Since December 2010, Canadian firms have team up for at least C$8 billion worth of joint ventures, many to develop unconventional resource plays.

The costs of doing business are higher. The natural gas market is stunted. And reliable U.S. investment has died down.

But Asian investment is heating up, panelists said at a DUG Canada 2013 discussion on joint ventures.

Canadian producers are turning over their expertise and money in a quest to export liquefied natural gas (LNG) and develop promising shale plays using those partnerships. Mitsubishi, PetroChina and CNPC, among others, have been pushing money into Canadian hands.

The funding gives life to projects that otherwise would sit on the shelf, said Richard Dunn, vice president, regulatory and government relations, for Encana Corp. (NYSE: ECA).

“The importance of foreign investment in the Canadian natural gas industry has a key role in commercializing the world class natural gas resource we have in this country,” Dunn said.

Global investors are taking note of Canada’s competitive environment, its vast natural gas resource and the opportunity to export LNG, Dunn said. Asian demand is projected to more than double to 65 billion cubic feet per day (Bcf/d) by 2020, with growth in Chinese consumption leading the way.

“It’s clear these days that market diversification through the export of LNG to a growing Asian market, along with accompanying Asian foreign direct investments will be the keys to the continuing viability of the Canadian natural gas industry,” Dunn said.

Dunn said joint ventures have long and short-term benefits. They allow companies to:

  • Make an immediate recognition of value.
  • Maintain capital and operating efficiencies on mature assets.
  • De-risk capital programs on early life plays.
  • Increase financial strength and flexibility.

Dunn said Canada is witnessing a paradigm shift as its best customer, the United States, no longer needs as much natural gas and oil from the country. That’s meant a drop in U.S. dollars flowing into the country.

“Essentially we’re moving from a model of U.S.-based investment export to a model more focused on an Asian-based export,” he said. “It’s the new Canadian reality but in some respects it’s really just business as usual.”

Canadian officials have estimated a need for C$650 billion worth of investment in the next 10 years to realize just oil and gas projects.

Encana has spent time building relationships and successfully executed joint ventures and partnerships with Asian investors. The company is working with Mitsubishi in the Montney shale, for example.

In the ventures, Encana typically keeps control of operations, though in other cases partners want to learn as much as they can from the company.

The partnerships usually involve well-established and promising emerging resource plays.

“We’ve entered into these joint venture agreements to accelerate the value of assets that otherwise would have sat dormant for a significant period of time,” Dunn said.

Dunn said the shift to an Asian focus is a positive development both for the industry and Canada as an opportunity for market diversification that could help extend the global reach of the natural gas industry.

For Asia, the need for the partnerships is equally important.

Shinya Miyazaki, CEO, of Diamond Gas Management Canada Ltd., a Calgary-based subsidiary of Mitsubishi, said, “Japan would welcome additional supplies of LNG in a country where natural resources are scarce and industry relies heavily on imports.”

In 2011, global LNG imports totaled 240 million tons. Japan imported 32.3%, more than all of Europe and the most by any country.

“Looking at the future, we anticipate that LNG demand in Asia will continue growing very steadily and very rapidly,” Miyazaki said. “Due to the substantial increase in China and India, we are anticipating LNG imports into Asian countries will grow by 100 million tons in the next 20 years.”

Japan’s import of LNGs has increased to 80 million tons from 70 million tons since an earthquake and tsunami devastated the country in March 2011.

A key factor was a dangerous situation at a nuclear reactor that prompted a shutdown of nuclear plants across the country. Policymakers had anticipated building more reactors, but now it’s not clear how that will play out, Miyazaki said.

Whatever the future, increased reliance on nuclear power seems to be unlikely or at least further off.

“Naturally, nuclear power can’t be as much as what we planned after the earthquake so we anticipate Japanese (LNG) requirement will grow further,” he said.

Miyazaki said Japan now relies on long-term contracts to supply more than 60 million tons of LNG to the country.

For Canada to become a player, Japan will want considerations such as supply stability, price competitiveness and involvement in the value chain.

“We still need to see more assurance that Canada can be a new LNG supply source that is more attractive than other potential supply sources,” Miyazaki said.

Victor Ojeda, managing director, LNG Canada Project, Shell Canada Ltd., said that’s easier said than done.

Joint ventures are necessary to make an LNG export work.

The capital and the technology required for producing, storing and shipping LNG is very significant. Lead times are long.

Nearly all fail, Ojeda said. In Australia, for instance, in the past 30 years hundreds of LNG export facilities have been proposed.

“There are only a very small subset that actually happen,” he said. “It’s a small club of people that have been through multiple projects throughout the world and know what it takes to make them happen.”

Put together parties that are “merely in it for the transaction and you have a recipe for non success,” Ojeda said.