LNG prices forecast to fall, jeopardizing B.C.'s chance of creating a new industry

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      There's more bad news for the B.C. Liberal government as it tries to kick-start a new liquefied-natural-gas industry.

      According to an article on the Natural Gas Daily website, a "looming supply gut and slowing demand growth" mean lower prices in Asia in the second half of this decade.

      It points out that large gas reserves in Canada, East Africa, and Russia "are expected to underpin several new export plants even under conservative estimates".

      "However, even without these projects, Citibank forecast last month that new US supplies alone would add 58-73 mtpa [metric tonnes per annum] by 2020," Natural Gas Daily reported. "Meanwhile, 60 mtpa is currently under construction in Australia, with 40 mtpa expected online towards the end of 2015."

      On November 25, natural-gas expert Trevor Sikorski also predicted lower long-term LNG prices in a blog post for Energy Aspects, which is an energy consulting firm.

      This is especially significant for B.C. because Deutsche Bank has concluded that North American LNG projects require an Asian price of US$12 to US$13 per million British thermal units to be financially viable (including regasification and shipment to customers).

      Sikorski pointed out that two Japanese nuclear reactors are likely to come onstream in the first quarter of 2015. (Yesterday, I wrote a commentary suggesting a revived Japanese nuclear industry poses one of the larger threats to B.C.'s LNG industry.)

      In light of various developments including the resumption of nuclear power in Japan, Energy Aspects has lowered its LNG price forecast for next year from $14.10 to $13.40 per million British thermal units.

      More ominously, Sikorski pegged the price at an annual average of $11 per million British thermal units in 2016—below the break-even point identified by Deutsche Bank for projects in B.C. after adding in shipping costs.

      "We have also initialised our 2016 LNG forecasts and the picture looks increasingly supply led as more and more liquefaction capacity comes on-stream in both Australia and the first US exports of shale gas start hitting the market," Sikorski stated. "Both 2015 and 2016 have big supply stories occurring against a background of only modest demand growth. Against coal, LNG even at 10 $/mmbtu will just look costly to use in power."

      In June, B.C. NDP leader John Horgan told the Georgia Straight that the B.C. Liberal government is only emphasizing the upside of the LNG industry without warning the public about potential downsides.

      “I think British Columbians with an understanding of history will remember northeast coal and the amount of investment that the government, on behalf of the people of B.C., put into creating infrastructure to get coal from the northeast to the coast at a certain price,” Horgan said at the time. “And then, after a number of years, that price started to drop. That is, I think, a cautionary tale for liquefied natural gas.”

      More countries get in the game

      Meanwhile, a report by Ernst and Young last year pointed out that the first wave of LNG producers was led by Algeria, Malaysia, and Indonesia.

      The next wave was led by Qatar and Australia.

      "The third wave could come from as many as 25 other countries, many of which currently have little or no capacity, but by 2020, these countries could provide as much as 30% of the world's LNG capacity," Ernst and Young stated.

      The consulting firm pointed out that proposed facilities in Western Canada "are underpinned by a large resource base...supportive government policy and a generally welcoming environment for foreign investment".

      "The projects, however, will be disadvantaged in comparison to their US competitors in that each of the Canadian projects will likely be an integrated greenfield project," the report noted. "Not only will the project developers construct the liquefaction/export facilities from scratch, they will also own and develop the gas resources."

      The requirement to add pipelines and other infrastructure would add US$150 million to US$200 million in projected capital costs, according to Ernst and Young.

      "The Deutsche Bank analysis suggests that the supply side of the LNG business needs to be assured that it will be able to achieve a netback (i.e., after shipping costs) of about US$10 to US$11 per million BTUs, or about US$12 to US$13 per million BTUs delivered," Ernst and Young stated. "Given a broad assumption that long-term oil prices average between US$80 to US$90 per barrel, this would imply that sellers would seek oil-linked contracts with slopes in the range of 14% to 16%, approximately where they currently are."

      Of course, since this report was written, oil prices have fallen below US$70 per barrel. So far, there's been no comment from the B.C. government about what this means for the future of the province's LNG industry.

      Comments

      21 Comments

      Bill Miner

      Dec 7, 2014 at 12:14pm

      Pipe Dream

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      Bruce

      Dec 7, 2014 at 12:45pm

      And then there's solar, on an exponential improvement and growth curve that just reached price-parity with coal generated electricity this year, and will be cheaper than LNG based power in most of asia within a few years.

      Solar is a tevhnolofy, not a fuel, and exponential change curves are odd things. One year you've got the best film camera on the market and digital cameras are expensive toys, five years later you can't even buy a film camera.

      Google "Bernstein Solar" to learn what the financial industry is starting to believe.

      Mocking all the stupid people who believe neocons like Clark

      Dec 7, 2014 at 12:49pm

      Well well well, those with half a brain knew this was coming, but apparently BC is filled with lemmings who hang on Christie's every fake promise of prosperity.

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      Bruce

      Dec 7, 2014 at 2:45pm

      What else does Deutsche Bank say?

      "The research predicts that by 2016, solar power will be cheaper than energy produced using coal or natural gas in 47 U.S. states."

      And a large solar project in India just won a bid at a lower price than power from Australian coal. So much for the LNG market in south Asia.

      http://www.investopedia.com/articles/markets/110414/solar-starting-win-p...

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      Pat Crowe

      Dec 7, 2014 at 4:57pm

      It's not Christy's fault because the NDP built fast ferries and Victoria is broken and she's just a helpless woman the men pick on. And we're going to grow the economy.
      Bad old NDP.

      0 0Rating: 0

      AC

      Dec 7, 2014 at 6:44pm

      Just the environmental consequences of burning fossil fuels and other potential hazards of transporting the crud is enough to say screw it. By the way, how did our gas prices spike from 39.9 a decade and a half ago to 1.20 after discovering the huge abundance of oil right in our backyard?

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      Briddy

      Dec 7, 2014 at 6:57pm

      It seem that the Premier and her advisors do not know a lot about global economics and equities. It was wide knowledge that by Sept. 30 that the performance of energy as a world sector was -4.9% (the lowest of all sectors). So corrections were coming - including slowing down, adjusting or pulling out of new development.

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      Of course

      Dec 7, 2014 at 6:58pm

      While I can't blame governments for being bold, it seems like our provincial politicians have an addiction for betting the house on big, risky projects. From the many white elephants to our 'boom or bust' reliance on resources, caution and Plan B's are foreign, sketchy ideas to be avoided at all costs. And we only have ourselves to blame. Decade, after decade we keep swinging hard for the wall, rather than racking up singles and planning for the long run.

      No surprise about the failing LNG market, everyone said it would happen and it did.

      0 0Rating: 0

      Hazlit

      Dec 8, 2014 at 5:03am

      Haven't our politicians heard about the resource curse that turns countries from advanced democracies into backwards tyrannies? Maybe they have and maybe they LIKE IT.

      0 0Rating: 0