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Canada Denies Petronas: A Catch-22 for LNG Exports

What will happen to junior natural gas stocks in Canada on Monday, following
the Canadian government’s denying Malaysia’s Petronas bid to acquire
Progress Energy (PRQ-TSX)?

A couple days of mild downside is my guess.  Don’t get me wrong-Progress
itself will be down 30% or more (the only good news here is that it’s the
arbitrage funds getting killed Monday, not retail or the regular Canadian
institutions).

But the junior gas stocks I follow (under 20,000 boepd–stocks like
Bellatrix (BXE-TSX), Angle Energy (NGL-TSX) etc have been rising because the
market sees a year-over-year storage surplus eroding quickly, and is hopeful
on better fundamental natural gas prices this fall and winter.  They haven’t
been going up on takeover speculation by anybody-another intermediate or a
major or a foreign company.

Certainly, stocks that are considered take out targets by The Street for
their gas-Painted Pony (PPY-TSX), Peyto (PEY-TSX), maybe Tourmaline
(TOU-TSX) and the recently announced deal of Celtic (CLT-TSX)-could have a
bit more of a dip.

These are the stocks that hold enough liquid rich natural gas in Canada that
they could have been bought out by foreign companies looking to cash in on
Canada’s short shipping lines to Far East LNG customers like Japan and
China.

However, there won’t be anybody looking to buy them out now-at least for
awhile.

The Harper government in Canada was deliberately vague about why the deal
was canned, and rumours focus on two points:

  • they didn’t want to give the same tax breaks Progress was getting to a foreign NOC
  • now they can nix the Nexen acquisition by the Chinese NOC and it appears fair

I certainly don’t know.  But I do know that natural gas is being discovered
everywhere these days in huge quantities-offshore Tanzania and Mozambique,
offshore Australia, onshore Australia-unlike oil, shale gas does not have a
monopoly on new big global supplies.

There is a race-worth tens of billions in infrastructure spending (read:
jobs for pipelines and Liquid Natural Gas (LNG) processing facilities) and
more tens of billions of dollars in sales of natural gas to the Far East.
And the Canadian industry does not have the capital or frankly, the
leadership in industry or government to make this happen.

There are no federal politicians sticking their neck out saying LNG or bust
to Canada’s west coast. All the big LNG proposals in Canada are spearheaded
by foreign companies-Shell (RDS-NYSE) and Apache (APA-NYSE), for example.
Petronas would have been the third-and maybe still could be, if the federal
government can tell the market why the deal was cancelled and what they can
do to have it approved.

The Canadian government, led by Stephen Harper, should hurry up however.

Canada has fallen behind in this race incredibly quickly.  Earlier in 2012
there were three proposals to get LNG to Japan by December 2015.  Six weeks
later the participants said 2017.  Now they’re saying 2019 or 2020.   Five
years went by in just six months.

There are two strikes already with Canadian LNG potential:

1.       Japan wants to de-link natural gas prices from oil (which are now
accepted to be roughly 13% of Brent) and Cheniere’s (CQP-NYSE) willingness
to do that.  I think that is a big reason that the Canadian proposals have
had a hard time getting firm contracts and moving back their timelines.
Forget the fact that the US hasn’t even allowed LNG exports yet.  The market
sees the potential for lower gas prices going to Asia than Canada might be
willing to sell for.

2.       Potential Regulatory and public opposition to an LNG trade on the
west coast.  The provincial BC government has issued permits for LNG
exports-but environmental groups, native groups, and now the provincial BC
government are taking a very hard line on the Enbridge oil pipeline to the
west coast.

As the process moves forward, it would be difficult for them not to give the
same scrutiny to LNG tanker traffic on the west coast.  Even the province of
BC, which has been very vocal in favour of LNG, will have to do lots of
studies and talk the talk on LNG tanker traffic being safe in narrow BC
coastal waterways.

And now, add Resource Nationalism as #3.  Canada has put itself in a
Catch-22-Canada needs foreign capital to capture the booming Asian LNG
market, but it won’t approve foreign capital so Canada can’t capture the
Asian LNG market.

The feds canned the deal even after Petronas publicly increased their bid in
the face of a mystery second bidder that was allegedly behind the scenes
ready to compete (rumoured to be Shell).

I hope the Canadian feds can show the market a clear plan for what they want
to see in a foreign takeover of a Canadian natural gas producer-otherwise
this could be the third strike for Canadian LNG exports.

PS-this issue won’t affect my favourite junior gas producer. That’s because
it has a silver bullet-from both a geological and market perspective-that
makes it THE junior gas play to own in 2013.  My full report should be ready
late next week.  The good news is, its’ share price will likely go down in
sympathy when the fundamentals remain incredibly strong.

by +Keith Schaefer



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