Next best thing to oil

Nicolas Van Praet
The Montreal Gazette
September 18, 2004

U.S. President George W. Bush’s top energy regulator sparked stupor in Quebec this week when he said it might be possible for liquefied-natural-gas plants proposed for eastern Canada to meet much of the energy demand of New England.

Activists were outraged by Patrick H. Wood III’s words, saying there’s no way people in Quebec, New Brunswick or Nova Scotia should approve industrial energy projects rejected by their U.S. neighbours.

Officials with gas company Gaz Metro were insistent. Their multimillion-dollar gas plan doesn’t provide for any exports to the United States.

As for Wood, he was simply aware of his audience. It’s smart to tell Americans their energy needs could be secured by plants next door, especially when you haven’t had much success getting such plants approved at home.

Liquefied natural gas, or LNG for short, has received little public attention so far in Canada. But with six LNG-terminal projects in development across the country, including two announced this year in Quebec, it is about to become a big deal.

Why? Demand is one reason.

LNG, which is simply natural gas chilled into liquid form for transport by boat from places that have it to places that need it, is becoming a hot commodity by default.

“Quite simply, in the absence of an economic alternative to oil and gas as the primary fuel of global economic activity, and allowing for the decline in major oil provinces, still-abundant international gas will be the fuel of the 21st century,” Deutsche Bank said in a July research report.

Another reason is the resistance to LNG and the divisiveness it has sparked within communities. Plans for LNG facilities have pitted people who want to preserve traditional economic livelihoods like fishing against others who believe LNG will bring a far greater prosperity with a manageable risk.

Promoters have had difficulty persuading local populations of the merits of LNG terminals. The U.S. Gulf Coast area supports the technology. The U.S. northeast is lukewarm to it, at best. Seven communities there have rejected recent project proposals.

Of 41 LNG terminal projects announced for North America, experts say they expect a maximum of five to be operational by 2010.

Four are already online. They are plants that have been reactivated after years of neglect.

TransCanada Corp., whose plan for an LNG terminal in Harpswell, Me., was rejected by residents there this spring, is trying its luck again, this time in Gros Cacouna in Quebec’s northeast corner.

Meanwhile, Gaz Metro, Quebec’s natural-gas distributor, faces opposition to its LNG project from activists brandishing the same impact studies as those used by lobster fishermen in Harpswell. The utility recently polled residents to gauge their reaction to the project.

Detractors point to the few but spectacular explosions that have occurred at LNG facilities, and say natural environments will be ruined. They also argue demand for energy is being stimulated by business subsidies and unwise consumption.

“The risk of accidents is not justified by the demand for energy,” said Tom Adams, head of Energy Probe, a non-profit environmental and consumer group.

LNG promoters say scare tactics by activists and a North American public that simply isn’t informed enough are holding back development of a safe and reliable source of energy.

“A lot of what (companies) have learned is that they should just pour a lot of effort into improving the access to information about this product,” said Bryan Gormley, vice-president of the Canadian Gas Association.

The stakes are huge. The U.S. Energy Department says natural gas is the fastest-growing primary energy source. Trade in LNG grew by 62 per cent between 1995 and 2002, the department reports.

Proposals for liquefied-natural-gas terminals along the Canadian and U.S. eastern seaboard sprouted like weeds following two years of high gas prices and growing demand for natural gas, especially for power generation. The construction in 1999 of a plant in Trinidad to export to the nearby North American market also drove a renewed interest in LNG.

But experts like energy consultant James Jensen argue the major problem in making an LNG project work is being lost in the hype: supply.

Supply is the expensive and tricky part, Deutsche Bank noted in its recent LNG report. For a typical $5-billion project, producing the gas and cooling it – the supply side – represents 60 per cent of the costs. And project resistance can happen in supply countries, too.

“Lobster fishermen in Maine are no less challenging than lobster fishermen in Angola,” the bank said.

Today’s supply crunch is due to factors that include a move by South Korea and Japan, the world’s largest LNG buyers, to purchase more gas.

Problems at supply plants have also resulted in a situation where demand is now outstripping available product. Deutsche says four of the world’s estimated 150 tankers are sitting idle with no product to carry. At the same time, existing LNG plants in the U.S. have not hit capacity.

It is within this environment that energy companies are announcing LNG terminal projects in North America. These typically consist of a pier, three or four storage tanks, and a building to convert the liquid natural gas back into gaseous form.

Companies with good partners that have a solid chain built from supply to sale will succeed, Jensen said. Companies doing it all themselves – from supply to transport to marketing – will also be winners, Deutsche said. It named Exxon Mobile and Shell as two examples.

LNG projects operate like a game of musical chairs, Jensen said. Those left standing without a contract or an essential partner often defer or abandon their projects.

Companies also try to posture and hope to psych rivals out.

“In an environment in which there are more projects than will finally be realized, part of the gaming means that you try to convey to the market that you’re way ahead and that the other guy hasn’t got a hope,” Jensen said. “The guy who blinks first is the guy who goes.”

The gaming is now on in Quebec between the Gaz Metro consortium and the rival partnership of TransCanada and Petro-Canada. It’s made even more interesting by the fact Gaz Metro is launching its Rabaska project for the sole reason of freeing itself from its dependency on TransCanada, from which it gets its natural gas pumped in from Alberta.

The market for LNG clearly exists. But with a public that’s still somewhat unconvinced, uncertain supply, and business interests championing competing visions of economic opportunity, anything can happen.

 

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