LNG’s Virtual Pipeline from Canada to Asia

Liquified natural gas (LNG) is here to stay.

In this time of shifting interest toward "greener” resources, high demand for cleaner-burning fuel in Asian markets has continued to drive rapid growth in LNG. Global demand rose by 27 million tonnes to 319 million tonnes in 2018, according to the latest LNG Outlook from Royal Dutch Shell.

The demand this year is expected to reach roughly 384 million tonnes.

However, the global supply of LNG is projected to increase by just roughly 35 million tonnes and this additional supply is expected to be absorbed by demand from both Asia and Europe.

Demand has been steadily rising for LNG and its role in the global energy system is becoming more and more prominent. With an ever-increasing number of countries turning to natural gas to feed this hungry consumer base, trade in LNG has grown from 100 million tonnes in 2000 to 319 million tonnes in 2018.

Market analysts speculate that investment interest in liquefaction projects could be revived somewhat by a rebound in new long-term projects. This is where Vancouver, BC, based junior resource company ArcPacific Resources Corp. (TSX-V: ACP, Forum) comes in.

ArcPacific is expanding its business to include a new resource, through a new project - Western North American LNG. This project has a proposed initial export capacity of four million metric tonnes per annum (MTPA) (approximately 0.6 billion cubic feet of gas per day (Bcf/D), with the potential to expand to eight million MTPA (approximately 1.2 Bcf/D).

The Company can access massive supplies of low-cost natural gas feedstock from numerous Canadian producers. Just as importantly, ACP can capitalize on two key competitive advantages that set it apart from others in the industry:

• Access to existing infrastructure with ample capacity

• Access and proximity to Asian markets

How this works is that gas producers in Canada will supply Western North American LNG, which will liquefy the gas at its production facility and then transport the LNG through a river-based barge system which is a“virtual pipeline” from its production facility to port on the coast, where the LNG will be transferred to oceangoing tankers and shipped to customers in Asia.

It’s not every day an opportunity arises that can effectively funnel this resource to market in a way that lowers LNG capital costs, production costs and shipping costs so substantially. It is this virtual pipeline and the ability to utilize LNG liquefaction components constructed in Asia at a significantly lower cost that separates this unique project from any other in the world today.

The project:

This is a fully integrated LNG project where the initial 4 million MTPA will be utilizing around 600,000 per million British thermal units MMBtu (approximately .6 Bcf/D) of natural gas feedstock per day (about 100,000 barrels of oil equivalent (BOE)).

A major selling point of the Western North American LNG export project is that it will utilize existing infrastructure to access cheap, reliable natural gas from Canada as the feedstock for the LNG.

On top of the Company’s access to existing infrastructure to deliver the natural gas feedstock, gas taken from Canadian producers will be liquefied utilizing renewable energy - hydroelectric and wind power. Transporting LNG by barge has been a popular low-cost method in Europe and Asia for years. The project will deliver the produced LNG to ocean-faring tankers for delivery to buyers in Asia who will have underpinned the multibillion billion development through long-term LNG purchase contracts and project financing support.

This is important, because shipping LNG to Asia from the West Coast is roughly $1.00 MMBtu cheaper than from the US Gulf Coast and avoids transit through the increasingly congested Panama Canal. This not only means lower shipping costs, but it also reduces greenhouse gas emissions across the Company’s whole value chain. This West Coast LNG supply is expected to be cheaper and “greener” than competing US Gulf Coast LNG delivered to Asia.


Canadian LNG industry at a glance:

Canada is in a prime position to be a low-cost natural gas exporter to Asian markets, given its massive gas production capacity.

Currently the fourth-largest producer of natural gas in the world, at 17.9 Bcf/D in 2018, Canada’s natural gas reserves are estimated to be at least 1,220 trillion cubic feet. 358 trillion cubic feet of which is conventional gas, while the rest is unconventional,low-cost coal-bed methane, shale and tight gas. Western Canadian gas reserves are among the largest in the world and production costs among the lowest.

This is a major reason for Western Canada’s low gas prices, which are far cheaper than Henry Hub prices on the Gulf coast. The Canadian benchmark price for natural gas AECO trades at a discount to the US benchmark Henry Hub. This discount is currently $0.90/MMBtu but it has exceeded $1.25/MMBtu in 2019.

Global LNG industry at a glance:

As a gas supply source, LNG is one of the fastest growing, with a compound annual growth rate (CAGR) of 4% a year to 2035. Asia and Europe will lead worldwide demand growth, according to industry forecasts. By this time, global demand could be as high as 575 million metric tonnes and to satisfy this hunger, the sector would need more than $200 billion in investment by 2030. Since the permitting and construction of a new LNG liquefaction plant can take 5 to 8 years, many expect that the LNG market will be short of supply by 2024.


(Image via ArcPacific Resources Corp.)

Long-term supply commitments are also on the rise in the global LNG market due to concerns about future availability of LNG. The average length of signed contracts more than doubled from 2017 (six years) to 2018 (13 years). Longer term contracts are required to support the development of new LNG capacity. The total contracted volume also more than doubled over this time to nearly 600 million tonnes. In 2018, there was over 1,400 spot cargoes delivered.

(Image via ArcPacific Resources Corp.)

The team:

ArcPacific has tapped some impressive names to help lead its LNG development efforts.

In late January 2020, the Company announced that Peter D. Robertson had been appointed to its Board of Directors. Mr. Robertson was previously the CFO of Pembina Pipeline Corporation (TSX: PPL, NYSE: PBA).

Another ACP Director is Mike Heier, who was Founder and Chairman of Canada’s third-largest oil and gas drilling company — Calgary-based Trinidad Drilling Ltd., where he was a central figure in all of the company's strategic decisions. With approximately 40 years of experience in the oil and natural gas industry, he has served on numerous public and private for-profit boards as well as non-profit boards. The extensive experience and expertise that he brings to the table should add a great value to the Company for its intended expansion into the LNG business.

The Company is also backed by strong support from Korean financing. Having already established a solid network with its mining operations, ArcPacific is working on establishing partnerships with Korean groups.


Financing:

Financing can be a challenge for many companies in the natural resource space, but ArcPacific had accounted for this factor coming out of the gate.

Projects like this can be an immense undertaking, but the project’s access to strategic financing, including from Korean sources, is a key advantage.

However, such project financing from Korea won’t be available until permits for the project are fully secured. Therefore, ArcPacific's role will be to bring $30 million of pre-construction development capital to the table in order to achieve all of the project milestones required to thereafter construct and commission the facility. How the Company intends to do that is by bringing in its partners out of Calgary — the gas producers — to provide at least $20 million.

There is an advantage to partnering with gas producers for all involved. If these companies were simply selling their gas to the open market, they would only get the market price for that gas. But coming into the LNG project as a partner, they could see some upside from the project’s profits from producing LNG as well.