OREANDA-NEWS. November 03, 2011. Companies from Royal Dutch Shell Plc to China National Petroleum Corp. are planning the first LNG shipping terminals on the west coast of Canada as fuel demand from Asia is set to replace sales to the U.S.

The record difference between the price of Canadian gas and the amount Japan pays for liquefied natural gas is making it potentially more attractive to import the fuel from Canada than Australia. North American gas is USD 12.50 per million British thermal units cheaper than LNG sold to Japan, according to Sanford C. Bernstein & Co. That compares with last year's average of USD 8.20, data compiled by Bloomberg show.

The widening price gap is benefiting companies in Canada that are being hurt by declining sales to the U.S., which is turning to cheaper, domestically produced fuel from shale deposits. Canadian gas exports to the U.S. may fall about 7 percent this year, according to Barclays Capital. Demand from Japan may rise almost 40 percent by 2020, Bernstein said.

"Exporting gas from North America to Asia makes a lot of sense given the current pricing differential," said Neil Beveridge, a Hong Kong-based analyst at Bernstein. "If the spread is sustained, it presents an enormous arbitrage opportunity, even taking development costs into account."

Canadian as well as U.S. producers can make money exporting LNG, Goldman Sachs Group Inc. analysts led by Johan Spetz in New York said yesterday in a report. Houston-based Cheniere Energy Inc. agreed to a 20-year contract to ship LNG from its terminal in Sabine Pass, Louisiana, to BG Group Inc. in Berkshire, England, and similar announcements are expected, Goldman said.

"This precedent suggests several plants could follow," Spetz said, pointing to five LNG projects in the U.S. and two in Canada that will add 6 billion cubic feet a day of capacity if they get government approval. "We continue to expect LNG exports to be profitable given our estimates for the cost of sourcing, liquefying and transporting."

Japan, the world's biggest LNG buyer, paid about USD 16.50 per million Btu for the fuel in August, while South Korea, the second-largest, paid about USD 14 in September, according to customs data.

Natural gas for December delivery rose 4.2 percent today to USD 3.923 on the New York Mercantile Exchange. That's up from this year's settlement low of USD 3.481 for gas futures and down 11 percent in 2011.

"Gas prices in Asia are indexed to oil prices and thus are much higher than in North America, a continent awash with gas for the foreseeable future," said Judith Dwarkin, director of energy research at ITG Investment Research in Calgary. "The Asia-Pacific region offers long-term demand growth and an opportunity to diversify markets."

Fukushima Disaster
Japan's LNG imports rose 11 percent to 6.7 million metric tons in September from a year earlier as nuclear output plunged in the wake of the Fukushima disaster, the finance ministry said this month. Demand may grow to 97.4 million tons by 2020, compared with 70 million tons last year, according to Bernstein.

China, whose imports climbed 27 percent to 5.2 million tons in the first half of the year, may purchase about 44 million tons a year by 2020, according to Philip Olivier, president of global LNG at Paris-based GDF Suez.

"We are willing to consider LNG purchases from North America, as that will diversify our supplies and boost our bargaining power," Bao Chunli, head of industrial policy at the energy research institute run by Cnooc Group, the nation's biggest offshore oil explorer, said in an interview. "We wish to have more and more choices."

BG's agreement to import 3.5 million metric tons a year of gas from Cheniere means the Sabine Pass terminal is poised to become the first new North American LNG export project since 1969, Wood Mackenzie, the London-based commodities research firm, said in an Oct. 26 note to clients. The Louisiana terminal, conceived to import LNG into the U.S., is being redesigned for exports as hydraulic fracturing, or fracking, helps boost output from shale deposits. Shale gas will account for 34 percent of U.S. production by 2035, up from 18 percent in 2008, according to the Energy Department in Washington.

LNG export plans may face political opposition in the U.S., Goldman Sachs said. Another possible constraint is the availability of ships to export LNG from North America.

"The global LNG ship order book is not yet reflecting the potential for increased U.S. and Canadian exports," Spetz said in the Goldman Sachs note. Despite these risks, Cheniere's contract with BG and the prospects for other North American projects has "substantially shifted" in favor of LNG exports from North America, it said.

The Hague, Netherlands-based Shell and partners China National Petroleum Corp., Korea Gas Corp. and Mitsubishi are planning to start shipping LNG from Kitimat, British Columbia, as early as 2016. The companies aim to export between 700 million to 1.2 billion cubic feet a day, Bernstein said. A second project in Kitimat received export approval this month from Canada's National Energy Board. The partners in that plan are Apache Corp., EOG Resources Inc. and Encana Corp.

"I'm pretty positive on exports from western Canada," said Zach Allen, president of Pan Eurasian Enterprises Inc., a Raleigh, North Carolina-based tracker of LNG shipments. "The dynamics of the market make sense for that."

Australia, currently Asia's biggest gas supplier, is poised to lose most from Canada's new terminals, according to Andy Flower, an independent LNG analyst in the U.K. The country's west coast is 4,400 nautical miles from Japan, according to Eurasia Group, a New York-based consultant. The journey to Tokyo from Kitimat is 4,200 miles.

"Canada would have an advantage in diversification because buyers in Asia prefer security of supply," Flower, a former executive in London-based BP Plc's LNG unit, said in a telephone interview.