The main offtakers of LNG from the Kitimat LNG terminal in western Canada remain uncertain. (Wikicommons)
There is “no guarantee” China will be one of the main offtakers of LNG from the recently approved Kitimat LNG (KM LNG) terminal in western Canada, a source with knowledge of the matter told Interfax on Friday.
The KM LNG project in Bish Cove, British Columbia, started out as an import terminal in 2006, but switched to a 5 million tons per annum liquefaction facility in 2009. The liquefaction site is well-placed for access to western Canadian unconventional reserves and shipping to Asian markets.
The source, who preferred to remain anonymous due to issues of procedural fairness, explained that Chinese buyers and the trio of North American firms behind KM LNG - Encana, EOG Resources, and Apache - may find it difficult to come to terms on pricing for LNG secured on long-term contracts.
“The Chinese are great bargainers. The Russia-China pipeline gas price negotiations that have been progressing for years are testament to that. If they are negotiating with KM LNG, they will seek lower coefficients [than Japan and Korea] with oil-indexed contracts,” the source said.
LNG heading to Western Europe and Asia is typically priced on oil-indexed contracts, whereas piped gas in the North American market is de-coupled from oil and trades at a significant discount.
The substantial price difference and KM LNG’s location on Canada’s Pacific coast have fuelled interest in the project from both prospective Asian buyers of LNG and North American suppliers.
Recent Henry Hub gas prices in the United States have hovered between $3.50 and $3.75 per million Btu, whereas import prices of LNG in Japan has been upwards of $17/MMBtu.
KM LNG will not make a final investment decision until sales and purchase agreements are signed to cover a majority of the 10 million tons the facility has been licensed to export annually by the National Energy Board of Canada.
In a conference call with investors on 4 October, Encana’s Vice-President of Canadian Marketing, Dave Thorn, revealed that there was interest from six Asian customers to take supplies of LNG from Kitimat, adding that China is likely to be the largest long-term offtaker.
Speaking with Interfax, the source expressed scepticism over assumptions that China would necessarily be the main purchaser of supply from KM LNG.
“KM LNG will not be in a position to offer [China] gas at prices similar to the cheap contracts from Australia or the Middle East, because they simply won’t be able to afford it. [KM LNG] is gambling that the spread that exists now between Asia and North America will exist for 20 years, which is risky. If gas prices rise in North America or oil drops, export margins will change significantly and better margins may be offered by not exporting and selling into the North American market,” the source explained.
“Of course, the parties [in KM LNG] are all sophisticated and will surely look to price these scenarios into any contracts,” the source added.
A number of alternatives open to China - including piped gas from Turkmenistan, Russia, and Myanmar, along with upcoming LNG projects in Australia - also suggest China would not necessarily sign on for the bulk of supply from Kitimat if KM LNG proves unwilling to offer Chinese buyers an attractive discount.
This could leave Japanese, Korean and Taiwanese buyers, who have traditionally had to pay more for LNG imports, as the more likely offtakers from Kitimat.
Who KM LNG is negotiating with remains unconfirmed, but a memorandum of understanding was signed between Korea Gas Corp. and KM LNG in 2009 for two million tons per year.
‘No guarantee’ China will take Kitimat LNG
The main offtakers of LNG from the Kitimat LNG terminal in western Canada remain uncertain. (Wikicommons)
There is “no guarantee” China will be one of the main offtakers of LNG from the recently approved Kitimat LNG (KM LNG) terminal in western Canada, a source with knowledge of the matter told Interfax on Friday.
The KM LNG project in Bish Cove, British Columbia, started out as an import terminal in 2006, but switched to a 5 million tons per annum liquefaction facility in 2009. The liquefaction site is well-placed for access to western Canadian unconventional reserves and shipping to Asian markets.
The source, who preferred to remain anonymous due to issues of procedural fairness, explained that Chinese buyers and the trio of North American firms behind KM LNG - Encana, EOG Resources, and Apache - may find it difficult to come to terms on pricing for LNG secured on long-term contracts.
“The Chinese are great bargainers. The Russia-China pipeline gas price negotiations that have been progressing for years are testament to that. If they are negotiating with KM LNG, they will seek lower coefficients [than Japan and Korea] with oil-indexed contracts,” the source said.
LNG heading to Western Europe and Asia is typically priced on oil-indexed contracts, whereas piped gas in the North American market is de-coupled from oil and trades at a significant discount.
The substantial price difference and KM LNG’s location on Canada’s Pacific coast have fuelled interest in the project from both prospective Asian buyers of LNG and North American suppliers.
Recent Henry Hub gas prices in the United States have hovered between $3.50 and $3.75 per million Btu, whereas import prices of LNG in Japan has been upwards of $17/MMBtu.
KM LNG will not make a final investment decision until sales and purchase agreements are signed to cover a majority of the 10 million tons the facility has been licensed to export annually by the National Energy Board of Canada.
In a conference call with investors on 4 October, Encana’s Vice-President of Canadian Marketing, Dave Thorn, revealed that there was interest from six Asian customers to take supplies of LNG from Kitimat, adding that China is likely to be the largest long-term offtaker.
Speaking with Interfax, the source expressed scepticism over assumptions that China would necessarily be the main purchaser of supply from KM LNG.
“KM LNG will not be in a position to offer [China] gas at prices similar to the cheap contracts from Australia or the Middle East, because they simply won’t be able to afford it. [KM LNG] is gambling that the spread that exists now between Asia and North America will exist for 20 years, which is risky. If gas prices rise in North America or oil drops, export margins will change significantly and better margins may be offered by not exporting and selling into the North American market,” the source explained.
“Of course, the parties [in KM LNG] are all sophisticated and will surely look to price these scenarios into any contracts,” the source added.
A number of alternatives open to China - including piped gas from Turkmenistan, Russia, and Myanmar, along with upcoming LNG projects in Australia - also suggest China would not necessarily sign on for the bulk of supply from Kitimat if KM LNG proves unwilling to offer Chinese buyers an attractive discount.
This could leave Japanese, Korean and Taiwanese buyers, who have traditionally had to pay more for LNG imports, as the more likely offtakers from Kitimat.
Who KM LNG is negotiating with remains unconfirmed, but a memorandum of understanding was signed between Korea Gas Corp. and KM LNG in 2009 for two million tons per year.