Today’s Qatar/Russia Gas Supply Announcements Add To The Challenge Facing BC LNG Post The New BC Govt
Jul 4, 2017
Today’s Qatar and Russia announcements are expected to add 7.6 bcf/d of natural gas/LNG supply in 2020 to 2024. Russia’s Power of Siberia 3.6 bcf/d pipeline to China has a planed startup in Dec 2019, and Qatar’s expanded development of the massive North Field is now planned to add 4 bcf/d in 2022 to 2024. Any new added global natural gas supply adds competition to BC LNG. At the same time, it looks even less likely for FID on Petronas BC LNG in 2017 or 2018 given new BC Premier Horgan’s view that Petronas has a “serious problem with location” and that this “is a critical issue that needs to be addressed”. It will be one thing to pick a new location, but there will be added time with new reviews/approvals/analysis for the new site, which is why we find it difficult to see how FID happens quickly ie. certainly in 2017 and likely also 2018.
BC Premier Horgan’s comments make it difficult to see Petronas go FID anytime soon, certainly not in 2017 and likely 2018. Last week, Energeticcity.ca interviewed Premier John Horgan [LINK] and his answer was clear that Petronas’s LNG project has a critical issue to be addressed before he believes it can proceed. We created a transcript from the interview [LINK], wherein Horgan said ““The Petronas proposal has a serious problem with location and I know they are working on trying to find a way around that but Lelu island which is the territory of the Lax-Kw’alaams is right at the mouth of the Skeena River, which is one of our vibrant and important salmon rivers and I believe that is a critical issue that needs to be address. But I think working together with the community, working together with first nations, and investors, we can get over that, we can find a better location. There are a number of places in the prince Rupert area that would be ideal for siting of a plant of this nature. And would get more universal support. That’s what I want to achieve. I want people to be embracing these new economic opportunities across the board, not just piecemeal”. Horgan is leaving the door open for Petronas to address the critical issue, but his message seemed clear – Petronas needs a new site for the LNG facility. If this is so, its hard to see, even if the LNG price outlook was favorable, how Petronas can go FID on this anytime soon. Its not just finding a new site, we expect a new site to bring environmental analysis, getting stakeholders such as First Nations onside, etc. and it will be hard to do so in 12 to 18 months. Perhaps the only exception will be if Shell moves ahead with LNG Canada or brings in new partners. In the same interview, Horgan indicated he was onside with Shell’s LNG Canada project. Horgan said “Well I would think LNG Canada, which has a proposal led by Shell in Kitimat has all of its permits in place, has social license from First Nations in the region, has the support of the community, and is waiting for economic conditions to turn around, and that project will proceed”. Based on Shell’s prior comments, we do not expect LNG Canada would get FID in 2017 and likely 2018.
Today’s two announcements could add 7.6 bcf/d of natural gas/LNG supply from 2020 to 2024. The other problem for BC LNG is that other global natural gas projects are moving ahead adding to supply in the supply gap, that could come as early as 2020. We hadn’t planned to write on Horgan’s comments until we saw announcements today in Qatar and Russia of major new natural gas/LNG supply projects were moving ahead. These two announcements potentially add 7.6 bcf/d from 2020 to 2024. In addition, yesterday Total announced their deal in Iran that plans to add 2 bcf/d for Iran’s domestic consumption.
Today, Qatar announced it will add new supply of 4 bcf/d, not 2 bcf/d in 2022 to 2024. Today, Qatar Petroleum announced [LINK] that it plans to increase its development plan for the south part of the North Field such that it will add 4 bcf/d and not 2 bcf/d. Assuming this all is via LNG, this represents 12% of 2016 LNG export volumes of 33.5 bcf/d. The timing remains for 2022 to 2024. We expect the timing is reasonable given this is expansion/development of an existing super giant natural gas field with existing natural gas/LNG infrastructure. The additional volumes will be basically all for export markets via LNG as LNG represents 88% Qatar’s natural gas exports with the balance being pipeline exported to UAE (one of the four who have cut diplomatic relations with Qatar) and Oman. Qatar is the #1 LNG exporter in the world, exporting 10.1 bcf/d or 30% of global LNG exports in 2016. Australia was #2 at 5.5 bcf/d in 2016.
Qatar LNG and Pipeline Natural Gas Trade In 2016
Source: BP Amoco
Today, Gazprom announced the new Power of Siberia 3.6 bcf/d pipeline is on track for late 2019 deliveries to China. We believe a key focus for Russia will be to get global natural gas share where possible, especially if they can do via pipelines. Russia is the #1 natural gas pipeline exporter with 18.5 bcf/d or 29% of total global natural gas pipeline exports in 2016. Norway was #2 at 10.6 bcf/d. Today, Gazprom announced [LINK] that Gazprom and CNPC signed a “Supplementary Agreement to the Sales and Purchase Agreement for Russian gas to be supplied via the eastern route, which had been inked by the parties on May 21, 2014” for deliveries to start in Dec 2019, or likely earlier. Gazprom also said “Our work is strictly on schedule, even ahead of schedule regarding Power of Siberia”. The Power of Siberia pipeline will have a capacity of 3.6 bcf/d. Any project that brings in natural gas demand into China can displace LNG imports. The project is a transmission system to bring together multiple eastern Siberia gas fields to an export point to China. This capacity is equal to 18% of Chinas 2016 natural gas consumption of 20.3 bcf/d. Below is the Power of Siberia pipeline from their website. [LINK]
Power Of Siberia Pipeline
Yesterday, Total announced a 20 yr deal for Phase 11 of Iran’s South Pars Phase 11 to add 2 bcf/d in 2020. Yesterday, Total announced [LINK] its 20 yr deal with the National Iranian Oil Co. for development of Phase 11 of the South Pars gas field. Total stated the “facilities will have a production capacity of 2 bcf/d, or 400,000 boe/d including condensate.” This may end up not being an impact on global LNG markets as Total says the “produced gas will supply the Iranian domestic market from in 2021.” This is a big volume relative to current Iran natural gas consumption of 19.4 bcf/d in 2016 and we would expect that natural gas will also displace some oil for electricity generation and some used for expansion of petrochemical capacity. The EIA estimates 25% of Iran’s 2013 electricity was generated from oil. Therefore on the surface, this Total deal could more impact global oil/liquids markets than global natural gas markets. However, we do see it impacting global natural gas markets. Iran has plans for many more phases at South Pars to come onstream in the early 2020’s. If Total can support big increases in Iran’s domestic natural gas demand, it frees up other South Pars Phases for export. Iran has multiple additional phases at South Pars for development. Iran only has small exports to date. It just started up modest pipeline exports to Iraq. But with the world’s biggest natural gas reserves of 1,183 tcf (Russia 1,140 tcf, Qatar 858 tcf), there is the potential for big growth now that foreign capital is flowing into South Pars.
No BC LNG exit valve helps keep AECO forward prices low and makes it tough to attract committed capital. BC LNG would give a good boost to mid term AECO prices. But Horgan’s comments make it less likely to see a Petronas FID in 2017 and likely 2018. AECO strip prices remain stuck ~$2.40 for 2019 thru 2021, in part driven by no BC LNG relief valve. Just like it was tough to convince investors that US oil could grow at $50, it is probably tough to convince investors that $2.50 AECO is a growth gas price. The excellent half cycle Montney returns at $2.50 AECO mean Montney producers should move their gas just about anywhere they can. Montney players have the optionality to look at almost any option to move their natural gas and still make a strong return. A good example of Montney returns was ARC Resources June investor presentation [LINK], which notes their Montney half cycle returns at AECO $2.50 and WTI $50 to be 114% at Dawson, 86% at Sunrise, 71% at Parkland and 75% at Tower. AECO $2.50 may not make anyone feel good, but it works for the Montney players.