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As plans to build a natural gas liquefaction (LNG) hub on the British Columbia coast move closer to reality this year, the market is buzzing with talk of new partnerships and takeovers involving Western Canadian gas producers, potentially sweeping up big names like Encana Corp.
The trend has the makings of the next big thing and could shake up the natural gas sector in Western Canada, where prices are languishing at disastrous levels and cash-strapped producers are motivated to make deals.
Oil majors like Royal Dutch Shell Group PLC and national oil companies like Malaysia’s Petronas are evaluating as many as five plans to build terminals in the Kitimat area to export LNG to Asian markets and will need to secure supplies to keep them full.
So far, they have secured about 17.8 trillion cubic feet (tcf) of resources in Western Canada, but will need 39 tcf to meet current plans, CIBC World Markets estimates in a recent report.
Companies like Encana, Talisman Energy Inc., Progress Energy Resources Corp., Painted Pony Petroleum Ltd., Paramount Resources Ltd. and NuVista Energy Ltd. could be sought after partners or even takeout candidates.
Canada’s West Coast and the U.S. Gulf of Mexico are seen as the two hot spots in the race to build North American export capacity, a nascent business made possible by the discovery of massive shale gas deposits.
Companies putting together LNG plants will likely look for natural gas supplies to use as feedstock, so their exposure is to the cost of producing them rather than the price of the commodity, Andrew Potter, executive director of institutional research at CIBC, said in an interview. “On balance, through 2012, we see this as a theme that gradually unfolds.”
The trend started last year, through partnerships involving companies like Progress Energy and Petronas; Nexen Inc. and Japan’s Inpex Corp., Penn West with Japan’s Mitsubishi Corp. and Korea Gas Corp. Last week, PetroChina purchased 20% of Shell’s Groundbirch natural gas asset in Northeast British Columbia.
Encana, which ended a $5.5-billion partnership with PetroChina last summer to develop shale gas in B.C. in an apparent dispute over control, could announce a new deal for the same assets as soon as Friday, coinciding with the release of its fourth-quarter results. Mike Graham, president of Encana’s Canadian division and one of the company’s most senior executives, resigned Tuesday, fuelling speculation about an announcement.
LNG players are crossing key decision points this year. The Kitimat LNG project, led by Apache Corp. with partners Encana and EOG Corp., is expected to make a final investment decision by the end of the year.
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