It may have gone under the radar but we had to think about the potential BC LNG implications from Cheniere Energy’s efforts to source as much Montney and Horn River as possible for its Sabine Pass and Corpus Christi LNG export projects. We can see the case for more Montney natural gas producers that aren’t part of an integrated BC LNG project to commit to a GoM LNG and receive HH linked prices. Its not necessarily that BC LNG may not get going. Rather, it’s hard to see BC LNG getting a big natural gas price lift relative to HH pricing, so why not deliver Montney gas to GoM LNG today?
Bloomberg TV interviewed Anatol Feygin, Chief Commercial Office at Cheniere [LINK] on Wed morning. He was asked “You’ve been getting gas now from Canada; how much are you expecting to get in the future, and how much of an exporter can you guys get?”. Feygin’s reply included “Great thank you, so as you said we’re the only game in town in terms of exporting LNG these days from the lower 48 and we have a very broad swath of supply choices all over US and now Canada as you’ve pointed out. We’re very happy to get as many molecules from Canada as we can logistically supply to our two facilities at Sabine and at Corpus and it is a wonderful resource in the Montney and Horn River that we plan to veil ourselves of as much as possible”.
It isn’t a surprise that the Montney is going to GoM LNG. The Montney being delivered to Cheniere’s Sabine Pass LNG project was first revealed in its Feb 28, 2017 Q4 earnings call, when mgmt. said “In fact, it doesn’t stop at the U.S., as we recently entered into our first supply deal to receive Montney gas on a Henry Hub Index from a Canadian producer”. The Montney producer was subsequently revealed to be Seven Generations.
The Horn River mention was a surprise. We don’t believe Cheniere would have mentioned Horn River if they haven’t had discussions at some level with Horn River players. It caught our attention and got us thinking – what does it say about BC LNG pricing and potential if a major Horn River players (either Chevron or ConocoPhillips now Cenovus) were to commit Horn River shale to Cheniere’s LNG as opposed to a BC LNG project.
The Horn River player is probably not Chevron. If COP wasn’t in the Horn River and signed up for Northern Montney, Feygin’s comments might have been seen as a slip of the tongue to imply Chevron was going to be the Horn River player to deliver gas to Cheniere. It still could be a possibility, but just not the obvious and logical one. But if it was Chevron, it would have implied no FID for Kitimat LNG and viewed as an acknowledgment that Kitimat wouldn’t be able to compete on a cost basis with GoM LNG. In the Q&A from Chevron’s March 7, 2017 analyst day, mgmt. was asked where Kitimat sits in the LNG pecking order. Mgmt replied “We’re spending a lot of time looking at the development of the processing facilities for Kitimat. We have to get that cost down to a point where it can compete heads up with the Gulf of Mexico for Asia deliveries. That’s our goal. And I think as we put all that together, and then we combine that with the market, we’ll have a good indication of when’s the right time for Liard.” The key takeaway from Chevron is that GoM LNG projects are setting the LNG cost to Asia benchmark for other LNG projects like BC LNG to meet to compete.
The logical Horn River player is COP, perhaps even more so with Wednesday’s announcement that Cenovus was paying $17.7 billion to buy COP’s Canadian assets. COP was one of the 11 producers who recently signed up for firm service on TransCanada’s Northern Montney pipeline project, which will connect NE BC into the TransCanada/NGTL Alberta system and ultimately to export markets. [LINK], There is logic that Cheniere was talking to COP. And if its COP, it speaks to BC LNG and how Montney/Horn River natural gas producers (other than those part of fully integrated LNG project) are likely to want to dedicate natural gas to US LNG projects. One assumption is that COP is thinking BC LNG is not going to be quick and Cheniere is a way to monetize a good asset. But we believe it is something else – it’s a view that global LNG prices are not likely to return to significantly higher prices for at least the next few years.
Most expect the LNG oversupply to last closer to 2025. This week, GIIGNL (the International Group of Liquefied Natural Gas Importers) issued its The LNG Industry: GIIGNL Annual Report 2017 [LINK], which is an excellent LNG data book to add to reference libraries. GIIGNL highlights “Looking at future years, with Australian projects ramping-up and new trains from the United States progressively coming online, the global LNG market could become oversupplied until the mid 2020’s.” The current oversupply has led to lower global LNG prices, and an increasing number of new contracts having LNG prices linked to HH prices. In 2016, we also saw examples of renegotiated long term LNG prices. In Jan 2016, Petronet (India) was successful in renegotiating its long term oil indexed LNG take or pay contract with RasGas (Qatar). Reuters [LINK] then reported “Under the new contract, Rasgas will supply LNG to Petronet at $6-7 per million British thermal units (mmBtu) from January 1, sharply lower than $12-13 per mmbtu agreed earlier, Oil Minister Dharmendra Pradhan told reporters on Thursday. The Qatari supplier has also waived off a $1.5 billion penalty against Petronet for lifting less gas than agreed, Pradhan said.“ Last week, JERA (joint venture between Tokyo Electric Power TEPCO and Chubu Electric Power) announced [LINK] a MOU with KOGAS (Korea Gas Corporation) and CNOOC to cooperate on LNG including “joint procurement of LNG” ie. read try to drive lower LNG prices. We should note that we are more optimistic than others and believe the LNG oversupply ends around 2020.
Why not capture LNG pricing today?. We think the bigger picture assumption is that the even if BC LNG goes, there isn’t likely to be a big price bonanza in the next few years and that LNG pricing is likely to be increasingly linked to HH based, at least for the next few years. Its difficult to see why any Asian LNG buyer will pay a premium just to get BC LNG. And if BC LNG pricing to the natural gas producer is likely HH based anyways, why not go to a HH based pricing now. Plus HH prices will be increasingly impacted by international gas prices as more US gas is exported via LNG and via pipeline to Mexico. So we aren’t surprised that Cheniere wants Montney and Horn River gas, which are two of the top natural gas plays in North America. And we won’t be surprised to see more Montney (and possibly the Horn River) natural gas producers that aren’t part of an integrated BC LNG project commit to the GoM LNG to get HH linked prices. This is a positive to Montney gas producers to provide the pathway to growth. We suspect that even with TransCanada’s Northern Montney project, there will be an ongoing challenge for egress and infrastructure. Why wait for a potential BC LNG if there isn’t likely to be a big natural gas price lift relative to HH pricing in a GoM LNG project today?