In the global race to power up LNG plants, firms face supply challenge

Anadarko Petroleum’s Bear Head LNG project in Point Tupper, Nova Scotia is still without a firm contract for supply of natural gas even though the company has spent $ 80 mm so far — prompting questions from analysts about the future of the plant.

Bob Daniels, vice-president of exploration and production for the Houston-based company, told analysts that his company is still doing what it can to secure a supply.
“We’ve been working the supply options as far as we can. We still have a couple that we’re moving forward with, but it has been slower than we anticipated, no doubt about that,” he said.

The region’s two competing projects have both already outlined supply contracts. Irving Oil partnered with Repsol-YPF, the Spanish oil giant with oil fields across Latin America, while Halifax’s Keltic Petrochemicals has partnered with Dutch oil giant Petroplus International. However, there are as many as 60 projects currently in various stages around North America.
“For many proposed projects, what remains to be seen is the nature of the supply contracts they are able to obtain,” said Angela Tu Weissenberger, a natural gas analyst in Calgary. “Short-term contracts might have to suffice until long-term supply commitments are awarded.”

Few new natural gas producing plants are being constructed anywhere in the world without long-term contracts for product and destination re-gasification plants in mind, despite countless analyses predicting a surge in demand for LNG.

Even Anadarko CEO James Hackett had to try to mollify analysts on how much the company would spend on its LNG project without a secure contract in place.

“If we don’t find an upstream solution in a reasonable period of time we’ll look at how we can monetize things,” he said. “So, be assured we’re not going to let this drag on forever.”

In the meantime, both Irving Oil and Keltic Petrochemicals are pushing ahead with their respective projects.

Kevin Dunn, CEO of Keltic, said the company is waiting for a response to regulatory submissions and expects to reveal more of its confidential, multi-year supply agreement with Petroplus after March 15.

“We think it’s going really good. But you never want to brag about something because tomorrow it could change,” he said.

The Energy Information Administration has estimated world trade of liquefied natural gas will climb to 18 % of natural gas consumption by 2020, so whichever company gets to market first will definitely enjoy benefits.

Ms Tu Weissenberger called it the “first mover” benefit.

“In a growing natural gas market with initially limited supplies, those who can capture market share early will enjoy higher prices, more profitable customers, and potential economies of scale from a well-established presence,” she said.

In a report for the Atlantic Institute of Market Studies (Casting a cold eye on LNG), Ms Tu Weissenberger said the Maritimes offers several competitive advantages to move the gas, including accessibility to ports, a proximity to the high-priced northeast American market, and pipeline infrastructure. Her report calls facilities such as Anadarko’s Bear Heard project “merchant terminals” — or ones built without supply or end-user contracts.

“Few project sponsors have attempted this business model because of the revenue risk associated with unpredictable volumes,” she said.