As LNG prices hit new records overseas, Canadian producers sit with frustration
Country's lone export facility is far from done as pandemic holds up projects
Canadian natural gas producers are watching with envy as liquefied natural gas prices in Europe and Asia hit new records while Canada's only under-construction export facility is years away from completion with other projects delayed by the pandemic.
“I won't hide the fact that COVID has had an impact on the overall development timeline,” GNL Quebec acting president Tony Le Verger said in an interview of his company's proposed $9-billion Energie Saguenay LNG export project in northern Quebec.
Less than a year ago, at the beginning of March, GNL Quebec confirmed it had lost a major potential investor in the LNG export facility when Warren Buffett's Berkshire Hathaway Inc. pulled out of the proposed terminal amid concerns about political risk following rail blockades. Two weeks later, the spread of the coronavirus sent natural gas and LNG prices crashing as economies around the world closed down for months. Quebec regulators questioned whether GNL Quebec's plans remained viable while the pandemic also delayed hearings for Energie Saguenay.
Le Verger said the delays might cause a slight increase in development costs but “it's at the margins” and the company has contingencies built into its cost estimates. Still, the company is hoping to make a final decision on the project by the end of 2022; first cargoes would leave the facility four years later.
The delay has been an annoyance for the company but, Le Verger said, with global LNG prices now jumping, the company is getting a needed boost in its efforts to finalize offtake agreements with LNG buyers.
“It's helping because it's showing there is demand for natural gas,.” Le Verger said.
The Canadian export project closest to completion, LNG Canada, isn't expected to be in service until 2023 at the earliest, which means Canadian producers will largely miss out on the current price boom.
Fluor Corp., which is building the Royal Dutch Shell Plc-led $40-billion LNG Canada project on the British Columbia coast, disclosed in a Sept 25 earnings call that the project was about 25-per-cent complete but had suffered delays prior to and as a result of the coronavirus pandemic.
“Up in Kitimat, our LNG Canada project is moving forward, albeit impacted by COVID-19,” Fluor CEO Carlos Hernandez said.
Bitterly cold winters in Europe and Asia have caused demand for LNG around the world to skyrocket and prices have jumped accordingly.
The Japan-korea Marker, Asia's benchmark for the fuel, rallied 15 per cent to US$32.49 per billion British thermal units (Btu) on Tuesday, the highest since S&P Global Platts began assessments in 2009, Bloomberg reported. The surge represents an 18-fold increase from the record low for the commodity less than nine months ago amid COVID-19 lockdowns.
Calgary-based Seven Generations Energy Ltd. is one of the few domestic natural gas producers currently benefiting from the rise of LNG prices in Europe and Asia as the company signed deals in 2017 to supply gas to Cheniere Energy Inc.'s Sabine Pass LNG export terminal in Louisiana.
“The recent rally in global LNG prices is constructive and further highlights the interconnective nature of the global market, and how North American LNG can help balance evolving supply and demand dynamics,” Seven Generations president and CEO Marty Proctor said in an emailed statement.
“Moving our gas directly to the U.S. Gulf Coast provides access to the premium North American export market,” Proctor said. Seven Generations stock, which fell to about $1.40 last March, has rebounded, trading at $7.18 in Toronto on Thursday.
The company has looked for ways to advance LNG export projects closer to home, including taking a stake in Steelhead LNG, a private firm with ambitions of building LNG projects on Vancouver Island. It is also a partner in Rockies LNG, an early-stage initiative that has yet to announce a project, alongside nine other Canadian natural gas producers.
The Rockies LNG office is the headquarters of Calgary-based Birchcliff Energy Ltd, one of the key backers of the project.
Birchcliff president and CEO Jeff Tonken said the partnership is making progress in its goal to build its own export project in Canada but is not discussing the project publicly as it advances partnerships with various First Nations.
“I don't think there's anybody in this city that's got more confidentiality agreements signed than Rockies,” Tonken said.
“These are multibillion-dollar projects so nothing is ever quick but we believe the best economics is to create our own opportunity and not buy existing projects,” he said. “Suffice it to say that we're working with partners to make sure that everyone who is involved is effective.”
While the Canadian industry will miss out on this winter's bumper prices for LNG in Asia and Europe, Tonken said he still believes there's upside for natural gas prices in domestic markets as evidenced by the forward curve, which allows producers to hedge their gas for the entire year at US$2.80 compared to current NYMEX gas prices of US$2.57 per gigajoule.
Tonken said that between U.S. domestic natural gas demand, U.S. LNG exports and U.S. natural gas exports to Mexico, natural gas demand south of the Canadian border adds up to about 97 billion cubic feet of demand per day.
“Supply is currently between 88 bcfd and 90 bcfd. So we're short gas,” he said.
Even if North American natural gas prices are looking up, producers are still missing out on global prices that are as much as 15 times higher than the full strip for NYMEX gas this year.