LNG decision delay not surprising

Is it really accurate to say that the greenlight from LNG project proponents is dependent on the price of oil?

Kitimat Mayor Phil Germuth got it exactly right when, in response to the announcement by LNG Canada, the majority of which is owned by Shell, that its project was on indefinite hold, he told the local newspaper, “Of course we were a bit disappointed, but we weren’t overly surprised.”

No one should have been surprised given the current state of the markets.

But where I think he was in error was in saying that the ability of project proponents to give the greenlight was related to “what the price of oil is.”

I concede that traditionally the price of liquefied natural gas (LNG) has been tied to the price of oil and as the latter went up so did the price of LNG.

As I write this, the price of oil is well south of $50 and still edging down.

The reason of course is that oil production continues to outstrip demand, dragging down the price. And there is no reason to think that will change any time soon.

Saudi Arabia has given no indication it is willing to cut its production, with sanctions lifted Iran is now an exporter at whatever price it can get because it needs the revenue and the US producers keep pumping despite the fact some are losing money on every barrel.

In the weird and wonderful way markets work, those producers actually lose less money doing that than they would if they shut down their wells.

But let’s say by some miracle all the major oil producers agree to cut their output in order to push the price upwards and as a result oil leaps to $65, even $70 a barrel with no apparent danger it will reverse that trend.

Based on the traditional oil-LNG linkage, wouldn’t that mean B.C.’s proposed projects would be off to the races?

Back in the day, yes. But that was then and this is now.

The problem is that even if oil production is cut, thus ending today’s supply glut, that doesn’t change the fact that the glut of LNG will not go away any time soon.

In fact, it will likely get worse in the short term – the next five years – as new production comes on line and that’s even if the current slump in Asian demand is reversed.

For example, the current LNG glut does not yet include the new production that will flow from the massive Gorgon project in Australia.

Gorgon actually loaded its first vessel in March but immediately had to shut the operation down because of a malfunction. It fixed that and tried again, only to have a further problem which required another shutdown.

Assuming they finally get it right this time, that is another 15 million tonnes of LNG a year – triple the planned production of the first phase of the Kitimat LNG project – that will flood on to an already super-saturated market.

Granted it is theoretically true that those LNG sellers who have locked up long-term contracts with the price tied to oil will benefit from a hike in the latter.

But I say theoretically because, as detailed in earlier columns, Qatar for example bowed to pressure from buyers such as India and Pakistan and rewrote its contracts with those countries resulting in the LNG price being slashed nearly in half.

While having to make concessions like that to keep its contracts would hurt the bottom line for Gorgon, after spending about $60 billion it may well have little choice but to suck it up and take what it can get on the basis a bird in the hand is worth a flock in the bush.

Incidentally, the partners in the Gorgon project include Chevron (47 per cent), the lead proponent of Kitimat LNG, and the above-mentioned Shell which has 25 per cent of the Gorgon project in addition to its Canada LNG stake.

But wait, as they say on those incredibly annoying TV ads, there’s more.

However I am out of space so it will have to wait for next time.

Retired Kitimat Northern Sentinel editor Malcolm Baxter now calls Terrace home.


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