By Darryl Anderson and K. Joseph Spears
The International Energy Agency’s 2011 ‘World Energy Outlook’ reported that both the supply and demand side point to a bright future, even a golden age, for natural gas; this view was shared by the BP Energy Outlook 2030. BP reported that non-OECD countries are expected to account for 80 per cent of global gas demand growth, with China accounting for 23 per cent of this increased demand. BP also reported that liquefied natural gas (LNG) is expected to represent a growing share of supply. This has important implications for Canada’s energy exports and future marine trade on the east and west coast.
In 2014 the Oxford Institute for Energy Studies report ‘The U.S. Shale Revolution and the changes in LPG Trade Dynamics’ observed, “One of the major developments associated with the U.S. shale revolution and that has attracted little attention from market analysts is the sharp expansion in U.S. liquefied petroleum gas (LPG) exports. This is a separate commodity from LNG which has received the lion’s share of attention. Substantial increases in domestic supply have not only meant that U.S. imports of LPG, which mainly come from Canada, have dwindled, but the U.S. has now become one of the world’s biggest exporters of LPG. Just between 2012 and 2013 alone, LPG exports rose by more than two-thirds, from 0.20 to 0.33 million barrels per day (bpd). According to the United States Energy Information Agency, U.S. LPG exports are expected to persist well into the next decade as natural gas liquids (NGL) output in the U.S. continues on its upward trend.”
What a difference a few years can make. In 2011 researchers from National University of Singapore’s Energy Studies Institute observed that North and South America were effectively “gas islands”, isolated from the rest of the world, with few significant transpacific or transatlantic gas flows. Developments in both gas demand and supply have led to a scenario where significant exports of LNG and NGLs from North America have become more than a distinct possibility.
Natural Resources Canada indicates that raw natural gas is mostly comprised of methane (the largest constituent of household natural gas), but also contains various heavier hydrocarbons, consisting of ethane, propane, butanes and pentanes, and are called natural gas liquids (NGLs).
NGLs are an important component of the Canadian energy mix. Ethane is a feedstock for the Canadian petrochemical industry. Propane is also used as a feedstock for the petrochemical industry and is used for space heating in the residential and commercial sectors.
Historically, Canada’s natural gas and natural gas liquids (NGLs) production was consumed within the country or shipped to the United States. With the U.S. successfully developing its shale gas reserves, that country is becoming a net energy exporter in some commodities.
This in turn is having an impact locally as Canada’s exports of natural gas and NGLs are being displaced by domestic U.S. production, as a result of which new overseas markets must be developed which will require new transportation infrastructure.
B.C.’s natural gas reserves are estimated at over 2,933 trillion cubic feet. To put it in perspective, each year, industry extracts about 4 trillion cubic feet of natural gas. At present rates of production, and based on present resource estimates, B.C. has over 150 years reserves of natural gas. In addition, there are the substantial natural gas resources in Alberta that need to find new export markets.
In the current low price environment, producers have focused their efforts on resource plays on NGLs-rich areas. Mr. Gerry Goobie, Principal, Gas Processing Management Inc. in a 2014 presentation to the Canadian Propane Association noted, “Producers will target rich gas prospects, and all recoverable NGL will be produced. The NGL component has become a much larger portion of the revenue from a gas well in recent years.”
With an increasing availability of surplus NGLs in Canada, producers have the option to either curtail extraction, seek North American buyers who need the gas liquids for petrochemical feedstock, or export to global LPG markets overseas.
Seeking new North American buyers in an increasingly saturated market is not without its transportation challenges. The U.S. Energy Information Administration reported that in April 2014 the Cochin pipeline was removed from propane service. Since the 1970s, much of the propane that wasn’t consumed in Canada was shipped to the U.S. along the Cochin Pipeline System, operated by Kinder Morgan, which carried up to 50,000 bpd to Minnesota and beyond. In July 2014 the pipeline was repurposed to ship light petroleum liquids north from Illinois to western Canada. Without this pipeline, western Canadian propane production has been shipped by other existing transport modes such as rail or placed into inventory at Canadian storage facilities. The declining value of western Canadian propane has encouraged the development of projects to provide additional outlets for growing production.
LNG is a global market that is dynamic in nature. Historically, LNG contracts have been based on attractively-priced long-term supply contracts, thus making investment into B.C.’s LNG industry and exporting the product to the energy-starved Indo-Pacific basin enticing.
The above factors will impact the existing nineteen proposed LNG export projects being considered for Canada’s Pacific Coast. However, the needs of customers in the LNG importing countries are not uniform and different approaches are being taken to try and maximize the value of the natural gas resources and improve project economics. Peter Howard, President Emeritus of the Canadian Energy Research Institute described two LNG export approaches at a recent Nautical Institute conference on maritime energy transportation. The Petronas development represents an example of a “hot gas” project (where the natural gas liquids would be left in because the end customer would use the gas for heating purposes) and the Shell project was an example of “lean gas” where the liquids would be removed.
The Canadian Energy Research Institute reports that if the netback received by a producer for extracting and marketing the NGLs in the local market is higher than that of leaving them as part of the LNG, the NGLs will be monetized locally. Production of LPG, a by-product of natural gas often consisting of propane and butane, has plateaued in Canada in recent years. But increasing shale production south of the border has kept LPG prices relatively low compared to global prices.
As Canadian natural gas liquids are being displaced from the U.S. market, new logistics and transportation solutions are needed to reach export markers especially for propane. Accordingly, a number of significant transportation infrastructure developments are in various stages of implementation:
• Alberta Rail Terminals: Keyera’s South Cheecham Rail and Truck Terminal project and Plains Midstream’s Fort Saskatchewan Facility expansion project would both support the shipment of propane and butane by rail to Midwest markets, Gulf Coast and West Coast marine export terminals.
• Pacific Coast Marine Terminals: Petrogas acquired the only existing LPG export facility in Ferndale, Washington. A new export LPG facility is being proposed for Longview Washington by Sage Midstream and in Portland Oregon Pembina Pipeline Corp. is advancing a project.
The Canadian Energy Research Institute’s October 2014 presentation entitled ‘Pacific Northwest as a Gateway to Asia Energy Export Opportunities’ seemed to suggest that the United States marine terminal developments represented a lost opportunity for the liquid rich shale resources found in Northeast B.C. and the Northwest and West Central regions of Alberta because the commodities would move by rail or pipeline to an overseas export position in the United States rather through a Canadian gateway. However, it is not entirely clear that a U.S. export gateway for NGLs will be the only option in the longer term.
Increased natural gas production and the removal of the natural gas liquids could lead to various types of specialized energy export opportunities for British Columbia. AltaGas Idemitsu Joint Venture Limited Partnership is proposing a liquefied natural gas (LNG) and liquefied Petroleum Gas (LPG) project. Another LNG export proposal in British Columbia Aurora LNG is considering the inclusion of a NGL marine loading facility as part of its project. Finally, companies such as Pembina are considering a Pacific Coast terminal to export LPG products such as propane that would be carried by rail to a British Columbia-based tidewater location.
The natural gas revolution is proving to be game changer not only in the evolution of global energy trade but also in the transportation infrastructure, modes and routes needed to support exports of both LNG and natural gas liquids from North America.
For those individuals who dream of Canada becoming a significant global energy supplier many factors (both local and global) must be considered and overcome before a final investment decision is made for a project to proceed. Given the size of the capital investment that is stake, it not surprising that the joint venture partners who have proposed LNG terminals in B.C. are completing extensive engagement and outreach with stakeholders, discussions and negotiations with First Nations and the senior levels of government to design projects that meet stringent environmental and safety parameters and respect the constitutional rights of all the parties that could be impacted by a new development. Before a final investment decision is made project proponents must also ensure that ensure that costs remain under control.
For those in the rail, port, pipeline and shipping community, discussions about safety will assume far greater importance as energy sector production volumes will increase significantly and the product mix will change to include more volatile and politically sensitive compounds. A challenge for everyone involved in the development approval process will be how to balance a variety of opinions with the collective benefits that economic growth can bring to the citizens of Canada. We will all be better off if the energy used to fuel the necessary dialogue and negotiations results in solutions that are as innovate as the technical tools that are driving the increased production of natural gas and the subsequent production of natural gas liquids.
Darryl Anderson is a strategy, trade development, logistics and transportation consultant. His blog Shipper matters focuses exclusively on maritime transportation and policy issues. wavepointconsulting.ca/shipping-matters
Joe Spears is an ocean policy consultant ad has worked in both public and private sector on energy and economic development. He holds a Masters in Economics from the London School of Economics.