By David Yager, National Leader, Oilfield Services
Like the Keystone XL pipeline, hardly a day goes by when there isn’t another story in the business press about some aspect of the promising but as yet nonexistent business of exporting liquefied natural gas from the west coast of Canada to international markets. The often conflicting news coverage of massive economic opportunity faced with seemingly endless challenges leaves most in the oilfield services sector confused at best.
The reason BC LNG gets so much media coverage is the enormity of the potential impact; the number of players involved; the rapidly changing dynamics of the world LNG marketplace; its stated political and economic importance to the province of British Columbia; and the fact it doesn’t actually exist.
Speculation on who will benefit if and when something actually happens has gotten so nutty that some public oilfield service company analysts tout various stocks as “well positioned” for the LNG boom. Meaning investors should buy them today. Wouldn’t want to miss this opportunity on the off-hand chance something actually happens.
So here’s the 30,000 foot view of the state of the impending/possible BC LNG boom. While OFS managers are well advised to keep an eye on the process don’t take your eye off the ball on the business you are actually doing or for which you have firm orders.
- Natural gas has made a big comeback without LNG exports. Regardless of whether any of these projects go ahead, the gas business in 2014 and beyond has made a meteoric recovery compared to the dark days of 2012. ARC Financial estimates the value of all the gas produced in Canada could be $14 billion higher this year than a mere $12 billion two years ago. On Friday May 23 producers could forward sell their Canadian gas for $4.46/mcf. The average price two years ago was closer to $2. The 12 month strip for Henry Hub gas is $US4.06. North American gas storage levels are more than 50% below the five year average storage levels keeping a floor under prices and ensuring producers can sell all the gas they can produce. LNG looked really exciting when gas was all but worthless. Those days are behind us.
- Canada’s National Energy Board sees gas higher production and prices without LNG exports. Production will rise this year from 14 bcf/day in 2012 to 14.5 bcf/day in 2014 or higher, depending upon price. Rising production from new areas like the Duvernay and Montney will go to gas storage markets plus the oilsands as demand for gas a heat source for thermal recovery continues to grow along with projects and bitumen production.
- Lots of gas drilling in northeast B.C. right now. Progress Energy Canada Ltd. (a unit of Petronas of Malaysia, likely the first full LNG project developer) alone ran 28 active drilling rigs this winter and will build 850 km. of gathering lines this year. These are to move and sell gas into existing takeaway facilities. No gas pipelines to the proposed LNG export terminals exist. While Progress wants to prove up 15 tcf of deliverable gas prior to committing to invest another $11-$15 billion in its LNG facility, it is also selling more gas from its B.C. and Alberta properties with current production of 43,045 boe/day. Because the Montney is so prolific and contains valuable natural gas liquids, drilling will continue, LNG projects or not.
- No clarity on B.C. tax rules. The B.C. government has yet to finalize its fiscal regime. B.C. has a lot of ways to collect revenue on the gas business. They include sales of drilling rights, production royalties, property taxes on leases and facilities, taxes on pipeline right-of-ways, PST on everything, payroll taxes on B.C. workers, and corporate taxes on B.C. companies. On top of this B.C. wants to introduce a special LNG tax to grab a bit more revenue before the fuel leaves the province for good. B.C. has promised to have this finalized soon. There is a lot of posturing going on among the government and developers, a stand-off between Victoria’s political promises and fiscal aspirations and the global economics of LNG. Once B.C. releases its fiscal framework developers will have to process this information away and see what it means.
- Cost overruns in other jurisdictions. The major LNG projects being built in Qatar and Australia have been plagued by massive cost over-runs. Oilsands plants in Alberta have been plagued by cost over-runs. This is a systemic problem with all major capital projects these days. Canada’s labor market is tight. An LNG boom will make it worse. What will these projects actually cost? Several developers have announced they are teaming up to share resources and keep a lid on expenses. Until there is some clarity on costs (including B.C. taxes), nobody is going to make a major commitment.
- News from Russia is just background noise. First it was good. Because of tensions in Ukraine and Crimea, North American LNG would be welcome in Europe to break the supply dependence upon Russia for natural gas. Then it was bad. Russia’s recent $400 billion announcement to build $70 billion worth of plants and pipelines to sell large quantities of natural gas for 30 years to China would reduce Canada’s LNG opportunities in China and other parts of Asia. In fact it is neither. Supplying European markets with meaningful amounts of LNG from Canada or the U.S. in any reasonable time frame is unlikely to impossible. Russia will never be able to supply China with all the gas it needs.
- Global LNG markets only emerging. That the world should burn more natural gas instead of coal is a no-brainer and the shale gas revolution has proven there is ample supply. But the rest is very complicated. Every part of producing natural gas and selling it at a profit after shipping it in liquid form halfway around the world is very expensive and still under development. The early stage players in big projects in Qatar and Australia have paid dearly to learn as they go. The attraction of selling LNG to Asia got a huge one-time price spike when a huge tsunami disabled Japan’s nuclear power industry in 2012. Will this happen again? Development costs are high and buyers want their gas at the lowest possible cost.
- Very early stage so focus on the business you know. It is likely that at least one of the 14 proposed LNG projects will proceed with Petronos/Progress in the lead because of the financial heft of its proponents and the fact it has a growing number of Asian LNG buyers as equity partners. But even if this group says “go” by year-end, there will be no gas shipped for years. It is fun to think the natural gas business in Northeast B.C. may enjoy a big and prolonged boom because of global LNG sales. But because of the size and quality of the reservoirs, there’s going to be some sort of OFS opportunity in this part of the world whether or not LNG tankers ever load up on B.C.’s west coast and head for new markets.