With global LNG demand projected to exceed supply by a wide margin, the prospects for North American exports of liquefied natural gas are exceptionally strong. But an unexpected development has raised a question about Canadian participation in this emerging export opportunity.

The question is: Will the Canadian government decide to block any of the pending acquisitions of its E&P players by foreign energy majors?

The answer will have long-term impacts on the LNG markets because the majors have the financial muscle to expedite sorely needed infrastructure construction in Canada.

The question arose on October 19, when Canada’s Ministry of Industry tentatively denied the application from Petronas Carigali Canada Ltd. to acquire Calgary-based Progress Energy Resources for $5.24 billion.

Industry Minister Christian Paradis said he reached his decision because he wasn’t “satisfied that the proposed investment is likely to be of net benefit to Canada.”

Net-benefit reviews of proposed foreign acquisitions are mandated by the Investment Canada Act. Minister Paradis didn’t reveal the reasons for his decision because of the ICA’s confidentiality provisions, but he pointed out that Petronas had 30 days in which to submit “additional representations” for further review.

On November 20, Petronas announced that it has submitted “additional representations,” and that – as provided in its “arrangement agreement” with Progress Energy – it has exercised an option to extend the “outside date” for the acquisition. Under this agreement, the pending deal may be extended in 30-day increments (for up to 90 days) as the parties await the ministry’s final decision.

So, unless the ministry issues its decision before Dec. 30, Petronas and Progress have the option to extend the deal’s “outside date” one more time – out to Feb. 1 – after which “either party has the right to terminate the agreement,” the Petronas announcement says.

Investors are Lining Up

Other energy majors targeting Canadian E&P companies include the China National Offshore Oil Corp., which has offered to buy Calgary-based Nexen, Inc. for $15.1 billion; and ExxonMobil, which has offered $2.92 billion for another Calgary company, Celtic Exploration, Ltd.

Without knowing the reasons for the Canadadian Government’s initial Petronas decision, it’s impossible to predict if the ExxonMobil and CNOOC deals are also in jeopardy. However, the decision shouldn’t be interpreted to mean that Canada has become any less interested in exporting gas – liquefied or otherwise – from its vast reserves in the western provinces.

Chris McCluskey, spokesperson for Canadian Natural Resources Minister Joe Oliver, told Breaking Energy that “our government is favorable to proposals to transport and export natural resources west, east and south. We have the largest trade relationship in the world with the US, but we’re very focused on creating new markets that allow Canadian businesses to benefit from opportunities in the fastest growing economies in the world; namely, India, China, South Korea, Japan, and others.”

Currently, McCluskey pointed out, Canada sells 100% of its natural gas (and 98% of its oil) to the US. But Canada has a compelling reason to seek additional markets for its natural gas.

“The explosive growth of [US] shale gas has pushed back from the US market some of the imports from Canada, and that process will continue over the coming years,” Bentek Energy analyst Javier Diaz told Breaking Energy. “So, there is a lot of incentive for Canada to find new markets.”

But Canada doesn’t have the infrastructure in place to export LNG from its western provinces, Diaz observed, adding that “what the market is demanding – especially the Asian buyers – is Henry-hub or other gas-linked prices [for LNG exports]. They’re interested in diversifying their sources of supply and, more importantly, the possibility of diversifying price structures.”

Asked why the prices for Canada’s LNG exports would be linked to oil prices instead of gas prices, Diaz said that, in his opinion, the Canadian price structure is intended to ensure the financial viability of its LNG projects.

“It’s the same program you see in Australia,” he said. “In their case, it’s more exaggerated because they have more infrastructure to develop – from the production fields to the pipeline infrastructure, liquefaction facilities, and so forth – whereas in Canada you need pipelines and liquefaction facilities, although their production is in place.”

Does that mean the Canada’s export pricing could dissuade foreign investment in its E&P companies?

there is a lot of incentive for Canada to find new markets.”

“No,” Diaz said. “The Canadians have an advantageous location to export to the Asian markets, with shipping costs and transit times very similar to those from Australia. I’m assuming that, once they build the necessary pipeline infrastructure, they will have access to cheaper field stock than the Australian projects because the Australians still have to develop their production.

“So,” Diaz continued, “I still expect that, even if there’s an upward revision in cap-ex, the Canadian projects will be competitive with US exports to Asia because their shipping costs will be less than those from the Gulf of Mexico – especially if US producers have to pay additional fees for using the expanded Panama Canal, although it’s not clear how expensive that’s going to be.”

A recent Bentek report predicts that global LNG demand will increase 39% over the next five years, – substantially more than the 27% growth in supply that Bentek expects during that timeframe. And the E&P companies are anxious to bridge the gap.

According to the Federal Energy Regulatory Commission’s Office of Energy Projects, seven new export terminals and/or liquefaction facilities have been formally proposed to FERC – with an additional six locations identified as potential sites. Of the 13 proposed or potential export sites on FERC’s map, nine are on the Gulf Coast; two are in the Pacific Northwest; and two are on the East Coast.

FERC also lists two, proposed export terminals in British Columbia, along with a third location (also in BC) identified as a potential site.

While the US may have many more LNG facilities on the drawing board, their future depends on the answer to a major regulatory question as well: When will the Energy Department process the licensing applications for LNG exports and export terminals?

Bentek’s Diaz said that the Energy Department is waiting for the results of a study intended to determine how the department’s licensing decisions will impact the domestic gas market.

Meanwhile, “In some cases,” Diaz said, “the uncertainty about which, and how many, projects will be licensed to export LNG to non-free-trade-agreement countries is causing problems with the efforts to source buyers and lock up agreements. We don’t expect the projects to obtain financing without agreements and contracts for the majority of their production over long periods of time.”