By Clyde Russell
LAUNCESTON, Australia, Oct 3 (Reuters) - The first majorliquefied natural gas (LNG) project to be approved globally infive years will be built in Canada, but its underlyingphilosophy appears to be more closely allied to the Australianconcept of "she'll be right, mate."
The LNG Canada project was given the green light on Tuesdayby Royal Dutch Shell, which is leading the $31 billionventure along with partners Petronas, Mitsubishi, PetroChina and Korea Gas.
What makes the first export plant on Canada's west coastdifferent to the last wave of LNG projects is that it isn'tunderpinned by long-term sales contracts.
These agreements had been necessary in the past to provide alevel of certainty to the oil and gas companies, and theirfinanciers, that buyers existed for the output and revenuescould be guaranteed.
Instead, Shell said in a statement that each of the partnersin LNG Canada would be responsible for providing their share ofthe natural gas to be liquefied, and would also be in charge ofmarketing the output of the super-chilled fuel.
In the Australian lexicon, this amounts to taking a bet thateverything will work out just fine, even though you currentlycan't really be certain of that.
There is perhaps a touch of irony in the fact that Canada'sforay into LNG is taking a chance that none of the developers ofthe eight new LNG projects built in Australia in the past fewyears were able to do.
These ventures, including Shell's floating LNG project, weresecured by long-term deals for much of their output, andalthough pricing terms remain confidential, it was usual forthese agreements to be linked to the price of crude oil.
What the approval of LNG Canada shows is that the marketdynamics surrounding LNG have changed dramatically sinceAustralia, and to a lesser extent the United States, embarked onthe last round of mega-projects.
Buyers have demanded an end to long-term, oil-linkedcontracts with restrictive destination clauses, and instead wantshorter-term and spot deals that allow them to diversify sourcesof supply.
The rise of China to become the world's second-largest LNGimporter behind Japan has also boosted this shift, as theChinese tend to be active in the spot market at times of peakdemand, most usually the northern hemisphere winter.
Other emerging buyers of LNG in Asia, such as India, arealso keen on more flexible arrangements, and LNG producers havehad to embrace the new dynamics, with those in the United Statesleading the way by offering cargoes priced against the U.S.domestic benchmark.
NEW MODELS
What the step-change in LNG did make more difficult wasfinancing new LNG projects, which typically cost billions ofdollars, take at least five years to build and have long paybackperiods for investors.
As LNG Canada shows, the element of risk is higher now thanwas the case previously.
Much of commentary surrounding LNG has been about the hugeamounts of the fuel needed in the next decade to meet the energyneeds of Asia, with typical forecasts for an increase in demandfrom the current 300 million tonnes a year to around 450 millionby 2025.
Under this scenario, LNG Canada's initial 14 million tonneslooks certain to find willing buyers, indeed, nowhere nearenough new projects have been approved to meet the forecastdemand.
Qatar, which will lose its place as the world's top exporterto Australia next year, will likely get the crown back byboosting its production by 23 million tonnes to 100 milliontonnes by early next decade.
Russia's Novotek also appears close to taking a finalinvestment decision on its almost 20-million-tonne-a-year Arctic2 project, and there are also two ventures in east Africa thatmay be approved in the not too distant future.
There are also other projects in Canada, the United Statesand Australia that could be approved, should their backersbelieve the optimistic scenario for LNG.
Herein lies the real risk as the industry doesn't have agreat track record of calling future demand correctly.
An expected shortage by the end of this decade prompted themassive wave of investment in Australia and the United States inthe past few years, but the market view then swung 180 degreesand a surplus was expected by the early 2020s.
Now that surplus has evaporated on the back of Chinesedemand growth, and once again the pundits are forecasting asignificant deficit by the middle of next decade.
But as has been shown by the rise of shale gas in the UnitedStates, the death of coal in much of Europe and the ongoingdeclines in the cost of renewables, much can happen in theenergy space in a relatively short space of time.
LNG Canada's partners are probably betting that LNG demandwill grow substantially, and even if its doesn't, they will befine because they have first-mover advantage in what may beanother wave of new projects.(Editing by Christian Schmollinger)
