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Malaysia's state-owned oil and gas company just made a
multibillion-dollar bet that Canada will choose to export its shale gas
riches. Even though the odds of securing permission to export liquefied
natural gas (LNG) from the Canadian west coast are still pretty poor, the
costs of such an endeavor immense, and the timeline in question very long, Petronas is putting $5.5 billion on the table – far
more than it has ever spent on an acquisition before – to secure a
large foothold in the British Columbia shale gas scene.
It's yet another sign that things are getting serious
in the global race for resources.
The race for resources drives much of our thinking
within the Casey Research energy group. It's more than a common theme –
we believe that it is one of the strongest forces at work in our world today,
and that it plays a role in determining the tone of many international
relationships and domestic policies. Countries that have resources, from
Russia to Australia, are altering fiscal structures and ownership rules so as
to glean as much benefit as possible from their riches, while still reserving
sufficient supplies to fuel their futures. Countries that lack
natural-resource wealth, such as Japan and South Korea, are racing to lock up
projects and partnerships abroad that can supply their future resource needs.
And a race it is, because they are not alone. There are
few countries in this world with natural supplies of all the energy
commodities they need – Australia, Russia, and Canada are among the few
that do – and everyone else has to constantly wheel and deal to secure
imports. Now the easy deposits of many energy resources are disappearing, but
global demand continues to rise. The result: stiffer competition.
PetronasPetronas
is buying Calgary-based Progress Energy Resources (T.PRQ) for C$4.8 billion
in cash. Including convertible debt the deal is valued at about C$5.5
billion. In announcing the deal, Petronas also said
it has chosen Prince Rupert, BC, as the home of its planned LNG export
terminal.
So the company is spending billions of dollars to
acquire 1.9 trillion cubic feet of proven and probable gas reserves…
but there is no guarantee that they will be able to export any of that gas in
the foreseeable future.
Pipelines have become a highly contentious issue in
North America – just as US citizens are embroiled in a debate over the
Keystone XL pipeline which would transport oil sands crude south, Canadians
are arguing the merits and liabilities of the Northern Gateway pipeline,
which would move oil sands crude to the west coast for transport to Asia. One
of the big arguments against Northern Gateway is the danger of sending tanker
traffic through the coastal waters of northern BC, where an oil spill would
be near impossible to clean and would irreparably damage a pristine
ecosystem.
The same arguments will surface with natural gas. The
LNG terminal that Petronas envisions in Prince
Rupert would send loaded tankers through those same sensitive waters, an idea
that is far from accepted in the region at this point. The pipelines ferrying
natural gas to that terminal would cross mountainous terrain burdened with
heavy winter snowpack and dramatic summer melts that regularly cause
hillsides to slide and rivers to swell their banks and take out bridges –
all points that opponents will use to argue that the potential risks outweigh
the benefits.
In short: Petronas and its
peers face a steep, uphill battle in their quest to permit pipelines and LNG
terminals on the west coast. But as we wrote last week, the potential for big profits will also
play a role.
Remember, natural gas in its gaseous state is a
landlocked commodity. Its low energy-to-volume ratio renders it uneconomic to
ship, which means pipelines are the only option. To move natural gas over
oceans it has to be condensed into LNG, increasing the energy-to-volume ratio
dramatically and making it economic to load onto tankers and send around the
world.
Many major global economies rely on LNG to meet their
natural gas needs; and demand is on the rise. In 2011, global LNG trade grew
by 9.4% compared to 2010, with Asia generating most of the demand increase.
Japan is the world's top LNG importer, having bought 79.1 million tonnes in 2011; South Korea is in second place with
imports near 36 million tonnes. India, China, and
Taiwan are all also major LNG buyers, helping to lift Asia into top spot as a
regional LNG import market: Asian LNG buyers accounted for 63.6% of the
global market in 2011.
That level of demand from a part of the world fairly
short on supply means high prices. LNG in Asia is currently worth between $17
and $18 per million British Thermal Units (MMBtu)
– six to seven times the price of natural gas in North America.
That price difference is precisely why Petronas is maneuvering to buy reserves in North America.
The gamble is simply worth its while – if Petronas
is able to build pipelines and an LNG terminal on the west coast, the company
will be able to take a commodity worth a few dollars here and sell it for
many times more in Asia.
The lure of that payout has drawn many players to this
expensive, drawn out, and highly uncertain game. With this deal, Petronas joins a growing list of international energy
companies including PetroChina, Mitsubishi, and
CNOOC that are spending billions on remote natural gas plays in Alberta and
BC, all of which share the same dream of selling the gas in Asian markets.
While these Asian energy giants take on the risk,
Canadian gas explorers pretty much get to just enjoy the benefits. Depressed
North American gas prices have brought most gas explorers to a standstill
– investors and banks alike are not interested in funding projects
where the cost of production is almost the same as the value of the product.
But being bought out or finding a partner with deep pockets is a perfect
solution. As Progress' CEO said, "Our asset base requires extensive
capital to develop its large potential and ultimately access international
LNG markets. Petronas offers the size and scale
that will enable our company to continue to grow and not be limited by the
same cash flow challenges faced by many producers in the North American
natural gas market today."
Since Canada's gas explorers are stuck in neutral, you
might think that Asian energy firms would be making minimal offers, trying to
acquire these resources on the cheap. Instead, Petronas
offered C$22.45 a share for Progress, 77% more than Progress' closing price
the previous day. Are they trying to earn goodwill with Canadians? Perhaps,
but there's a more likely explanation for their generosity: pressure from
behind. If they made a stink bid and Progress voiced displeasure, the dispute
could draw attention from Petronas' peers, which
are also on the lookout for good natural gas deals. One of these peers might
then swoop in and make a better offer, leaving Petronas
empty-handed.
This is the impact of the race for resources. These
Asian energy giants are racing with each other to secure resources for the
future. The constant pressure to stay ahead in the race means companies will
offer whatever it takes to secure a deal quickly, before anyone else trips up
their efforts.
No country
has been more aggressive in snapping up worldwide energy resources than
China. In the last five years, it's spent approximately $75 billion on oil
acquisitions alone. It has even taken a 33% stake in a massive drilling project
in southwest Texas.
Shale gas riches have positioned North Americans as
beneficiaries in the global race to secure natural gas supplies. However,
complacency is a dangerous thing. Just because North America has gas doesn't
mean it has all of the energy resources it needs for the future. President
Obama's recent executive order on Russian uranium was a reminder that the US
relies on imports to feed its nuclear reactors, and with the Megatons deal
coming to an end, the United States is being thrust into the global race for
uranium just as that race is heating up.
Scarcity is a powerful force and it leaves those in
control of limited resources wielding great power. We think a scarcity of
uranium will increase Russia's power; control over some of the last big, easy
oil deposits has earned Saudi Arabia great global influence. Petronas' deal with Progress is a sign that shale gas
could generate similar prowess for North America, and is a strong reminder
that the global race for resources will provide some with money and power
while leaving others in the dust.
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