ANALYSIS-Eastern Canadian LNG export plans face supply quandary







By Dave Sherwood

PORTLAND, Maine Wed Feb 4, 2015 6:00am GMT


Liquefied Natural Gas Ltd
Repsol SA

PORTLAND, Maine Feb 4 (Reuters) - Eastern Canada has joined a race to export North America's vast natural gas riches to energy-hungry markets overseas, with four projects betting the far-flung Atlantic provinces will be the easiest route to Europe and India.

But firms behind those proposals, such as Spanish oil giant Repsol and Australia's Liquefied Natural Gas Ltd have one major hurdle to clear: huge investments are needed to expand regional pipeline capacity to feed them, and it is unclear who will pay.

"They have come at a rush over the last four or five months," said analyst Mark Pinney, of the Canadian Association of Petroleum Producers. "But these plants will need to get their act together quickly, both at the supply and demand end."

The stakes are high. If successful, the projects would provide a much-needed economic boost in Canada's Atlantic provinces, broaden the market for plentiful North American gas, and shore up energy security in parts of Europe.

It effectively means, however, tapping U.S. gas deposits that would require investing billions of dollars in pipelines crossing New England - a gas-starved U.S. northeast with a history of blocking such investments on environmental grounds.

"The interstate pipeline companies are not going to construct facilities unless they have firm commitments," said Thomas Kiley, president of the Massachusetts-based Northeast Gas Association.

Together, the four projects proposed for New Brunswick and Nova Scotia would take an estimated 1.5 trillion cubic feet of gas per year - the equivalent of three weeks' worth of U.S. consumption - liquefy it, and ship it abroad in tankers from Canada's rocky coast.

The geography makes sense. The voyage from Eastern Canada to Europe is about four days shorter than from the U.S. Gulf Coast, where a cluster of competing terminals has been proposed, and is also quicker than from U.S. East Coast ports. ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^

Graphic of proposed export terminals in Eastern Canada:

Table of proposed U.S. LNG projects: ) ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^

"Our advantage is location and wide community acceptance," said Mark Brown, project director with privately-owned Pieridae Energy, Ltd, which has secured environmental permits for its proposed $10 billion terminal in Nova Scotia.

Slumping energy prices made shipping North America's LNG to Asia unprofitable in recent months, but projects targeting Europe look still viable, in part because of uncertainty about supplies from Russia because of the Ukraine crisis.



Pieridae, for example, said it has signed a 20-year contract to sell 5 million tons of gas per year to Germany's E.ON , the largest of many European utilities looking to cut dependence on Russia.

The problem is a lack of local supply. Quebec, Newfoundland and Labrador, and Nova Scotia have all imposed various forms of moratoriums on hydraulic fracturing - a process required to access shale gas deposits - over concerns about the potential impact on ground water. New Brunswick, which has one of the thickest shale gas reservoirs in North America, is poised to do the same.

With Nova Scotia's offshore fields in decline, that leaves the vast Marcellus shale gas deposit beneath Pennsylvania, Ohio and West Virginia as the next most viable source. That, however, would require expanding or building new pipelines going through New England states that have opposed new energy infrastructure in the past.

"From a Canadian perspective, we look at it, and we think, 'Hmm, where's the gas going to come from to fill all these plants?'" says Pinney.

Officials at the companies have declined to detail their plans for securing supply, with Repsol - the company pushing the largest project - saying the question is still under review.



Spectra Energy's Maritimes and Northeast pipeline is Atlantic Canada's main connection to Marcellus gas. The 889-mile (1430 kilometer) pipe now runs north to south with a capacity of 304 billion cubic feet of gas per year and the company has announced plans to start pumping the other way and add capacity.

But natural gas fuels half the electricity generated in New England, and any export would vie for precious space in its already constrained pipeline network. "I wouldn't say it's a slam dunk," said Spectra spokesman Steve Rankin.

New England's pipeline capacity shortfalls sometimes climb to 1-2 billion cubic feet on the coldest winter days, triggering spikes in electricity costs and factory shutdowns. The four new eastern Canadian plants would require nearly twice the region's current annual consumption of natural gas.

"It just doesn't make sense to build over-sized infrastructure, potentially at a cost to ratepayers, only to have some portion of that exported," said Greg Cunningham, an attorney with the Boston-based Conservation Law Foundation.

But Morningstar analyst Jordan Grimes says New England's pipeline bottlenecks may be an opportunity in disguise for Eastern Canada's gas projects.

"If pipeline companies expand capacity to solve the constraint problems in New England, you are going to have a lot of excess capacity during the nine months of the year that are not winter," he said. "That is where an LNG export facility can come in." (Additional reporting and editing by Richard Valdmanis; Editing by Tomasz Janowski)