Kogas Agrees Kitimat LNG Supply Deal
Korea Gas (Kogas) has signed a contract to buy 2mn tonnes per annum (tpa) of liquefied natural gas (LNG) from the planned Kitimat LNG project in British Columbia in Canada. Under a memorandum of understanding (MoU) detailing the sales and purchase agreement (SPA), Kogas will receive 2mn tpa for 20 years, with the contract thought to be worth more than US$20bn. Kogas also has an option to take equity in the facility. The deal is a boost to the project, which has been seeking formal expressions of interest from potential users since November 2008. It also diversifies Kogas' LNG supply base, adding to its long-term contracts with Qatar, Oman, Malaysia, Brunei, Indonesia, Australia, Yemen and Russia.
The proposed Kitimat LNG terminal is designed to receive natural gas via pipeline from Western Canada, to liquefy the gas and to then export the LNG by sea to key consuming markets in Asia. The plant will have liquefaction capacity of 3.5-5mn tpa and will also include two 210,000 cubic metre LNG storage tanks. Four to five shipments of LNG per month are envisioned. Kitimat expects to begin construction on the terminal in 2009, with commercial operation beginning at the end of 2013.
Kitimat LNG had originally planned to build a CAD700mn, 7tpa regasification terminal at the Bish Cove site to import LNG from Asia and/or Russia's Far East Sakhalin projects to supply North American markets. In September 2008, however, the company announced that it had decided to scrap these plans in favour of building an LNG export terminal. Several reasons were cited for the volte-face, chief among which was that rising gas demand in Asia and recent gas supply growth in North America, particularly in the US, had led to significantly higher gas prices in Asia than in North America. In addition, Kitimat said that delays and cancellations of several LNG liquefaction terminals had caused major LNG shortfalls globally, leading to regasification terminals in North America being underutilised. The underlying motive, however, is that Kitimat was unable to secure the requisite LNG supply contracts to make the import terminal project feasible.
With LNG demand in Asia set to continue its strong growth and prices in the Pacific Basin likely to remain higher than in the Atlantic Basin, the decision to proceed with an export terminal appears sensible. This will depend of course on ensuring adequate gas supplies from Western Canada, which is a risk as output is declining in the area and according to a September 2008 report by brokerage FirstEnergy Capital 'the current pace of drilling is simply insufficient to prevent more production declines from occurring' in the region. Kitimat has said that large new discoveries in north-eastern British Columbia will boost production in the Western Canadian Sedimentary Basin. Negotiation is currently underway with other potential investors and buyers for further offtake and equity stakes in the project. The degree of interest by other possible partners will depend on their assessment of the supply risks and the sustained growth potential of demand and prices in the Asia Pacific LNG market.