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Wood Mackenzie: Western Canadian LNG – Corporate Positioning will Impact the Winners and Losers

HOUSTON/EDINBURGH/SINGAPORE, 8th November 2012 – Huge gas resources, established and emerging, are increasingly focusing developer attention on western Canadian Liquefied Natural Gas (LNG) exports projects according to an integrated analysis by Wood Mackenzie’s Upstream and Global Gas teams.
Wood Mackenzie notes that several LNG export projects have been proposed on the British Columbia coast, as Canada reaches for new gas markets in Asia. Primarily due to competition from US shale gas, Western Canada’s gas exports have reduced by 4 billion cubic feet per day (bcfd) in the last five years. This, combined with reduced gas prices, have contributed to the decline of annual gross revenue from western Canada’s gas exports by some US$26 billion, or 80 percent, since 2008. While US export growth could yet return, Asian markets offer Canadian upstream sellers a viable and attractive new monetization opportunity which has the support of provincial and federal governments in Canada.
“The proposed Canadian LNG projects could leverage off the massive gas resource that has emerged in western Canada,” explains Hugh Hopewell, Senior Upstream Research Analyst for Wood Mackenzie. “We estimate resource potential of the Montney, Horn River, and Liard Basin at 280 trillion cubic feet (tcf). The region is also home to other plays currently at earlier stages of exploration, but with huge potential. These include the liquid-rich Duvernay shale, and the remote Cordova Embayment, which could further boost Canada’s gas resource base.”
According to Wood Mackenzie Montney and Horn River plays are the most established resource plays. Of these, Montney is the most attractive resource with breakeven costs as low as US$2.40 per million British thermal units (mmbtu), assisted by its liquids-rich content. The economics of dry Horn River shale gas are further challenged by its more remote location and carbon dioxide content. As a result, Montney gas is better positioned to be monetized for exports as LNG, to the US or the domestic market.
“Recognizing the more cost competitive nature of Montney gas, companies have been positioning themselves in this low-price gas resource,” notes Hopewell. “This includes companies with legacy positions in Horn River, and those actively pursuing LNG, as seen in the proposed acquisitions of Progress by PETRONAS and Celtic Exploration by ExxonMobil. For other operators holding gas resources but with no LNG plans, there are still opportunities - larger companies could enter into Joint Ventures (JVs), while smaller companies could prove to be attractive acquisition targets.”
Meanwhile, Wood Mackenzie underscores that developing Canadian LNG requires significant infrastructure development. Asish Mohanty, Senior Gas Supply Analyst for Wood Mackenzie explains: “Not only do you need to build a liquefaction facility and port infrastructure in a remote location, but you also have to develop a multi-billion dollar pipeline up to 800km long to link these gas resources to the liquefaction plant. That makes it expensive compared to other facilities around the world. In addition, threat of delays and cost overruns are high as there could be resource constraints and cost inflation from having to compete with oil sands projects. Also, achieving environmental and local stakeholder support, including First Nations, will be key to determining whether proposed pipeline and liquefaction facilities are approved. Some projects might have two years of engineering and permitting work ahead of them and they might still not be successful.”
Despite this, aided by its close proximity to Asian markets and its low cost gas resource, Wood Mackenzie believes that a well-managed western Canadian LNG export development could achieve costs of delivery into Asian markets similar to those from major competing options in the US and East Africa – in the US$10-12/mmbtu range.
While global LNG supply competition will restrict Canadian LNG exports Wood Mackenzie notes that Canadian LNG offers some possible advantages over competing sources. These include low political risk, value chain equity investment opportunities, potential for local market sales and the potential to offer liquids rich gas using low cost local liquefied petroleum gas, something that will appeal to specific Asian buyers. It is also possible that a combination of prolonged high-cost environment in Australia, East African delays and US regulatory uncertainty could pass the impetus to Canada. However, the ability of Canadian LNG to realize its potential will, in part, be dependent upon the attitude of the Canadian federal government to international investors.
According to Mohanty, “Some projects, notably Kitimat LNG and the smaller BC LNG, have taken the lead with regulatory approvals, local stakeholder support, site development and engineering. Yet other projects such as Shell’s LNG Canada and Petronas’ proposal with Progress are perceived to be ahead on marketing. Other developers such as BG perceive securing the pipeline route as the key determinant of project success and have made that their priority. The contrasting nature of strengths and weaknesses suggests there is room for project collaboration and consolidation, but the intensity of future corporate positioning will be influenced by the outcome of ongoing regulatory corporate acquisition approvals. While efforts and decisions taken over the next two years will determine the winners and losers in Canadian LNG, the current slate of projects and promoters suggests first western Canadian LNG is unlikely before 2019.”

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