Monday, March 1, 2010

Korea Invests in Natural Gas

Nathan VanderKlippe
Gas-hungry Asia is making a major push into one of Canada's most promising energy frontiers, with a billion-dollar investment by a South Korean company that boosts British Columbia's efforts to become a natural gas export hub.
The deal announced yesterday by Korea Gas Corp. also sets the stage for more foreign interest in Canada's natural gas resources, which have struggled under low commodity prices but still form a huge reserve basin that other countries covet.
Korea Gas plans to spend $1.1-billion over the next five years to bring gas to the surface from a huge patch of land that is owned by EnCana Corp. (ECA-T34.490.080.23%) of Calgary.
The company expects to extract a trillion cubic feet of gas from the area, which lies in the lucrative gas fields of B.C.'s north-east corner.
That's nearly enough to feed South Korea's demand for a full year.
Although the Korea National Oil Corp. has invested in both oil sands and Canadian refining assets, this is the first South Korean move on Canada's gas-rich lands, and could precede investments from other Asian nations.
Overseas ownership of the oil sands has already taken root through major investments by Chinese, Japanese, Norwegian and French companies.
Now, observers believe, gas could be next, as the discovery of massive Canadian shale fields attracts notice from gas-poor nations intent on transporting it for their own use.
You'll probably see more companies looking to invest in Canadian natural gas,” said Bill Gwozd, vice-president of Calgary consulting company Ziff Group. “The value chain proposition is increased by owning the resources.”
Foreign attention has been stoked by plans for a liquefied natural gas export port at Kitimat, B.C., which could make Canada a natural supply source for Asian nations, linked by Pacific tankers. Korea Gas was the first major company to sign on to that project, inking a memorandum of understanding to buy 40 per cent of the $3-billion project's 700 million cubic feet of daily export capacity.
The export terminal, developed by Kitimat LNG Inc., has itself has been the object of increased attention. It won an undisclosed investment for a 51-per-cent ownership stake by U.S. gas producer Apache Corp. this January. An investment decision on the terminal is expected by next year. The first gas – which would come as Canada's first ever overseas gas export – could be delivered as early as 2014.
Kitimat LNG has yet to sign any commercial shipping agreements for the project, but chief executive officer Rosemary Boulton called the Korea Gas investment “a really big deal. It really validates the terminal.”
The Korea Gas deal with EnCana will allow it to be both exporter and importer of gas.
Korea Gas has agreed to invest in drilling and development of 72,000 hectares, nearly 20 per cent of EnCana's portfolio in the Montney and Horn River plays. It will gain a 50-per-cent interest in those lands, and expects to produce 50 billion cubic feet of gas from them in 2017.
“These are lands that we're not very active on right now,” said EnCana spokesman Alan Boras. “This helps us accelerate our development of our prospective land base.”
South Korea used about 1.2 trillion cubic feet of gas last year. Although South Korea has discovered some offshore natural gas near its borders, the country is petroleum-poor. Korea Gas is the world's single-largest buyer of liquefied natural gas.
Korea Gas operates three import terminals, and has plans to build two more.
In Asia, natural gas is priced as a multiple to crude oil. That means it currently sells for far more than North American gas. That difference is the key driver for plans to export gas to Asia from Canada.
However, Mr. Gwozd cautioned that the cost to transport it across the Pacific could reach $5 per thousand cubic feet, enough that he believes the profitability of exports through the Kitimat terminal is far from certain.
Ms. Boulton believes gas can be delivered to the Asian market for $3 to $4 per thousand cubic feet.

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