Gazprom to Supply Proposed Rabaska LNG Terminal in Canadian Province of Quebec

The Rabaska LNG project consortium has announced that Gazprom has agreed to supply 100% of the proposed terminal's receiving capacity. Under the terms of the Letter of Intent signed yesterday, Gazprom will become an equity partner in the project as well as commit to supplying the entirety of the project's imports. The parties expect to ink a more definitive deal later this year. Rabaska is a limited partnership between Enbridge, Gaz de France, and Gaz Metro.

The Rabaska project consists of a proposed C$840-million (US$840.5 million) LNG facility with a send-out capacity of 500 million cf/d. The plant is to be located across the St Lawrence river from Quebec City, and will help to meet the natural gas needs of Quebec as well as markets in eastern Ontario. Given the project's proximity to the U.S. Northeast, it is not inconceivable that supplies could further find their way to the wider region via pipeline. The project already had the necessary regulatory and governmental approvals in place prior to yesterday's announcement, with the long-term supply agreement essentially being the last piece of the puzzle needed to ensure an investment decision. Construction of the terminal is now expected to start in 2010 with completion to correspond with the expected start-up of Gazprom's Shtokman project in the Barents Sea in 2014.

The Shtokman field is located in the central Barents Sea in about 350 metres of water and a further 1.9 km-2.3 km below the seabed. The field was discovered in 1988 and is thought to hold a massive 3.8 trillion cubic metres of natural gas, along with around 37 million tonnes of gas condensates. Initial output rates are expected to be around 22.5 billion cm/yr of natural gas and 205,000 tonnes of gas condensates, before eventually rising to 70 billion cm/yr and 600,000 tonnes of gas condensates. Production will be sent onshore via subsea pipelines, where the vast majority will be destined for Europe via the 27.5-billion-cm/yr Nord Stream pipeline currently under construction, with supplies also set aside for liquefaction into LNG before being shipped to other markets. The Shtokman project is being undertaken by Gazprom in first-phase partnership with Total of France and output is expected to last for 50 years.

Outlook and Implications

Partly to diversify away from Europe, Gazprom has been thinking about sending natural gas supplies to the North American east-coast market for a number of years, though up until yesterday little in the way of progress had been made in this regard. The Rabaska deal thus marks an important milestone for not just the partners involved but also for Canada and Russia, and potentially even the United States. The state gas monopoly had previously also been in discussions with a PetroCanada-led consortium that had been planning to build the Gros-Cacouna LNG receiving facility on the other side of the St Lawrence River, but when it became evident, after much feet-dragging, that Gazprom was not going to supply that project, PetroCanada decided to put the entire effort on hold. Gazprom's decision to place its faith in Rabaska is thus a tremendous success for Enbridge and its partners, especially given that other proposed LNG terminals across North America have generally found securing long-term supply contracts from LNG producers extremely difficult. This problem has been compounded by the fact that as natural gas is generally cheaper in Canada and the United States than it is elsewhere, spot LNG supplies have tended to go to larger LNG consumers like Spain and Japan willing to pay top dollar.

It is of course an open question whether Gazprom will be able to meet its 2014 schedule for Shtokman start-up, given that it had previously planned to have the development up and running by 2010. With Total now on board, the risk of an extended further delay is certainly diminished but in no way dismissed, and the reality could well be that the field does not come online until much later. The Rabaska partners would do well to bear this in mind. Putting aside for now the question of exact project timetables, the wider strategic outlook for LNG imports into North America remains positive. Although gas demand continues to grow strongly across the continent, production has failed to keep up despite the fact that significant, but thus-far untapped, gas reserves exist, particularly in Alaska. A pipeline to bring Alaskan gas supplies down into the lower-48 states has been on the drawing board for a number of years, but the companies holding the leases to those reserves have so far refused to commit the required capital for what would in effect be the country's largest and most expensive energy infrastructure project in history. Recent policy developments in Alaska regarding the pipeline have given that project new momentum, but there are as yet no firm construction plans. At present, LNG forms only around 16% of total imports and an even smaller share of total gas supply in the United States, but this picture is expected to change in the coming years, with all signs pointing towards greater LNG imports into North America generally and increasing market penetration.

Related Articles

Canada: 27 March 2008: Gros-Cacouna LNG Plans in Canadian Province of Quebec Fall by the Wayside

Canada: 19 June 2007: Petro-Canada Still Seeking Supply Partners for Proposed Gros-Cacouna LNG Plant in Canadian Province of Quebec

Canada: 25 October 2007: Approval Given to Rabaska LNG Terminal in Canadian Province of Quebec

Canada: 24 October 2007: Gazprom in Discussions over Canadian LNG Project

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