By CHESTER DAWSON and BEN LEFEBVRE
PORT EDWARD, British Columbia -- Some of the world's largest
energy companies are racing to transform backwaters like this
hamlet of 544 people into boomtowns.
The energy giants are proposing half a trillion dollars in
projects to export vast new finds of North American natural
gas. Western Canada and the US Gulf Coast are competing to see
which region receives the lion's share of the investment.
Port Edward has been shrinking since the canneries and pulp
mills began shutting decades ago. But it has a deepwater port
that could someday handle the huge ships that carry liquefied
gas. And Malaysia's state-owned energy giant Petronas says
it is prepared to spend $20 billion on a terminal, pipeline and
other infrastructure here.
A drilling revolution in the
US and Canada has unlocked a glut of natural-gas reserves
across the continent. That has sent prices tumbling-a boon for
consumers and industrial users. But it has also sent energy
companies scrambling for a way to profit by sending the cheap
gas to Asia, where demand and prices are high.
Producers largely have divided up into two camps: One is
betting on Canada's industry-friendly federal government and
its closer proximity to Asia. The other group is hoping
already-developed infrastructure in the US will outweigh
political uncertainty in Washington over large-scale exports of
the cheap fuel.
Industry executives say most of the projects announced so far in the two
regions won't be built, so companies are jostling to be first
out of the gate. Eurasia Group, a research and consulting firm,
estimates energy companies eventually could spend $50 billion
converting existing liquid-gas import plants in the US into
export plants, while they may shell out an additional $60
billion to build such plants from scratch in Canada.
That spending spree will help shape energy prices around the
world for decades to come. Currently, natural gas sells for
just $4 per British thermal unit in North America but $16/BTU
in Asia. Using LNG
always will be more expensive than locally produced gas because
converting gas into liquid, transporting it, and converting it
back into gas is costly. But exporting LNG still can help
narrow the price gap between North America and Asia, shaving
power bills for manufacturers and consumers abroad.
The biggest economic impact will be in North America itself.
The British Columbia government estimates that a single LNG
plant will cost as much as $20 billion, creating 3,500 construction jobs and 200 to 300
"We can be the second-largest exporter of liquefied natural
gas in the world," said British Columbia Premier Christy Clark,
who is contemplating a $100 billion "prosperity fund" from
expected tax revenue. "When we reach our potential for
gas, it will have the same impact on Canada's national
economy that the oil sands in Alberta have had."
Those backing US plants have a different take.
"The reality of it is that the additional cost to build the
pipeline and liquefaction equipment in such a remote and
pristine area will raise the cost so much that their advantage
of lower shipping will be completely eliminated," said Michael
Smith, chief executive of Freeport LNG in Freeport, Texas.
Martin Houston, chief operating officer for BG Group, the UK
gas giant, acknowledges that challenge, but cites shorter
sailing times to Asia as a key selling point for Canada.
Shipments from Western Canada take eight to 10 days to reach
East Asia, less than half the time it takes from the US Gulf
Coast. Still, BG is hedging its bet with a proposed plant on
both sides of the border.
"We see a world in which global supply will be challenged to
keep up with global demand," said Mr. Houston.
As recently as 2007, North America was preparing for a gas
shortage and building terminals to import LNG, not ship it
offshore. But with the advent of the North American gas boom,
many of the import terminals have seen little business.
Now they are being converted to export terminals at around
$10 billion apiece.
So far, the US
government has approved two projects for LNG exports, with
Freeport as one of them. A debate rages in Washington over
whether to allow more. Some industry groups say the gas should
stay on the continent, to ensure cheap energy for US
manufacturing and consumers.
There is no such debate in Canada. Ottawa has approved three
export applications, including projects led by Chevron and
Royal Dutch Shell. Four others filed this summer are pending --
including one large-scale plant by ExxonMobil and two more
major terminals by BG Group and Petronas.
None of them have yet fully committed to a Canadian project.
Before spending the billions of dollars necessary for an
LNG-export plant, they want long-term contracts for the gas. So
they are courting Asian buyers or recruiting them as partners
for their projects. Asian buyers, meanwhile, are pushing to get
the gas as cheaply as possible before they commit.
Few in the energy industry doubt that Asian buyers will sign
deals for Canadian gas. The best evidence is the number of
Asian companies that have taken equity stakes in Canadian LNG
projects or snapped up tracts of gas-rich ground in western
Just the same, Apache and two former partners struggled to
line up buyers for its Canadian LNG project on the site of an abandoned
pulp mill in the coastal town of Kitimat. Many were spooked by
the companies' lack of experience in LNG and the high prices
the consortium sought to cover upfront costs, according to
company and industry officials. The project got a boost after
Chevron, a giant with deep pockets, bought in late last
"Chevron brings financial strength, operating experience and
marketing expertise to the project," said Apache spokesman Paul
Freeport's Mr. Smith says projects in the US had a different
challenge. Amid deep reservations in Washington about letting
large-scale LNG exports go forward, planners realized their
success lining up buyers would be determined by their place in
the permit line. Freeport won the second recent US export
license in May.
As projects on both sides of the border compete for LNG
buyers, a boomtown mentality has taken hold along isolated
stretches of Canada's north Pacific coastline, where
practically no LNG infrastructure exists currently. The
epicenter of the excitement is a handful of small coastal
communities some 350 miles northwest of Vancouver and less than
50 miles from Alaska, like Port Edward, with ice-free harbors
Companies would need to build berths, gas-liquefaction
plants and the pipelines running to gas fields hundreds of
miles inland. Petronas paid over $5 billion for Canadian gas
producer Progress Energy to get access to the gas reserves that
would feed its proposed plant in Port Edward.
Chinese state-owned energy giant Cnooc Ltd. has expressed
interest in nearby Digby Island, home to Prince Rupert's
single-runway airport, and another site 16 miles farther north,
local officials say. Last year, Cnooc spent $15.1 billion
buying Nexen, another Canadian energy firm with significant gas
holdings in British Columbia.
industry appears to be caught up in a gold rush along this
coast," said Jack Mussallem, mayor of Prince Rupert, population
11,838, which shares a deep-water port with Port Edward. "We're
getting new inquiries monthly."
The community of Kitimat,
125 miles southeast of Prince Rupert, is also bracing for
change. Situated at the end of a picturesque fiord popular with
salmon fishermen, groups led by Chevron, Shell and a smaller
consortium have snapped up abandoned industrial and
native-owned lands for proposed LNG terminals.
"We've probably seen every world class energy company come
and visit us over the past year," said Rose Klukas, economic
development officer in Kitimat, whose city hall operates out of
a partially vacant shopping mall.
Tim Hortons Inc. opened its first coffee-and-doughnut store
in Kitimat in December. The town expects its first hotel to
break ground by year's end, and town officials changed its
bylaws in June to allow escort services, expecting an onslaught
of temporary workers.
The town welcomes all the new attention after a period of
economic malaise. In 2010, West Fraser Timber Co. shut a paper
mill after 40 years in Kitimat.
"We feared our home equity had gone to zero overnight," Ms.
Klukas said. Today, real-estate prices have rebounded, with
home sales doubling last year, according to local real-estate
Driving all the activity are huge shale-gas formations in
the Western Canada Sedimentary Basin, which make up the bulk of
the nearly 1,300 trillion cubic feet of known "tight gas"
resources in Canada that could contain more than 100 years' of
gas at current production levels, according to the Canadian
Society for Unconventional Gas. Long thought too costly to tap,
horizontal drilling and hydraulic fracturing, or fracking, now
promise to unlock much of that gas, trapped in shale and other
Getting it to Asia won't be
simple. At the Chevron-Apache project in Kitimat, bulldozers
are leveling dirt at the site at a cost of hundreds of millions
of dollars, but no formal construction date has been set for
the project, already two years behind its original
Work crews at the site in the lower Kitimat valley are busy
installing some 1,600 ground panels to stabilize the soft soil
after removing 100,000 square feet of clay prone to liquefying.
And a pipeline has yet to be built to carry gas hundreds of
miles, over a coastal mountain range, from fields near the
interior border with Alberta.
"All projects have their challenges," said Joe Geagea,
Chevron's global natural
gas marketing chief. "We have not seen anything that cannot
be overcome with good engineering and good planning."
Back in Port Edward, Petronas has awarded preliminary
contracts for pipelines and other engineering work, and expects
to make a final investment decision next year. While publicly
pursuing separate facilities, Petronas and BG are
discussing ways of possible collaboration, said people familiar
with the companies' plans.
"There are so many proposals out there," said Greg Kist,
president of Pacific Northwest LNG, the name of the
Petronas-backed project. "It's about who's got all
the pieces in place at one point in time."
Geological surveys began the last week of June on the small,
brush-covered islet called Lelu Island it has leased for the
LNG facility. Mr. Kist says it could soon be swarming with
3,500 workers building the first two of three planned trains,
or facilities, for super-chilling 18
million tons of gas annually from 2018.
But first it needs a bridge. A 500-foot span of water
separates the uninhabited island from Port Edward proper. Local
residents say Lelu Island, with no roads or electricity, is a
popular recreational spot. Shawn Pettitt, the town's volunteer
fire chief, lives within sight of the island and recalls family
"This community needs the jobs," he said. "But I'm sure
going to miss the fishing and swimming."
In the early 2000s, soaring gas prices triggered plans to
build dozens of LNG import terminals in the US. In 2008,
Cheniere Energy opened the doors on one such facility in
Cameron Parish, Louisiana. But by then, a revolution in
drilling and extraction was unlocking vast new reserves of gas
Demand for imports fell, and Cheniere laid off much of the
staff. In his Houston office, Cheniere CEO Charif Souki keeps a
model of an LNG
cargo ship his company bought at the time to bring in the gas
imports. The company was forced to sell the ship at a
"A bad memory," Mr. Souki calls it.
Today, the facility is suddenly at the front of the pack in
the new race to export gas. Cheniere is spending $12 billion to
expand the plant to super-chill gas into a liquid state for sea
shipment. Its first shipment is expected in late 2015, and
should be the first to hit the market.
Dow Jones Newswires