A setback for Canada's leading liquefied natural gas project reflects the ripples that continue to spread from OPEC's decision to maintain crude production levels in the face of a global supply glut, as the links between oil and natural gas carry new uncertainties into world methane markets.
Last week, Malaysian oil and gas company Petroliam Nasional Berhad, or Petronas, announced that it was backing off its commitment to reach a final investment decision in December on an expensive new LNG terminal to be sited along Canada's British Columbia coastline.
After more than a year of wrangling with provincial officials over the deal's tax terms, previously seen as a key sticking point, Petronas officials were careful last week to say that regulatory concerns are not driving the postponement (EnergyWire, Oct. 23).
"Petronas and its partners in the Pacific NorthWest LNG project continue to review the economic viability of the project which, in a time of declining oil prices, presents challenges," the company said in explaining the move.
Petronas said it would defer the $36 billion final investment decision "to ensure that critical project components align with economic viability of the project and competition from other LNG producing countries."
British Columbia's gas export proposition has always been shaky compared with the U.S. competition, pairing high development costs with potentially expensive natural gas contracts.
The new oil price environment only adds to that pressure, leading oil and gas companies to reassess their balance books and look critically at projects that involve massive spending to enter highly competitive markets.
LNG project developers around the world have been keeping wary eyes on proposals to ship the product from facilities offering LNG priced against U.S. Henry Hub gas. Over the past few years, that has priced out much more favorably than LNG sold at oil-linked prices from projects proposed and developed in Australia, Canada and elsewhere.
Proposals to export LNG from projects along the heavily industrialized U.S. Gulf Coast and elsewhere also boast lower upfront costs than those available to projects like Petronas' that envision carving out new facilities in remote areas and building lengthy pipelines from gas fields to the waterline (EnergyWire, Oct. 23).
Now the oil price drop is pulling down LNG prices and bolstering the appeal of oil-linked natural gas, but the more favorable outlook for buyers competes with the tougher investment climate for developers to prevent a shift away from the United States.
Will oil drag down natural gas?
Even as oil pulls down world LNG prices, there is risk that it will also indirectly drive up natural gas prices in the United States, some observers warn.
Kevin Book, an analyst at Washington, D.C.-based ClearView Energy Partners, points to U.S. Energy Administration Information data in an estimate that roughly half of U.S. natural gas production is from wells where oil and oil condensates play a role in economic viability.
"Roughly one-fifth of gross gas production could be sensitive to low oil prices. If the next year were to bring enduringly low crude oil prices, we wouldn't just expect producers to cut their capital spending, but also to focus their efforts on highest-value production. In other words: producers might try to avoid 'gassy' oil wells ... potentially leading to lower volumes of associated gas," he wrote in a recent update.
Such drilling decisions aren't likely to put a serious damper on natural gas production, which the EIA reported last week reached a record high in 2013. But agency data show that among states with falling gas production, Alaska led the way due to falling crude production that knocked associated natural gas production offline (Greenwire, Dec. 4).
EIA natural gas production figures for the coming year have been bullish, with somewhat lower rig counts offset by growing productivity at well sites as industry fine-tunes its ability to wring natural gas from shale. Still, with the oil and gas investment climate for next year in flux and industry ready to hunker down for a lean spell, it remains to be seen how prices at the Henry Hub will respond (EnergyWire, Nov. 10).
Geographic risk reduction
The narrowing price spread between U.S. and foreign LNG supplies cuts into the advantages of domestic projects.
But Hidehiro Muramatsu, general manager of the Washington, D.C., office of the Japan Oil, Gas and Metals National Corp. (JOGMEC), said it will do little to curb Japanese interest in signing new deals in the Lower 48.
With oil trading between $60 and $70 per barrel and the Henry Hub a bit above $4 per million British thermal units, prices are roughly in parity between oil-linked and non-oil-linked suppliers, he said, though the specifics of transit distances and contract terms are crucial.
But U.S.-based contracts offer prized geographical diversity for Japan, Muramatsu said, noting that presently more than 80 percent of the island nation's LNG must pass through the Strait of Hormuz between Iran and Oman, largely from Qatar, the world's largest supplier.
Fuel from Australia, Canada and the United States can reduce Japanese vulnerability to Middle East tensions, Muramatsu said, noting that buyers are actively involved in negotiations with two LNG export projects under development in Oregon, as well as with numerous Canadian project backers.
More than an oil price change, Japan is looking to a domestic policy change around nuclear power to temper its interest in natural gas.
Since the Fukushima Daiichi disaster in 2011, nearly all of the country's nuclear power base has been offline; Muramatsu said any shift away from natural gas and back toward nuclear "depends on the psychological factor of the general public."
That appears to be gradually softening as the Japanese economy continues to struggle with recession and the foreign exchange hit of its natural gas appetite, and as the government and nuclear industry offer assurances that systems are in place to ensure safety.
That psychological shift has been happening slowly, though, and with a nuclear restart seemingly always just around the corner, locking in fossil fuel supplies remains important.
"Low oil prices really help the Japanese economy," Muramatsu said. But even with the oil price plunge bringing bouts of LNG price parity, Muramatsu affirmed that the island nation "of course" remains keen to sign U.S. contracts.
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