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“Many” Montney Players Looking At Cheniere’s GoM LNG Vs Waiting For BC LNG

By Dan Tsubouchi

“Many” Montney producers reportedly want to send gas to Cheniere’s Gulf of Mexico LNG. No one should be surprised to hear that more Montney players are looking to move natural gas to Cheniere’s Gulf of Mexico LNG projects.  Yesterday, Upstream reported  [LINK] reported that Cheniere Energy was “ in talks with more Montney producers to secure supply deals for its US Gulf Coast liquefaction facilities, a company official said on Wednesday.  Chief commercial officer Anatol Feygin did not disclose how many Montney operators Cheniere is speaking with, but said the company is in discussions with “many players”.   This follows Feygin’s March 29, 2017 Bloomberg TV interview [LINK]  that it had completed its first supply deal with a Montney producer, later revealed to be Seven Generations.

Excellent half cycle Montney returns at $2.50 AECO mean Montney producers should move their gas just about anywhere they can.  Montney producers can generate very strong returns at $2.50 AECO or lower, which gives them the optionality to look at almost any option to move their natural gas and still make a strong return.  The Montney has emerged as the 1A or 1B natural gas play in North America. The best test is always where is capital being allocated.  And this test is being passed by the Montney, Encana’s Permian Update [LINK] this week noted how there are more active Montney gas rigs than in any other natural gas play in North America.  And the Montney half cycle economics are excellent.  ARC Resources June investor presentation [LINK] notes their Montney half cycle returns at AECO $2.50 and WTI $50 to be 114% at Dawson, 86% at Sunrise, 71% at Parkland and 75% at Tower.

The expected change to a BC NDP government next week adds expectation of higher costs for BC LNG.  Today, the BC legislature returned for the first time since the election with the first order of business being a new speaker and throne speech.  Following the throne speech today, BC NDP leader Horgan reconfirmed the plans are to call for a confidence vote next week, which is expected to see the Liberal govt overturned.  In light of the NDP/Green agreement, the Lieutenant Governor is expected to ask the NDP to form a new government.  And that would bring the likelihood that BC LNG projects go ahead, the costs will go higher under a BC NDP government. At a minimum, BC LNG proponents will want to see what emerges from a BC NDP govt given the BC NDP platform [LINK] position “Even if a plant were to open, the desperate BC Liberals signed sweetheart deals with LNG proponents that leave British Columbians without any real benefits.” Pg 78. “Unlike LNG agreements in Australia, Christy Clark’s bad deals make no mention of job guarantees for local British Columbians. Nor do they address the need to work respectfully with First Nations, or to meet our climate change commitments. While LNG can still represent a significant opportunity for BC, it won’t under Christy Clark. To ensure BC benefits, we will require LNG projects meet four conditions: Projects must offer jobs and training for British Columbians, especially jobs for local people. The people of BC must get a fair return for our resources. Projects must secure full partnerships with local First Nations. Projects must complete a made-in-BC environmental assessment, and achieve the highest environmental standards while respecting our commitments to combating climate change”.

At the same time, Cheniere says its cheaper for Montney to move to GoM LNG than to a new BC LNG, even before added costs related to a BC NDP government.  We have to believe that meeting the above BC NDP 4 conditions for LNG will add to the cost of any BC LNG project relative to the current expectations.  Prior to any BC NDP impact on costs, Cheniere already believes it is cheaper to move Montney natural gas to the GoM instead of via a new pipeline to the BC LNG projects.  Upstream also noted that Cheniere CEO Feyygin “said today that in order for producers in Western Canada to get their gas to the West Coast for export, a $7 billion pipeline would have to be built. “It’s going to be nightmarish for them to build, and fantastically expensive,” Feygin told reporters at the CWC LNG Americas conference in Houston.  “I guarantee you I can land that AECO gas in the Gulf Coast cheaper than they can move that AECO gas to the West Coast … Once you get past a certain amount, and new infrastructure is built, it gets a little fuzzier. But today, no question.”

LNG oversupply has shrunk spreads in Asian LNG to HH prices with LNG marginal supply today being linked to HH prices in great part due to Cheniere.  The below graph shows Japan LNG prices (proxy for Asian LNG prices) vs UK National Balancing Point NBP prices  (proxy for Europe natural gas prices and Henry Hub HH prices .  BC LNG projects being strongly considered and the big Montney land grabs were just as the Asian LNG price spreads vs NBP and HH reached their peak around 2012 ie. the Petronas acquisition of Progress Energy was announced on June 28, 2012.  LNG was moving to an expected undersupply from strong China LNG demand growth, Fukushima tsunami, and other factors.  This expected undersupply of LNG drove prices to $16 in Japan in 2012.   It took 4 or 5 years for the LNG market to respond.  But as the market moved to its current undersupply, Japan LNG prices and the spread to UK NBP and HH dropped significantly.  This spread decline and Cheniere’s increasing LNG supply into the oversupplied LNG market is why the marginal LNG supply barrel has currently become more HH price linked.

Gas Prices: Japan LNG, UK National Balancing Point, and Henry Hub


Source: Bloomberg

Until there is a change in global LNG pricing trends (spreads), it doesn’t make sense for a Montney producer to wait to see if BC LNG can start up around 2023.  The Cheniere comments on many Montney producers should not surprise anyone.   It is the right decision given the risk for any major BC LNG project to go FID in 2017 or 2018.  We do not see any FID happening in 2017 or 2018 unless there is a clear change in LNG pricing (spread) expectations.  The Montney half cycle economics are excellent and likely have break even economics well below AECO $2 vs the current AECO strips for 2019/2020/2021 of approx. $2.40.   The Cheniere CEO comments fit to the conclusion from our March 30, 2017 blog “Cheniere’s Push For Montney/Horn River Gas Makes Us Think About BC LNG Implications”  [LINK] was “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”.  This is even moreso if Cheniere CEO is right and the delivery costs to the GoM are cheaper than a new pipeline to the BC west coast.

But ultimately, the key factor in any supply deals to Cheniere may be the term.  The LNG question is when will LNG markets move from oversupply to balanced or undersupply.   The graph above is a great illustration of what happens to spreads of Japan LNG vs NBP and HH in periods of balance, oversupply and undersupply.  It is why we have highlighted this question in multiple blogs as it may be the most important swing factor to the tone and valuations for Cdn natural gas in 2018 and 2019.  Prior to 2017, the common view was that LNG would remain oversupplied until close to 2025.  That view has changed in 2017 and most expect the oversupply to be gone before 2025 with some as early as 2020.  And if the rebalancing happens near 2020, it should impact natural gas valuations in 2018 and 2019.   Our April 20, 2017 blog “If LNG Markets Tip to Undersupply In 2020/2021, It Should Impact Cdn Natural Gas In 2018 and 2019” [LINK] and our May 24, 2017 blog “Woodside On LNG Markets: “I Will Repeat That, We Think The Market Will Rebalance Earlier Than We Previously Thought[LINK]   Our April 20 blog also highlighted Cheniere’s analyst day and how they see LNG marketing tightening starting in 2020 and perhaps more importantly, their statement that “long lead time to new supply means once the market is tight it will take 4+ years for supply to adjust”.  The 4+ years is exactly what happened in 2010 thru 2014 in the above graph.  This is why we believe term may end up being the key factor in any supply deal to Cheniere, it will be important for Montney producers to not just move their gas to make money today, but to try to  share in the global LNG price uptick once the market tightens.