According to a report by Reuters, Spanish energy company Repsol is looking for partners to build an LNG export facility on Canada's east coast. The company is said to be seeking partners willing to invest $4 billion so that natural gas from North America can be shipped to Europe in order cut the continent's dependence on gas supplies from Russia. However, the project has a number of obstacles to overcome before it would ever see the light of day.
A small window of opportunity
Repsol is hoping that it can find some deep pocketed European partners, such as a utility company, to fund the building of an LNG export facility at the company's Canaport facility in New Brunswick. The project could receive gas produced from U.S. shale plays and then liquefy it and ship it to Europe. That said, Repsol isn't planning to build this project alone as it would only move forward if it can find partners to invest a bulk of the capital needed. Its main involvement would be to provide its struggling Canaport LNG import facility, which has seen imports plunge in light of the boom in natural gas production in North America.
Repsol is hoping to take advantage of Europe's current sticky situation whereby a third of its oil and gas comes from Russia, with 40% of those volumes being shipped through Ukraine. Russia had hoped to supply even more gas to Europe, but recently canceled its $40 billion South Stream gas pipeline. That project would have supplied enough gas to Europe to meet 10% of its demand and wouldn't have gone through Ukraine. With that project now canceled Europe needs to find alternative sources for gas, and Repsol is hoping that its Canaport site just might be a solution.
Well behind the curve
The problem, however, is that the project is just one of many looking to supply cheap North American natural gas to the world. The eastern seaboard already has LNG export projects from Dominion (NYSE:D) and Kinder Morgan (NYSE:KMI) that are well ahead of it in the process. The Dominion project, the Cove Point LNG in Maryland, is actually expected to be in service by late 2017. While, Kinder Morgan's Elba Liquefaction project in Georgia, is expected to begin construction in the second half of next year. Because of this both projects will be online, and potentially be shipping gas to Europe, well before Repsol's proposed project gets under way. That's not to mention the fact that there are a number of Gulf Coast LNG projects in development that could also ship gas to Europe.
Moreover, Repsol's facility isn't exactly strategically located near cheap sources of gas. Because of this the gas would have to be piped in from either the Atlantic, with gas sourced from a project such as EnCana Corporation's (NYSE:ECA) Deep Panuke offshore facility, or all the way from the Marcellus shale play in the U.S. In one sense the project could make a nice pairing with EnCana's Deep Panuke, which has been rumored to be up for sale. Further, there is untapped development potential from other known natural gas deposits off Canada's east coast that could be used to support the project. So, it is quite possible that a major European energy company could look to partner on the project so that it can develop the natural gas deposits in the Atlantic and then have that gas then exported to Europe.
Repsol is looking to take advantage of the current situation in Europe by turning one of its underutilized assets into something that could be of great value to Europe. That said, the project appears to be a long shot right now as Repsol won't go it alone to fund this project and it the project doesn't currently have access to cheap natural gas. Because of that it needs partners on both sides of the Atlantic as it could use a utility buyer to contract for the gas as well as an energy producer willing to develop Canada's gas reserves off its east coast or that has access to gas from the Marcellus. Bottom line here, don't bet on this project just yet.
Matt DiLallo has the following options: short January 2016 $32.5 puts on Kinder Morgan and long January 2016 $32.5 calls on Kinder Morgan. The Motley Fool recommends Dominion Resources and Kinder Morgan. The Motley Fool owns shares of Kinder Morgan. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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