Wednesday, October 3, 2012

Cheniere Deal Hurts Canadian LNG Project

Nothing like a dose of low prices to kill a seller's market.  Case-in-point is the proposed Kitimat LNG export facility in British Columbia.  Developers of the project are miffed that the LNG export deals signed by Cheniere Energy earlier this year that are tied to Henry Hub pricing are setting the expectation with buyers for inexpensive North American LNG.

The Kitimat project is being developed by Apache, Encana and EOG Resources as a way to bring the bountiful natural gas resources of B.C. to the Asian marketplace since the U.S. marketplace is saturated with gas.  The problem is that Kitimat and its associated pipeline infrastructure is a greenfield project that will be very expensive to build.  Compare that to Cheniere's Sabine Pass facility that is already built (at least for imports) and has ample neighboring pipeline capacity.

 Also, as pointed out by the Wall Street Journal, Cheniere is less sensitive to prices given its role as a middleman, while Apache, Encana and EOG are producers, for whom the price is very important.  One advantage of Kitimat is its west coast location, but that is only a minor cost advantage over Gulf Coast facilities.

The clock is ticking on Kitimat.  It sounds like Asian buyers are sitting on the sidelines waiting for lower prices.  Right now the U.S. government is sitting on future LNG approvals pending the release of a study around year-end.  If the U.S. approves the pending applications, a proverbial flood of LNG will come to market with Henry Hub-based pricing.  At that point Kitimat's owners will be in a tough spot.  Kitimat is vital to B.C., but the economics might not work.

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