In the LNG business, China holds all the cards
Oh those Russians.
Life was already complicated enough when it came to B.C.’s LNG aspirations, but the Russians and Chinese have just cranked it up several notches.
I refer to the late May deal signed between the two that will see a pipeline built that will ultimately carry 3.7 billion cubic feet of gas a day from Russia’s East Siberian gas fields to customers in China.
Now there were a couple of things to like about the deal if you were a proponent of a B.C. LNG plant.
First, it is for 30 years and that is just the sort of long-term contract that project proponents here – especially Kitimat LNG – have insisted they need.
Second, the price is linked to that of oil, another must-have for those same proponents.
The bad news is the price.
Back in the days of heady optimism that sparked the LNG “gold rush” and saw the provincial Liberals hitch their election campaign wagon to that rising star, Japan was paying between $15 and $18 per million British Thermal Unit (mbtu) while Canadian benchmark prices were as low as $3.
Even with the cost of extracting the gas, paying the toll to get the gas delivered by a pipeline company and building the liquefaction plant, an LNG export project was clearly a licence to print money.
So what will China be paying the Russians? Consensus says about $10 per mbtu.
Five weeks later, it was announced that Indonesia had renewed an admittedly small contract with one of the Chinese provinces. Again it was long-term – 20 years – and again it was oil-linked. The price was $10.30/mbtu.
So if that is as much as the Chinese are willing to pay, what does that mean for B.C. projects?
In a column last July, I noted that Cheniere, the outfit going full steam ahead with an export plant in Louisiana, estimated that with US natural gas prices of $4 it could deliver LNG to Asia at around $10.50/mbtu.
And that Janine McArdle, senior vice-president of gas monetization for Apache – don’t you just love those grand titles – had already made it clear that, at that sort of price, Kitimat LNG was a non-starter.
But is that all the Chinese are prepared to pay?
Probably not since they are smart enough not to put all their eggs in one basket and so will want to line up a number of sources, including Canada.
But they will use the Russian contract as a very big stick to persuade any potential new suppliers that they have to significantly moderate their price aspirations if they want to sell LNG to them.
There are other price pressure points as well.
There is the possibility of a second Russia-China pipeline to follow the one just agreed to.
Turkmenistan, which already supplies half the current Chinese natural gas needs, is planning to double its output by 2020.
And Chinese domestic production is expected to rise 50 per cent by 2017.
Now, if you add up all those non-Canadian supply sources, the total is still short of the forecast increase in Chinese demand.
But those forecasts are based in large part on the avowed goal of China to phase out its coal fired power plants and replace them with natural gas plants.
And government policy in China, untroubled by the need to ensure re-election, can change on a dime. In other words, it doesn’t need to hit that goal by any specific date.
So whereas the Russians, given the consequences of their Crimean adventure, needed that deal with China, China doesn’t necessarily need us.
Sure, they will buy our LNG, but only if the price is right. But what they likely consider the right price is almost certainly not enough to persuade B.C. proponents to spend billions of dollars on their projects.
While I would love to be proved wrong, frankly I cannot see the green light being given to any B.C. LNG project this year. And I have my doubts about even next year.
I’ll give the final word to Jeff Lehrmann, Chevron Canada president as quoted in my November 2013 column.
“(Kitimat LNG) may not be for today, but it may be for the future. Something for my kids or their kids,” he said.
Retired Kitimat Northern Sentinel editor Malcolm Baxter now lives in Terrace, B.C.