Steelhead’s LNG Proposal & LNG Market Analysis with ZEMA

Liquefied natural gas (LNG) is quickly becoming a major energy commodity in the global industry. According to the U.S. Energy Information Administration (EIA), world consumption of LNG was 120,017 billion cubic feet (Bcf) in 2012, with the trend increasing from 116,395 Bcf in 2011.[1] Canada has recently garnered the attention of LNG market observers, as Steelhead LNG has revealed its $30-billion plan on July 8, 2014 to create one of the largest LNG facilities in the world on Vancouver Island. As with the recent approval by the National Energy Board (NEB) of Enbridge’s Northern Gateway project, oil and natural gas politics in Canada have never been livelier in energy-industry news. As a pre-emptive move to avoid conflicts with First Nations protest groups, Steelhead has already met with and signed an agreement with the Huu-ay-aht First Nations (HFN) also on July 8.^th This mutual agreement is intended to foster exploration and development of the LNG project on HFN-owned land at Sarita Bay on Vancouver Island. The company is only at the start of a lengthy process, where NEB conditions, competing projects, and construction costs pose barriers to development.

Steelhead’s facility is expected to be able to export 30 million tons per annum (mtpa) of LNG if the NEB approves their recently submitted export permit, making it the largest of the 13 LNG projects on the West Coast of North America. The facility is expected to run for at least 25 years, creating hundreds of jobs.[2]

The gas will have to travel from gas reserves in Northern B.C. to Sarita Bay (approx. 1,300 km – Figure 1) and Steelhead is still looking for options as to how to achieve this goal. Eoin Madden, a climate change campaigner with the Wilderness Committee, said anytime there is a proposed LNG project, this project will be serviced by fracked gas. Madden remarked: “The amount of water being used in fracking is currently unregulated, and the current Water Act here in B.C. is not being applied as the law says it should be.” Whether environmental activists will take action against Steelhead to the degree of Enbridge’s Northern Gateway remains unclear, as British Columbian environmental politics become increasingly intertwined with the global energy industry. On top of this, new pipelines would need to be built for transporting natural gas across the Georgia Strait to the facility, which poses a significant infrastructure challenge already.

Expansion into Japanese and other Asian markets is a major motivating force behind the construction of the facility. Earlier this year, Tokyo Electric Power Co. (Tepco) General Manager Toshiaki Koizumi claimed he expects Canadian LNG to be its primary importer in the future: “We are quite looking forward to having long-term relations with Canadian people and Canadian LNG.”[4] In 2010, approximately 30% of Japan’s electricity came from nuclear energy. Now, nuclear energy looks less like a viable source after the Fukushima incident in 2011. As a consequence, natural gas has increased from 32% to 49% of power generation, a large portion of which is LNG, making Japan the world’s largest LNG importer. Besides the Steelhead project, Japanese companies are already interested in four U.S. LNG export projects along the West Coast of the U.S., and Russia and Mozambique are also additional competitors for LNG exports.

As a consequence of increasing LNG demand, LNG market fluctuations can be difficult to follow. ZEMA is capable of tracking global LNG pricing and market activity. Whether traders use NYMEX, ICE, or any other exchange data, ZEMA can keep investors up to date regarding price fluctuations in energy and commodity markets. Figure 2 (below) is a graph built in ZEMA  of Argus LNG pricing (average) for Northeast Asia (ANEA – South Korea, Japan, Taiwan) between March 1^st, 2014 – July 21, 2014.

As Figure 2 shows, LNG daily prices in ANEA are dropping steadily as of February 2014. According to research done by BG Group, three new LNG production trains (liquefaction and purification facilities) and eight new re-gasification terminals were due to start in Australasia between January and April of this year.[5] Having an increase in supply of LNG to Asian consumers impacts LNG markets by creating lower pricing, as Figure 2 shows a steady decrease from April onwards.[6] Bloomberg reports of LNG pricing in Japan and Northeast Asia “nosediving” earlier this year as traders in the region purchased fewer shipments after receiving a sufficient quantity for April.[7] Adding further supply to Asian markets are reports that European reloads and LNG from Angola entered Asian markets in March earlier this year.[8] The vast increase in supply of LNG to Asian consumers can drive market prices steadily downward when demand is insufficiently strong to respond. Along with Steelhead are other B.C. LNG projects including Prince Rupert LNG Exports Ltd. (4.2 bcfd), Pacific Northwest LNG (2.5 bcfd), Woodfibre Natural Gas Ltd. (0.27 bcfd), and WCC LNG (4 bcfd) – all of which were approved for construction on December 16^th, 2013.

To make an illustrative comparison, the total LNG consumption in the U.S. during 2013 is 71 bcfd making the combined output of these 4 B.C. projects capable of meeting 15% of U.S. annual demand. If successful, B.C. will become the primary exporter of LNG on the West Coast of North America.[9] As Globe & Mail business reporter Brenda Bouw comments, “Why the rush to build LNG facilities on British Columbia’s coast? [Well,] energy companies are looking to capitalize on natural gas prices in Asia, which today range between $14 and $18 (U.S.) for one million British thermal units…, which [are] about four times higher than in North America… Japan has been particularly hungry for LNG since the Fukushima disaster took its 48 nuclear reactors offline.”[10] If Japanese investors in the ANEA market trust in the future of the Saria-Bay facility, economic ties between Canada and Japan will strengthen.

ZEMA collects Argus natural gas data, including data from the Argus International LPG report and the Argus LNG Daily report. To learn more about how ZEMA can automate your data collection and equip your business with the latest analytical tools, book a complimentary demo with us.