Russia-China gas accord to pressure LNG in Canada, Australia

JAMES PATON and REBECCA PENTY
Bloomberg

Russia’s move to broaden its energy ties to China is clouding the outlook for natural gas export projects on the drawing board in the U.S., Canada and Australia.

Companies looking to approve LNG plants in the next couple of years and start shipments at the end of the decade will probably experience delays, according to energy consultants Tri-Zen International Inc.

Gas-supply agreements between Russia, the world’s largest energy exporter, and China, the biggest consumer, are adding to pressure on projects that are already facing increasing competition, rising costs and the prospect of lower prices.

“It’s just bad news generally” for LNG around the world, said Peter Howard, president of the Canadian Energy Research Institute. “It’s going to get really crowded.”

China and Russia signed an initial gas accord two days ago, after a $400 billion deal earlier this year. The tie-up means that only one-in-20 proposed LNG projects targeting the 2020 market will be needed, while one-in-five seeking 2025 sales will be required, according to a Macquarie Group Ltd. report.

“It’s not good news for projects hoping to get to a final investment decision in the next year or two,” Tony Regan, a consultant at Singapore-based Tri-Zen, said. “Those developers will need to think about the post 2020 market.”

Vulnerable Canadians

The export of new supplies to Asia increases the possibility of a glut in global energy markets by early next decade. Once deliveries begin, China would supplant Germany as Russia’s biggest gas market, even as relations have soured with the U.S. and Europe over the Ukraine crisis.

Multibillion-dollar projects led by companies including Royal Dutch Shell Plc, Petroliam Nasional Bhd., Chevron Corp. and Exxon Mobil Corp. are among more than 20 proposals for LNG export that Canadian regulators have approved or are considering from the nation’s Pacific and Atlantic Coasts. Most Canadian projects are scheduled to begin after 2020.

“The Canadian ones are probably the most vulnerable,” Regan said by phone.

Among proposed projects in Australia are Woodside Petroleum Ltd.’s Browse and Sunrise LNG ventures, with partners including Shell, and Exxon’s Scarborough venture. Expansions of plants including Exxon’s $19 billion project in Papua New Guinea are also being considered.

Those proposed plants would follow seven Australian projects currently under construction for about $185 billion.

Window Closes

In Australia, “new local projects will be undercut by international competitors while existing projects will see downward pricing pressure” as Russian pipeline volumes add to supplies, according to Macquarie.

In the U.S., Cheniere Energy Inc. is set to be the first company to export gas produced from the shale boom. Dominion Resources Inc.’s Cove Point terminal in September became the fourth U.S. export project to win permission from the Federal Energy Regulatory Commission to ship LNG around the world.

Mozambique is among countries vying with the U.S., Australia and Canada to build mega-LNG projects.

Demand for Canadian LNG in China will be strong regardless of the latest deal for a gas pipeline from Russia, said Nigel Kuzemko, CEO of Steelhead LNG, a proposed export project. China’s appetite for gas is probably stronger than some forecasts suggest, Woodside said in May.

Second Deal

The second gas-supply pact is less attractive to China, and Russia’s OAO Gazprom may need to offer a “serious discount’’ to secure a final deal, according to Alexander Kornilov, an Alfa Bank energy analyst in Moscow.

The price in the Chinese contract earlier this year is equal to about $10 per million British thermal units, two Russian officials said in July. China pays about $16 per million British thermal units for LNG, Macquarie said.

“The more Russian gas going into China” means the less higher-cost LNG China will import from places like Canada, Reynold Tetzlaff, energy leader for Canada at PricewaterhouseCoopers LLP in Calgary, said by phone. “So we can’t ignore it, that’s for sure. We do need to move quickly or the window starts to close.”

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