Bloomberg News

Asian LNG Exports Drive Canadian Gas Industry Purchases

June 29, 2012

The prospect of shipping liquefied natural gas to Asia helped convince Petroliam Nasional Bhd to buy Canada’s Progress Energy Resources Corp. (PRQ) The purchase may trigger other partnerships for cash-strapped Canadian producers.

Malaysia’s state-owned energy company, known as Petronas, said it will push ahead with a 2011 agreement with Calgary-based Progress to develop a LNG terminal on Canada’s Pacific coast as part of its C$4.8 billion ($4.64 billion) acquisition announced yesterday. The companies plan to start shipments by 2018, Progress Chief Executive Officer Michael Culbert and Petronas Executive Vice President Anuar Ahmad said in a joint interview.

“LNG is an important part of where our gas will go,” Culbert said yesterday in the telephone interview. “From an economic perspective, that gas should be directed to the LNG projects.”

British Columbia’s Montney Basin, one of Canada’s largest proven shale-gas reserves, is thousands of kilometers from North America’s eastern markets and gas prices are languishing near a 10-year low. To get the gas flowing to Asia, there will need to be more company takeovers and land acquisitions in Canada like the Petronas-Progress deal, said Jennifer Stevenson, a Calgary- based fund manager at Dynamic Funds.

Potential Canadian targets include Painted Pony Petroleum Ltd. (PPY) and Bonavista Energy Corp., Stevenson, who helps oversee about C$5 billion in assets, said by phone.

Canadian Plans

“Consolidation is inevitable,” Stevenson said. “For the small guys, their balance sheets are weighing on them heavily and they’re not growth stocks because they don’t have the capital.”

Petronas is one of a handful of energy companies including Royal Dutch Shell Plc, Apache Corp., and the U.K.’s BG Group Plc that are exploring proposals to ship LNG from Canada’s Pacific coast, developments that may turn Canada into one of the largest exporters of the fuel. About 62 percent of Canadian gas was exported to the U.S. in 2010, according to the Canadian Association of Petroleum Producers, an industry group.

Petronas plans to spend a record 300 billion ringgit ($94 billion) over five years to help replenish Malaysia’s diminishing reserves, Chief Executive Officer Shamsul Azhar Abbas said last year. The company has embarked on a worldwide review of its portfolio and it wants to add more energy assets in developed markets such as Canada and Australia, Shamsul said March 30.

The sole manager of Malaysia’s energy reserves is seeking to reverse a production slump after oil and gas output from the country fell to 1.61 million barrels of oil equivalent a day in the year ended March 31, 2011, from 1.63 million a day a year earlier, according to the company’s annual report.

Low Prices

Gas prices dropped yesterday after a government report said U.S. stockpiles increased more than forecast last week. Futures for August delivery slid 1.9 percent to $2.722 per million British thermal units on the New York Mercantile Exchange. The price is down 8.9 percent this year and fell to a 10-year intraday low of $1.902 per million Btu on April 19.

Larger producers such as Encana Corp. (ECA) and Talisman Energy Inc. (TLM) are counting on a switch to gas liquids like butane to help them survive the low prices.

Both Encana and Talisman have assets they may want to sell to larger competitors, said Gordon Currie, an analyst at Salman Partners in Calgary. Encana already has a joint venture with Mitsubishi Corp. to develop its resources in the Montney Basin and is working with Apache and EOG Resources Inc. on a plan to export LNG from the coastal town of Kitimat, British Columbia.

Painted Pony, Birchcliff Energy Ltd. (BIR) and ARC Resources Ltd. (ARX), all based in Calgary, are also among companies that would be attractive to larger buyers, he said.

‘Large Resource’

Painted Pony rose 1.7 percent to C$7.23 yesterday in Toronto. Bonavista (BNP) climbed 5.2 percent to C$15.50, while Birchcliff closed 2.1 percent lower at C$5.19. ARC rose 8.7 percent to C$22.19 a day after its rating was raised to buy from hold by Roger Serin, an analyst at TD Newcrest Inc.

Potential LNG shippers from Canada will need a 20-year supply of the fuel in order to be successful, said Ari Levy, a fund manager at Toronto-Dominion Bank in Toronto.

“You need a large resource to back an LNG project,” Levy, who manages the TD Energy Fund, said in an interview yesterday on Canadian news channel BNN. Canadian companies have been held back by their reliance on the U.S. market, he said.

“It’s in the interests of producers to be exposed to more markets and expand the number of buyers,” he said.

Gas Differential

Driving global interest in Canada’s gas reserves is the difference in North American prices compared with those paid in Asia for the fuel, which is linked to the price of oil. Oil- linked prices averaged $16.66 per million British thermal units of gas in the first quarter while in New York gas futures averaged $2.50 per million Btu.

Petronas’s LNG project should be highly profitable and benefit from oil-linked prices, Anuar said yesterday.

Chinese consumption of the fuel has increased an average of about 16 percent annually from 2000 to 2010 and will continue expanding as much as 12 percent a year through 2020, according to Bloomberg New Energy Finance estimates.

Japan, the world’s largest LNG importer, is looking to buy more gas after idling its nuclear power plants following the March 2011 earthquake and the subsequent meltdown at the Fukushima Dai-Ichi nuclear power plant.

Asian buyers will probably continue looking to Canada as a potential energy supplier, said Terry Marshall, a senior vice president at Moody’s Investors Service.

“There’s tremendous interest in Asia for oil and gas assets and Canada is open for business,” Marshall said. “They’ll probably keep coming.”

To contact the reporter on this story: Jeremy van Loon in Calgary at jvanloon@bloomberg.net

To contact the editors responsible for this story: David Scanlan at dscanlan@bloomberg.net; Susan Warren at susanwarren@bloomberg.net


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