Russia and China’s Natural Gas Deals are a Death Knell for Canada’s LNG Ambitions

By Marin Katusa, Chief Energy Investment Strategist

In recent years, a number of Asian companies have been betting that Canada will be able to export cheap liquefied natural gas (LNG) from its west coast. These big international players include PetroChina, Mitsubishi, CNOOC, and, until December 3, Malaysian state owned Petronas.

However, that initial interest is decidedly on the wane. In fact, while the British Columbia LNG Alliance is still hopeful that some of the 18 LNG projects that have been proposed will be realized, it’s now looking less and less likely that any of these Canadian LNG consortia will ever make a final investment decision to forge ahead.

That’s thanks to the Colder War—as I explain in detail in my new book of the same name—and the impetus it’s given Vladimir Putin to open up new markets in Asia.

The huge gas export deals that Russia struck with China in May and October—with an agreed-upon price ranging from $8-10 per million British thermal units (mmBtu)—has likely capped investors’ expectations of Chinese natural gas prices at around $10-11 per mmBtu, a level which would make shipping natural gas from Canada to Asia uneconomic.

At these prices, not even British Columbia’s new Liquefied Natural Gas Income Tax Act—which has halved the post payout tax rate to 3.5% and proposes reducing corporate income tax to 8% from 11%—can make Canadian natural gas globally competitive.

These tax credits are too little, too late, because Canada is years behind Australia, Russia, and Qatar’s gas projects. This means there’s just too much uncertainty about future profit margins to commit the vast amount of capital that will be needed to make Canadian LNG a reality.

Sure, there are huge proven reserves of natural gas in Canada. It’s just been determined that Canada’s Northwest Territories hold 16.4 trillion cubic feet of natural gas reserves, 40% more than previous estimates.

But the fact is that Canada will remain a high-cost producer of LNG, and its shipping costs to Asia will be much higher than Russia’s, Australia’s, and Qatar’s. So unless potential buyers in Asia are confident that Henry Hub gas prices will stay below $5, they’re unlikely to commit to long-term contracts for Canadian LNG—or US gas for that matter—because compression and shipping add at least another $6 to the price.

Shell has estimated that its proposed terminal, owned by LNG Canada, will cost $40 billion, not including a $4 billion pipeline. As LNG Canada—whose shareholders include PetroChina, Korea Gas Corp., and Mitsubishi Corp.—admits, it’s not yet sure that the project will be economically viable. Even if it turns out to be, LNG Canada says it won’t make a final investment decision until 2016, after which the facility would take five years to build.

But investors shouldn’t hold their breath. It seems like Korea Gas Corp. has already made up its mind. It’s planning to sell a third of its 15% stake in LNG Canada by the end of this year.

And who can blame it? The industry still doesn’t have clarity on environmental issues, federal taxes, municipal taxes, transfer pricing agreements, or what the First Nations’ cut will be. And these are all major hurdles.

Pipeline permits are also still incomplete. The federal government still hasn’t decided if LNG is a manufacturing or distribution business, which matters because if it rules that it’s a distribution business, permitting is going to be delayed.

And to muddy the picture even further, opposition to gas pipelines and fracking is on the rise in British Columbia and elsewhere in Canada. While fossil fuel projects are under fire from climate alarmists the world over, Canadian environmentalists are also angry that increased tanker traffic through its pristine coastal waters could lead to oil spills.

Canada is now under the sway of radical environmental groups and think tanks like the Pierre Elliot Trudeau Foundation, which take as a given that Canada should shut down its tar sands industry altogether. For these people, there’s no responsible way to build new fossil fuel infrastructure.

Elsewhere, investors might expect money and jobs to do the talking, but Justin Trudeau’s Liberal Party, which has called for greenhouse gas limits on oil sands, is now leading the conservatives in the polls. (Just out of curiosity, does Trudeau plan on putting a cap on the carbon monoxide concentration from his marijuana agenda? But I digress.) If a liberal government is elected next year, it might adopt a national climate policy that would cripple gas companies and oil companies alike.

Some energy majors are already shying away from Canadian LNG. BG Group announced in October that it’s delaying a decision on its Prince Rupert LNG project until after 2016. And Apache Corp., partnered with Chevron on a Canadian LNG project, is seeking a buyer for its stake.

Not everyone is throwing in the towel. Yet. ExxonMobil—which is in the early planning phase for the West Coast Canada LNG project at Tuck Inlet, located near Prince Rupert in northwestern British Columbia—has just become a member of the British Columbia LNG alliance.

But Petronas was a key player. It was thought that the company would be moving ahead after British Columbia’s Ministry of Environment approved its LNG terminal, along with two pipelines that would feed it.

Instead, Petronas pulled the plug. We can’t know how many things factored into that decision nor whether it’s absolutely final. All the company would say is that projected costs of C$36 billion would need to be reduced before a restart could be considered. (That $36B figure includes Petronas’s 2012 acquisition of Calgary based gas producer Progress Energy Resources Corp., as well as the C$10 billion proposed terminal, a pipeline, and the cost of drilling wells in BC’s northeast.)

This latest blow leaves Canadian LNG development very much in doubt. In fact, most observers believe that Petronas’s move to the sidelines probably sounds the death knell for the industry, at least for the foreseeable future.
For more on how the Colder War is forever changing the energy sector and global finance itself, click here to get your copy of Marin’s New York Times bestselling book. Inside, you’ll discover more on LNG and how this geopolitical chess game between Russia and the West for control of the world’s energy trade will shape this decade and the century to come.

The article Russia and China’s Natural Gas Deals Are a Death Knell for Canada’s LNG Ambitions was originally published at casey research

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EIA: The Strait of Hormuz is the World's Most Important oil Transit Choke Point

The Strait of Hormuz (shown in the oval on the map), which is located between Oman and Iran, connects the Persian Gulf with the Gulf of Oman and the Arabian Sea. Hormuz is the world's most important oil choke point due to its daily oil flow of almost 17 million barrels per day (bbl/d) in 2011, up from between 15.5-16.0 million bbl/d in 2009-2010. Flows through the Strait in 2011 were roughly 35% of all seaborne traded oil, or almost 20% of oil traded worldwide.

On average, 14 crude oil tankers per day passed through the Strait in 2011, with a corresponding amount of empty tankers entering to pick up new cargos. More than 85% of these crude oil exports went to Asian markets, with Japan, India, South Korea, and China representing the largest destinations.
At its narrowest point, the Strait is 21 miles wide, but the width of the shipping lane in either direction is only two miles, separated by a two mile buffer zone. The Strait is deep and wide enough to handle the world's largest crude oil tankers, with about two-thirds of oil shipments carried by tankers in excess of 150,000 deadweight tons.

Several alternatives are potentially available to move oil from the Persian Gulf region without transiting Hormuz, but they are limited in capacity, in many cases are not currently operating or operable, and generally engender higher transport costs and logistical challenges.

• Alternate routes include the 745-mile Petroline, also known as the East-West Pipeline, across Saudi Arabia from Abqaiq to the Red Sea. The East-West Pipeline has a nameplate capacity of about 5 million bbl/d, with current movements estimated at about 2 million bbl/d.
• The Abqaiq-Yanbu natural gas liquids pipeline, which runs parallel to the Petroline to the Red Sea, has a 290,000-bbl/d capacity.
• Additional oil could also be pumped north via the Iraq-Turkey pipeline to the port of Ceyhan on the Mediterranean Sea, but volumes have been limited by the closure of the Strategic Pipeline linking north and south Iraq.
• The United Arab Emirates is also completing the 1.5 million bbl/d Abu Dhabi Crude Oil Pipeline that will cross the emirate of Abu Dhabi and end at the port of Fujairah just south of the Strait.
• Other alternate routes could include the deactivated 1.65-million bbl/d Iraqi Pipeline across Saudi Arabia (IPSA) and the deactivated 0.5 million-bbl/d Tapline to Lebanon.

EIA's World Oil Transit Chokepoints analysis brief contains additional information about other chokepoints, and the Middle East & North Africa overview contains additional information about countries in the region.

Today's 50 Top Trending Stocks

Hyundai, Samsung May Jump 80% on Demand for Oil Drilling Ships, Mirae Says

South Korean shipbuilding stocks may jump as much as 80 percent in four months as they catch up with gains in oil prices, according to Mirae Asset Securities Co., an affiliate of the nation’s second largest money manager.

The Korea KRX Shipbuilding Index (KRXSHIP), which tracks Hyundai Heavy Industries Co., Samsung Heavy Industries Co. and eight other shipbuilding stocks, may rebound as rising oil prices spur demand for drill ships and liquefied natural gas tankers, said Lee Sokje, a Seoul based Mirae analyst. The index has tumbled 42 percent since reaching the highest this year on May 2.

“Looking at how oil prices are doing, it’s only a matter of time before shipyard shares follow,” Lee said by phone on Dec. 2. “This is a very good opportunity to buy.”

Brent crude, the benchmark used to price two-thirds of global oil supplies, has jumped about 9.8 percent since Oct. 4 because of easing economic concerns and political tensions in Iran. The price may rise to $127.50 a barrel at the end of next year as the global economy avoids recession, Goldman Sachs Group Inc. said in a Dec. 1 report. It traded at $109.60 Dec. 2..... Read the entire article.


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Phil Flynn: Bailout Bounce

There is nothing like a big bailout to get energy traders' minds off of the dangerous world we live in. Oil prices are defying a stronger dollar as the market is rallying on the news that Europe finalized a 67.5 billion Euro bailout of Ireland and created a plan that could have bondholders taking haircuts to help pay for their solvency.

Yet oil may also be getting a geo-political bounce as tension rise in the world and I am not just talking about the Korean Peninsula. A revelation from Wiki-Leaks may add to tensions in the Middle East and perhaps even threaten the delicate peaceful balance that sort of exits there. Reuters News reported that, “Saudi King Abdullah has repeatedly urged the United States to attack Iran’s nuclear programs, according to a vast cache of diplomatic cables released on Sunday in an embarrassing leak that undermines U.S. diplomacy.

The more than 250,000 documents, given to five media groups by the whistle blowing website Wiki Leaks, provide candid and at times critical views of foreign leaders as well as sensitive information on terrorism and nuclear proliferation filed by U.S. diplomats, according to The New York Times. The White House condemned the release by Wiki Leaks and said the disclosures may endanger U.S. informants abroad.” It could also create tension in the OPEC cartel as Iran may try to retaliate against Saudi Arabia in some way.

The Saudis already have their hands full fighting Al-Qaeda and other terrorist rightfully fear a nuclear armed state sponsor of terror like Iran. The Saudi King in the leaked memo said that the US should, “cut off the head of the snake”. It’s good to be back! Make sure you are signed up for Phil's daily trade levels! He can be reached at pflynn@pfgbest.com. Also make sure you catch Phil on the Fox Business Network where you can see him every day!


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Crude Oil Futures Decline on Concern Ireland Crisis May Spread, Tension in Korea

Crude oil fell from a one week high on concern Ireland’s debt crisis will spread to Portugal and Spain, reducing economic growth and fuel demand, and as tensions in Korea mounted. Oil dropped as the euro declined to a two month low against the dollar, curbing investor demand for commodities. Euro area finance ministers plan to complete an agreement on an Irish bailout on Nov. 28, a European Union official said on condition of anonymity. North Korea warned its confrontation with South Korea could lead to war.

“Concerns that the European debt crisis will spread pushed the euro to a new two month low against the dollar,” said Tom Bentz, a broker with BNP Paribas Commodity Futures Inc. in New York. The oil market is down “primarily on European debt worries.” Crude oil for January delivery slipped 10 cents to settle at $83.76 a barrel on the New York Mercantile Exchange. The January contract gained 2.2 percent this week. The front month contract added 2.8 percent for the week and has increased 7.4 percent in the past year.

Brent crude oil for January settlement declined 52 cents, or 0.6 percent, to end the session at $85.58 a barrel on the London based ICE Futures Europe exchange. Brent added 1.5 percent for the week. Shoppers crowded U.S. stores for Black Friday, the biggest shopping day of the year and a bellwether for the holiday season. Analysts’ estimates for holiday sales vary from little changed to increases of 4.5 percent. The National Retail Federation has forecast November-December holiday sales will rise by 2.3 percent from a year ago, the most since 2006.......Read the entire article.

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Commodity Corner: Crude Oil Falls on Europe, Korea Concerns

Crude dropped for the third day Tuesday amid a backdrop of lingering concerns about the European debt crises and the two Koreas' shelling exchange.

Light, sweet crude futures fell 49 cents, settling at $81.25 a barrel on the New York Mercantile Exchange. Oil tumbled 0.6 percent Tuesday, a day after Ireland sought a financial bailout from the European Union and International Monetary Fund. German Chancellor Angela Merkel's comments that the euro is in an "exceptionally serious" situation added to the European debt fears, sending the dollar up against the euro. A stronger dollar curbs commodities' appeal for buyers with foreign currencies.

Escalating tensions between North and South Korea also contributed to decreasing prices. North and South Korea's exchange of artillery fire early Tuesday drove investors to seek refuge from riskier assets, according to analysts. The intraday range for crude prices was $80.28 to $82.10 Tuesday.

Natural gas for December delivery fell by less than a penny Tuesday to settle at $4.26 per thousand cubic feet. The decline came as forecasts showed milder weather in the U.S. The National Weather Service now expects normal to above normal temperatures in the Northeast for the next six to 10 days. The December contract for natural gas expires Wednesday, along with the release of this week's inventory report. It will be released a day earlier due to the U.S. Thanksgiving holiday on Thursday. Henry Hub natural gas peaked at $4.29 and bottomed out at $4.115.

Front month December gasoline also settled lower, falling 1.77 cents to end Tuesday's trading session at $2.13 a gallon. RBOB gasoline fluctuated between $2.10 and $2.15 Tuesday.


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Another War and Then Another War and Then… What is This Groundhog Day?

If you haven’t heard the latest news about North Korea attacking and making aggressive moves towards Yeonpyeonga, a small South Korean island, you missed what moved the gold market today. South Korea scrambled fighter jets and returned artillery fire after North Korea provoked the peninsula’s most serious confrontation in decades.

What you probably did not know was the $20 move up in gold today was signaled the day before by our “Trade Triangles.” How was this possible? It has everything to do with some very cool technology developed by MarketClub.

Yesterday, MarketClub through its “Trade Triangle” technology flashed a buy signal in gold. This was 24 hours before today’s big up move! How could it be possible that a technology could know what was going to happen before it happens?

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Phil Flynn: Crude Oil Is Shell Shocked

North Korea’s shelling of a South Korean Island is raising fears of a global catastrophe and the impact on oil might be dramatic. Overnight in what is being called the most aggressive attack since the Korean War Cease fire back in 1953 North Korea's shelling of South Korea is shaking up global commodity markets. Oil prices are falling with traders seeking safe haven in the US dollar as they wait and try to figure out just what the heck is behind North Korea's aggressive action. North Korea, without provocation, decided to shell a South Korean Island and as reported by the New York Times.

“North and South Korea exchanged artillery fire on Tuesday after dozens of shells fired from the North struck a South Korean Island near the countries’ disputed maritime border. Two South Korean soldiers were killed, 15 were wounded and three civilians were injured", said Kiyheon Kwon, an official at the Defense Ministry. Reuters News reported, “South Korea has warned North Korea it would “sternly retaliate” to any further provocations. There may be a lot of reasons for North Korea’s action. Perhaps it is because their secret nuclear weapons facility was exposed. That led to reports that South Korea’s defense minister saying that South Korea might again might hoist......Read the entire article.




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Financial Markets Tumble on Geopolitical Tensions and Fears over China's Demand

What happened today has drawn a bit of the market focus from sovereign crisis in peripheral European economies. Unfortunately, the incidents only hurt market sentiment further, instead of recovering it. South Korean military reported that North and South Korea exchanged military fire this morning and at least 1 South Korean soldier was killed and 13 injured. Korean won and many Asian currencies weakened as investors sought shelter in the US dollar.

News said that China's biggest banks are close to reach their lending quotas and will stop making new loans to avoid exceeding the limits. Commodities especially oil and base metal prices were pressured as curbs in lending would slow investments and hence demand growth. Gold price remained resilient although early gains were partly pared amid broad based decline in commodity prices.

Tensions between the two Koreas have intensified since March when the sinking of a South Korean warship killed 6 sailors. North Korea denied any responsibility. Yonhap News reported North Korea the morning fired tens of artillery shells near the western border with South Korea, in prompting the South's military to fire back.

The attack has caused at least 1 South Korean soldier was killed and 13 injured. Market sentiment has been badly hurt with equities and growth currencies slumping. The MSCI Asia Pacific Index excluding Japan tumbled more than -2%. While South Korea's KOSPI index slipped -0.79%, Hong Kong's HSI plunged -2.67%, Singapore's Strait Times Index fell -2.03% while China's Shanghai Composite Index slid -1.94%. Korean Won fell -2.60% against the dollar while other currencies also fell.

Rumors said Chinese banks such as Industrial & Commercial Bank of China, Bank of China and Agricultural Bank of China have almost reached their annual lending quotas and will only lend as existing loans are repaid. New loans have reached RMB6.9 trillion as of November, approaching the government's cap of RMB7.5 trillion for the full year. Also weighed on commodity prices was the Customs' final trade data for October. Several commodities showed decline in imports, raising fears that China's demand has moderated. For instance, imports for both copper concentrate and refined copper tumbled -30% m/m in October. Imports for nickel, zinc and lead also contracted during the month.......Read the entire article and charts.



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