Canada has big dreams to tap Asian gas market

Canada, which exports most of its natural gas to the United States, has set its sights for the first time on Asia to diversify its market - with China a key target.

With largely stagnant gas consumption domestically and in the neighbouring US, Canada is seeing a golden opportunity in the Asia- Pacific region, where demand for liquefied natural gas (LNG) alone is forecast to grow 61 per cent to 241 million tonnes in 2020 from last year, or an average of 5 per cent annually.

This has hit home in the small coastal town of Kitimat in British Columbia, Canada's westernmost province, where construction on the nation's first gas liquefaction terminal for export has begun.

The terminal, estimated to cost C$4.7 billion (HK$36.7 billion), along with a 465km gas pipeline linking to gas fields, are scheduled to come online by late 2015. It replaces a plan introduced five years ago to build a terminal that would import gas to feed energy-intensive oil sands extraction projects in Alberta, more than 1,000 kilometres east of Kitimat.

Neil Beveridge, a senior analyst at Sanford Bernstein, said the Kitimat project's owners - Apache and EOG Resources from the US and Canadian firm Encana - were already in talks with state-owned China Petrochemical and PetroChina about long-term supply contracts.

Despite owning just 0.9 per cent of the world's proven gas reserves, Canada was the world's third-largest gas producer in 2010, with an output of 160 billion cubic metres (bcm), according to the BP Statistical Review of World Energy.

Its production exceeds domestic demand by 66 bcm, and it meets 10 per cent of gas consumption in America, the world's largest consumer. But the past decade has seen weak demand in both markets, and Canadian output has fallen, with a 15 per cent drop between 2006 and 2010.

Canadian producers were also hit by US technological innovations that made the profitable exploitation of gas possible, turning America's shortages into surpluses - to the detriment of exporters' profit margins and prices. On the other hand, technology has also made Canada's vast shale resources economically viable, though the target market will shift from North America, where prices are low, to Asia, where a supply squeeze has pushed LNG prices to records.

For instance, LNG in Japan traded at a historical high of around US$17 per one million British thermal units (mmbtu) last year.

This leaves ample room for North American gas to be sold in Asia at a profit even after accounting for transport costs of around US$4 per mmbtu to ship the goods across the Pacific Ocean, provided the necessary infrastructure is built.

But competition will be tight as Asian countries are expected to hike up demand.

Pat Bell, British Columbia's minister of jobs, tourism and innovation, said Canada was racing against Australia for the same gas markets.

'We understand that we are in a foot race with Australia ... We know that it's a time-limited opportunity [since] the market will at some point [have] its capacity utilised,' he told South China Morning Post in an interview in November.

'If we are going to be successful, we need to make sure we beat the Australians into the market,' he said, adding that Canada could count on low hydropower costs.

One key market is Japan, which needs more gas after an earthquake and tsunami in March 2011 crippled most of its nuclear power plants, interrupting the supply chains of many domestic industries. Japanese demand is forecast to rise 20 per cent to 97.7 million tonnes despite its stagnant economy.

China and India have a growing need to import clean energy. Between 2011 and 2020, China's demand is projected to more than quadruple to 48.6 million tonnes, while India's will more than double to 23.4 million tonnes.

However, Beveridge said LNG supply would be tight in the next three years amid the lack of new projects coming onstream.

'But the market will not stay tight forever,' he said in a report. 'Given the wave of new projects which are being approved in Australia and could be approved over the coming years, we believe by 2016 there could be a glut of LNG in the market again.'

Canada can count on a recent wave of gas deals to buoy its plans for expansion in Asia. PetroChina last week agreed to buy a 20 per cent stake in Royal Dutch Shell's Groundbirch shale gas project in British Columbia, in a deal worth over US$1 billion, according to a FinanceAsia report.

Back home, PetroChina is building depots in various mainland cities - all the while signing gas contracts from suppliers in Australia and Qatar.

China Petrochemical, the parent of Hong Kong-listed Sinopec, in December completed its C$2.2 billion acquisition of Canada's Daylight Energy, which owns shale gas projects under development in British Columbia and Alberta.

Like its mainland rival, it has projects lined up in the mainland cities of Zhuhai in Guangdong, Tianjin and Guangxi, along with long-term LNG deals with Australia.

China Petrochemical officials are worried that approval of the C$5.5 billion Kitimat pipeline, which will facilitate crude oil exports, will be delayed due to fears of possible leaks raised by environmentalists and aboriginal communities.

But Bell said he was optimistic that the pipeline would be approved, saying Canadians generally saw piped natural gas as 'fairly environmentally neutral'.

11%

Out of its total gas consumption, China imported this much natural gas in 2011 - a figure that will grow dramatically starting this year