Fed up with low prices, rivals that produce 20% of Canada’s natural gas team up to build own LNG project

CALGARY — Frustrated by persistently low prices for their product, Seven Generations Energy Ltd, Peyto Exploration and Development Corp. and Advantage Oil & Gas Ltd. and seven other producers have formed a consortium with the aim of building a new liquefied natural gas export project in Canada.

“Companies are excited about it. There’s momentum there,” according to  Andy Mah, president and CEO of Advantage and a member of the group.

“We as a group are very keen to see LNG off the West Coast,” said Darren Gee, president and CEO of Peyto, noting that there is support for LNG shipments from both the Alberta and B.C. governments.

Producers were looking at options for ‘controlling their own destiny’ rather than relying on foreign super majors like Shell and Chevron to build export projects

“No one company is so large that it can look at an LNG project on its own,” Gee said, adding the producers are hoping to revive a mothballed project, underpin it with gas supply and eventually find a larger company with enough capital to fund its construction. “We wanted to get the ball rolling.”

Advantage Oil & Gas CEO Andy Mah

Todd Korol for National Post

The consortium has hired Greg Kist, former president of Pacific NorthWest LNG, as a consultant to explore options to either revive a cancelled LNG export project or support an active proposal. The scrapped $36-billion Pacific NorthWest was backed by Malaysia’s state-owned Petronas Bhd and other Asian producers, but was axed in 2017 before Petronas bought a stake in a competing project.

There were more than 20 proposals from a range of different companies to build LNG projects on Canada’s West Coast as recently as five years ago, but construction has only begun on the Royal Dutch Shell Plc-led $40-billion LNG Canada facility, in which Petronas bought a stake.

Financial Post has not been able to identify the other seven companies involved in the group, which is said to involve senior producers. Canadian Natural Resources Ltd., currently the largest natural gas producer in the country, said it was not a part of the consortium. Encana Corp., the third-largest producer, is also not part of the group.

Tourmaline Oil Corp., the second-largest natural gas producer in the country, did not respond to requests for comment.

Kist called the group of 10 companies “a collaboration amongst competing producers” that collectively produce 20 per cent of Canada’s natural gas and 40 per cent of natural gas products such as propane, butane and ethane — though he declined to name the companies citing a non-disclosure agreement.

“The producers want to deal with the challenge we have today with weak prices,” Kist said, adding that an additional LNG project would lift domestic gas prices to rise in Alberta and B.C., as some of the natural gas is diverted to the more lucrative Asian markets.

If they are successful, gas from Western Canada could fetch multiples of its current price, according to analysts. According to AltaCorp Capital data, the price of gas in Alberta captured at the AECO hub was $2.28 per thousand cubic feet, compared with $11.88 per thousand cubic feet in Japan on Monday.

Western Canadian gas prices have also faced worsening discounts relative to U.S. benchmarks NYMEX and Henry Hub in recent years, but an LNG export project on the West Coast could give producers the ability to secure multiples of those prices in Asia.

Kist declined to discuss specific projects but said he is tasked with looking “across all of the different opportunities that are out there” and the consortium might end up “picking up the pieces of a project” that did not reach a final investment decision.

The companies would not announce a specific project or a site until they have agreements in place with First Nations, but the consortium is operating on “a fairly aggressive timeline,” Kist said.

The consortium hopes to have a project operating by 2026 given forecasts of LNG demand outstripping supply by that time, though that would require a final investment decision within two and half years.

The idea for producers banding together to get their natural gas to market is inspired by a similar Canadian producer group initiative in the late 1990s, called Fort Chicago, to build the Alliance natural gas pipeline to move Canadian gas to Chicago.

“The fundamental components are the same,” Seven Generations spokesperson Alan Boras said of the comparison between the consortium and the Fort Chicago group. He confirmed Seven Generations is a member of the current consortium.

Alliance is now jointly owned by Enbridge Inc. and Pembina Pipeline Corp. and is fully subscribed by shippers.

“That’s been very good for Canada,” Boras said of Alliance, on which his company is a shipper.

The idea of producers’ consortium to develop an LNG project has been discussed for a couple years and gained traction as major LNG projects in B.C. were cancelled, said Cameron Gingrich, director of gas services at Solomon Associates.

Producers were looking at options for “controlling their own destiny” rather than relying on foreign super majors like Shell and Chevron Corp. to build export projects, according to Gingrich.

“It’s great that it’s finally getting some traction,” Gingrich said, though he’s concerned that the B.C. government’s new emission rules could make a new LNG project more expensive.

Under the province’s NDP government, new laws require future LNG projects to be electric-fired rather than gas-fired, which Gingrich said could make a project uneconomic.

He said he wasn’t surprised when ExxonMobil Corp. cancelled its LNG project in B.C. following the new emissions plan, and announced it would proceed with an LNG project in Texas earlier this month.

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