temperature is when the gas reaches a liquid state and can be loaded on ships bound for Europe and Asia.

The long roundabout route has been a profitable way for Seven Generations to market 100,000 cubic feet of natural gas per day for the past three years. But overseas natural gas markets have collapsed in recent months, which has also put pressure on other markets around the world.

The ability to raise funds, to bring partners to join us, is undermined by the global situation

Marty Proctor, CEO of Seven Generations

“It’s a huge surprise that the price at Henry Hub is mediocre, but it’s even worse in Europe right now,” said Proctor, chief executive of Seven Generations.

Coronavirus pandemic has reduced demand for electricity worldwide, Wood Mackenzie analysts expect global demand for LNG to contract by 2.7%, marking the first time in eight years that demand for this product decreases.

Market chaos is also hampering Seven Generations’ efforts to find a shorter route for its natural gas to liquefaction facilities and foreign markets. In 2016, the company purchased an interest in an early stage LNG project on Vancouver Island called Steelhead LNG. He then partnered with nine other gas producers to form Rockies LNG, a consortium seeking to build a project in northern British Columbia.

The installation of Seven Generations Energy in Karr at the Kakwa River project, 100 kilometers south of Grande Prairie.


Seven Generations Energy Ltd.

But Canadian LNG export projects have been repeatedly delayed and are now struggling to find joint venture partners, financing and withdrawal agreements to support construction. With few options for accessing capital, LNG supporters are asking the federal and provincial governments to help with an economic stimulus package to revive the country’s economy after COVID-19.

If aid does not come, the national natural gas industry’s dream of building several LNG export facilities in Canada – rather than using LNG projects 4,700 kilometers away – could be further delayed, leaving the a country dependent, once again, on a single export market, the United States, which increasingly needs Canadian gas, because American companies swim so much in their own gas that they burn it with torches across North Dakota and Texas.

A natural gas torch on an oil well platform burns at sunset outside Watford City, North Dakota.


Reuters / Andrew Cullen / File photo

“There probably aren’t any better prices to be had where we can access them right now,” said Proctor.

UK National Balancing Point’s benchmark price for natural gas averaged only US $ 1.67 per thousand cubic feet for the full day Thursday, according to data from AltaCorp Capital, which was 15 cents lower as the Henry Hub benchmark in Louisiana, a place with lots of gas and access to more across the continent.

In Japan, the world’s largest LNG importer, LNG prices fell to US $ 2.34 per mcf, which is higher than the Henry Hub benchmark at US $ 1.81, but well below cost gas liquefaction and its shipment across the Pacific Ocean.

As a result, US LNG exports fell 37% in a few months.

But despite the dynamics of world prices, Proctor said its company continues to sell 100,000 cubic feet per day to Houston-based Cheniere Energy Inc. for export to foreign markets. He said the company was receiving benchmark prices from Henry Hub for its gas and therefore was not exposed to lower prices in Europe and elsewhere.

Other companies have canceled contracts to cool their gas at various LNG facilities on the US coast of the Gulf of Mexico.

20 LNG cargo departures have been canceled since the fall in commodity prices in March

For example, Cheniere, the largest LNG exporter in the United States, confirmed in a profit call in May that it had received $ 50 million in cancellation fees after prices fell overseas .

“While global markets remain weak, we have had customers who have chosen to cancel certain additional cargoes,” said Cheniere chairman and chief executive officer Jack Fusco, although he refused to quantify the volume of cancellations. .

Wood Mackenzie Research Director Robert Sims, in a June 2 research note, said more than 20 LNG cargo crossings have been canceled since the drop in commodity prices in March, which is “significant for the market ”and that the US LNG terminals would be underused for months, potentially in 2021.

But while existing facilities, including those at Cheniere at Sabine Pass and Corpus Christi, face canceled contracts, projects that are still trying to raise funds and find partners are also in trouble.

“The ability to raise funds, to get partners to join us is being challenged by the global situation,” said Proctor of Rockies LNG, the consortium planning to build a facility near Kitimat, British Columbia. British.

The Canadian natural gas industry’s dream of exporting to the West Coast has been repeatedly delayed. Ten years ago, more than 20 projects were proposed for construction in British Columbia, but the vast majority of them were abandoned or delayed indefinitely by their owners.

Last month, the only LNG project to innovate in the country during this period, LNG Canada’s $ 40 billion project led by Royal Dutch Shell PLC, celebrated the first soldering at its terminal near Kitimat.

The last few Canadian LNG promoters said the contracts they had already signed had no impact, but market turmoil and economic deadlocks related to COVID-19 have once again postponed delays. previously planned construction.

“We had no problems with the existing contracts. It’s a long term vision. We are not going to make any significant investment decisions based on the spot price of LNG entering Asia, ”said David Keane, President of Woodfibre LNG Ltd., which is working on the construction of a liquefaction facility at $ 1.6 billion near Squamish, British Columbia.

The company planned to make a final investment decision last year, but its engineering and procurement contractor was forced into receivership, and this, combined with the closings, pushed the company’s scheduled date to make a decision on the project until May 2021, says Keane.

“It is projected that demand for LNG will continue to grow significantly,” he said, adding that the company remains committed to building the facility to export Canadian gas to Asian markets despite current market challenges.

Natural gas producers were shipping 37% less gas to LNG facilities in the middle of the pandemic, according to an IHS Markit report in May.


Kimimasa Mayama / Bloomberg News

Natural gas producers were shipping 37% less gas to LNG facilities in the middle of the pandemic, according to an IHS Markit report in May. The market researcher also said gas deliveries to LNG facilities fell to six billion cubic feet per day in mid-May from 9.5 billion cubic feet per day in March.

“We are witnessing a historic event where American LNG is playing the new role of swing supplier,” said Terrell Benke, executive director of IHS Markit, in the report, using a term for producers of raw materials who have a combination of available capacity and a cost structure that allows them to increase and decrease production according to market forces.

We are witnessing a historic event where American LNG takes on the new role of swing supplier

Terrell Benke, Executive Director of IHS Markit

Many facilities on the American coast of the Gulf of Mexico, including those built and operated by Cheniere, manage a toll operation: they charge natural gas producers to liquefy at their facility and have the flexibility to downsize when these producers choose to do so, although producers need to pay cancellation fees.

In contrast, many other projects around the world have integrated supply chains, from the natural gas wellhead to the liquefaction facility and the export terminal, a process that inherently has higher fixed costs while along the value chain.

Many of Canada’s smallest LNG proposals, including Woodfibre and Rockies LNG, are advancing with this type of integrated business model.

Canadian gas producers believe that toll LNG facilities are capturing too much value from the gas supply chain. Proctor of Seven Generations has stated that part of the desire to build the LNG Rockies project is to allow producers to capture more margin for their gas.

“These times of low prices really amplify the disparity in the value chain and who gets the value of our gas,” he said.

Likewise, Birchcliff Energy President and CEO Jeff Tonken, in an interview with the Financial Post in April, said the toll model has too many built-in costs.

“The departing economic rent does not make the project feasible. You are in a much better position to pilot a project. This is what we are trying to do, “he said, noting that Birchcliff is providing offices in its current headquarters at Rockies LNG to do its job and save money.

Rockies LNG is looking for partners, but also seems to be going through a redesign. Greg Kist, until recently president of the company, informed the Financial Post this week that he was no longer part of the company.

Cameron Gingrich, Director, Strategic Energy Consulting at Solomon Associates Canadian, said that promoters of LNG projects face another challenge in today’s market at difficult prices: finding enough customers to buy their future gas because they have need these contracts to finance the billions of dollars it costs. build a new facility.

Gingrich said that many of Asia’s largest consumers of public services have already signed contracts for their long-term LNG requirements, leaving only less creditworthy “level 2 secondary players”.

“It is very difficult to invest and contract a billion (dollars) in credit,” he said.

Funding difficulties would likely delay any construction start date for LNG projects in Canada, but economic stimulus plans being prepared across the country could change that.

“If the government, the Business Development Bank of Canada, helped bridge the credit gap between these small Asian consumers, it could help these guys boost investment in LNG installation,” said Gingrich .

Pieridae Energy Ltd.’s Goldboro LNG project, which, if built, would transport natural gas from Alberta to a $ 10 billion facility on the coast of Nova Scotia, is a project that actively solicits the government assistance in making a final investment decision.

“We are selling our idea to government that the time has come for the government to be brave about something,” said Alfred Sorenson, chief executive of Pieridae.

The company has already delayed its expected final investment decision and now hopes to announce construction starting in June 2021.

Prior to that date, Sorenson said, Pieridae plans to do some site preparation work and is actively talking to the governments of Nova Scotia, Alberta and Ottawa about funding.

“The Pieridae cannot do this alone,” he said.

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