CALGARY-- In early January, an unusual delegation landed in the dark cold of Canada's High Arctic. A group of high-powered South Korean natural gas executives had come to the Northwest Territories town of Inuvik on a scouting mission with an audacious goal.
The group, which included Korea Gas Corp. chief executive officer Kangsoo Choo, wanted to examine the potential for exporting Canada's Arctic energy to Asia. Amid a rush of foreign players snapping up Canadian resource properties, Kogas, as the company is known, is now studying a plan to build a liquefied natural gas port on the northern shores of the Northwest Territories. The port would take gas produced in the region, load it on to massive icebreakers and send it to the Far East.
For Kogas, the world's largest LNG importer, it is early days for the project. But its interest in the major reserves of gas in Canada's north is another measure of how the global business of natural gas has been upended by the discovery of huge new supplies in the U.S., where technological advances have sparked a rush to develop huge "shale" reservoirs.
Shale gas production has contributed to an industry supply glut that has caught the attention of energy-hungry foreign powers.
It's also triggered a dramatic rethinking of what can be done with North America's more distant gas supplies.
Canada's Arctic gas has been a particularly vexing question. The Mackenzie Delta alone contains an estimated nine trillion cubic feet of recoverable onshore and offshore gas, with another six trillion to 26 trillion cubic feet of potential resources. If the high end of those estimates is correct, the Mackenzie Delta area could contain nearly half as much gas as Alberta's entire remaining conventional gas supply.
But getting it to market has been anything but easy. Although the federal government approved the $16-billion Mackenzie Valley natural gas pipeline earlier this year, serious doubts have now emerged over whether that project will ever be built. The industry has made little progress recently, amid an already flush natural gas market in North America where prices are depressed.
If the Mackenzie pipeline "does not come to reality in the near future, another option is converting to LNG and shipping to Asian countries or even Korea," where prices are much stronger, said Chad Yang, general manager of Kogas Canada Ltd., which has become a major investor in Canadian gas.
Last February, it agreed to a joint venture with Encana Corp. that will see it invest $1.1-billion (U.S.) over five years in northeastern B.C.'s gas reserves. The company is also jointly studying the construction of a possible LNG terminal on the west coast of B.C., with Royal Dutch Shell PLC and Mitsubishi Corp.
In the Arctic, Kogas Canada signed a deal late last year that will see it pay $30-million for a 20 per cent stake in a Northwest Territories gas field owned by MGM Energy Corp - but $10-million of that is due only "upon the decision to construct the Mackenzie Valley pipeline or any other project to commercialize production."
One of those options could be an LNG port, and Kogas has begun the work of figuring out how to build such a facility - asking detailed questions about northern Canada's regulatory process and the geography of potential sites such as Cape Bathurst, which lies northeast of the region's prolific gas fields. The idea "will take time" to develop, according to Mr. Yang, who said other companies are also interested in the concept. But the South Korean executives, which included the company's Canadian president, made a favourable impression.
"They were even willing to help us get natural gas into Tuktoyaktuk," said the mayor of that town, Mervin Gruben. "Our own government can't do that, but a foreign country wants to help us. They're good people."
The idea of shipping out Arctic energy is not new. A northern exploration rush in the late 1960s and early 1970s discovered substantial hydrocarbons, and the ensuing years have seen many options discussed. Even Imperial Oil Ltd., which has led the Mackenzie project, has contemplated the idea - although the company continues to believe that using a "pipeline to bring gas to market represents the best opportunity for commercializing that resource," spokesman Pius Rolheiser said.
Still, a northern LNG study done two years ago for Petro-Canada, whose rights to major gas discoveries in the Arctic archipelago now belong to Suncor Energy Inc., determined it can be done.
"It's certainly feasible," said Robin Browne, a long-time Arctic naval architect who worked on the study. "It has a number of problems, but technically this can be done. ... And there's a lot of us who have always believed that shipping from the Arctic is no more expensive than a pipeline."
Among the problems are the uncertain costs of building in such a remote place and the fact that no ship has yet been built that could transport gas year-round through the Arctic ice. Another problem would involve the thorny question of breaking ice across the top of Alaska, since ice is an important transportation asset for Arctic peoples. Equally tricky: Canada would have to agree to let others take away its gas reserves.
"Firstly, gas should be for Canadian use, secondly for North American consumption under NAFTA," said Hal Kvisle, the former CEO of TransCanada Corp., which has long backed the Mackenzie project. "I think it does raise a real question as to whether or not it should be exported off the continent."
Others, however, believe Canada would be foolish to do anything but encourage outside investment, even if that means Arctic gas warms South Korean homes.
"Look at the legacy of all the American investments into Canada over the course of the last five or six decades. They've built our infrastructure, off of which we've grown prosperous," said Peter Tertzakian, chief energy economist for ARC Financial Corp. "Here we have another window of opportunity for people with deep pockets to build stuff we can use for all sorts of future purposes, not just exporting to Asia."
******
UMIAK GAS FIELD
Korea Gas Corp. recently bought a percent stake in a field owned by MGM Energy Corp. for $30 million
BEAUFORT PORT
Kogas is examining potential sites such as Cape Bathurst east of the Mackenzie Delta for a liquefied natural gas terminal
ARCTIC ROUTE TO ASIA
Gas would be shipped in icebreaking LNG tankers across the top of Alaska and then south to Asia
https://investdb1.theglobeandmail.com/servlet/story/GAM.20110420.RBGASARCTICVANDERKLIPPEATL/GIStory/