Proposals for natural gas, oil exports to Asia to move ahead

Two proposals to export Canadian energy to Asian markets are set to take major steps forward in 2010, but there are questions as to whether the grass is truly greener on the other side of the Pacific Ocean when it comes to marketing oil and gas.

CALGARY — Two proposals to export Canadian energy to Asian markets are set to take major steps forward in 2010, but there are questions as to whether the grass is truly greener on the other side of the Pacific Ocean when it comes to marketing oil and gas.

Kitimat LNG expects to break ground this year on its 700-million-cubic-feet-per-day liquefied natural gas plant on the northern British Columbia coast. The LNG, natural gas that has been cooled into a more easily transportable liquid state, would be carried by sea to countries like Japan and Korea.

The project was originally conceived as an import terminal to receive LNG cargoes from overseas for the North American market. But prolific new shale natural gas plays in Canada and the United States prompted the company to change the project’s course in 2008.

“Asia appears to be the growing market, not the United States,” said Ralph Glass, vice-president of operations with AJM Petroleum Consultants in Calgary.

Technological advances like horizontal drilling have unlocked enormous natural gas reserves from shale formations that were once too difficult to exploit.

So far two major northeastern B.C. producers, EOG Resources Inc. (NYSE:EOG) and Apache Corp. (NYSE:APA), have announced memorandums of understanding to supply gas to the terminal. On the receiving end, Korean and Spanish gas companies have agreed to buy the gas.

The United States would likely use gas from its own enormous resource plays, like the Haynesville in Louisiana and the Barnett in Texas, before it sought out gas from the Horn River Basin and Montney plays in British Columbia, Glass said.

“I’m not sure that the North American market is very lucrative for Canadian gas in the long term,” he said.

“I still think that we need some sort of an alternative market and I still think Kitimat is the way to go.”

The chief executive officer of Canada’s largest natural gas shipper has a different take on the demand outlook.

Calgary-based TransCanada Corp. (TSX:TRP) has a vast pipeline network that stretches from Alberta to markets throughout Canada and the United States.

The system has the ability to carry about 13.5 billion cubic feet a day, with about three billion cubic feet per day of spare capacity, said chief executive Hal Kvisle.

With natural gas supplanting coal to generate electricity, the demand outlook for Canadian gas looks healthy, he said.

“I believe the North American market is going to look relatively good for a long time,” Kvisle said.

“It is not clear to us that the Asia-Pacific market is going to be the most attractive market. It seems that we have direct access to the largest gas market in the world: the United States.”

Producers in northeastern B.C. have committed about 2.5 billion cubic feet per day of their volumes between 2011 and 2015 to a proposed TransCanada pipeline that would head eastward toward the company’s Alberta system.

There has also been a push to open up Canadian crude oil supplies to markets other than the United States.

Crude shipper Enbridge Inc. (TSX:ENB) is expected to file a regulatory application in the first half of this year for its Northern Gateway pipeline, which would carry crude from Alberta’s oilsands to the West Coast.

“Fundamentally we believe it’s a vital link between Canada’s energy industry and the growing markets of the world,” said John Carruthers, president of Enbridge’s Northern Gateway Pipelines business.

“It’s very much about market broadening and pricing.”

TransCanada, on the other hand, is comfortable sticking with the market it has been focusing on for its crude shipments: the United States.

The first deliveries from the first phase of its Keystone pipeline are expected to reach refineries in the U.S. Midwest later this year.

Once completed, Keystone will be one of the largest oil-delivery systems in North America with the capacity to deliver 1.1 million barrels per day from Hardisty, Alta., to points throughout the United States.

A second phase would extend the line to the U.S. Gulf Coast and expand its capacity by 500,000 barrels per day by 2012.

“In terms of new markets for Canadian crude, you’ve got to go to where the refineries exist,” said Russ Girling, TransCanada’s chief operating officer in an interview last month.

So far refiners in the U.S. and the Canadian companies that supply them have shown the most interest.

That hasn’t been the case with any potential West Coast-Asia connection, Girling said.

“Those types of commercial arrangements haven’t gelled enough that we would say that they are at the top of our radar screen,” he said.