Canadian Gas is Going Global: An Interview with Cheniere Energy and ARC Resources
Earlier this year Cheniere Energy and ARC Resources announced a new supply agreement to export Canadian gas from an LNG facility located on the US Gulf Coast.
This week on the podcast, Anatol Feygin, Executive Vice President and Chief Commercial Officer at Cheniere and Ryan Berrett, Senior Vice President, Marketing at ARC Resources tell us more about their agreement.
Here are some of the questions that Jackie and Peter ask them: How well positioned is North America versus other potential LNG suppliers to Europe? By 2030, how much will US LNG exports grow compared with today? Considering the long transportation distance, does it make economic sense to export Canadian gas from the US Gulf Coast? With the increasing pull from international markets, do you expect North American gas production will grow? Are ESG attributes important to buyers of LNG?
Read the press release about the Cheniere Energy and ARC Resources supply agreement.
In May 2022, Cheniere Energy and ARC Resources announced a new supply agreement to export Canadian gas from an LNG facility in the US Gulf Coast. In this episode of ARC Energy Ideas Anatol Feygin, Executive Vice President and Chief Commercial Officer at Cheniere and Ryan Berrett, Senior VP Marketing at ARC Resources share more about the agreement.
To put Cheniere in perspective, the United States produced 95 billion cubic feet (BCF) of natural gas per day, Canada about 17 BCF. Cheniere produces 7 BCF. It is more than seven percent of the US market and second only to Qatar Energy in terms of the volume they operate.
“80 per cent of the volume that Cheniere has produced year to date has been moved to Europe, but a very small percentage of that 80 per cent is moved there by Cheniere. The overwhelming majority is moved there by our customers who select to go to the optimal market for them,” explains Feygin.
Historically natural prices have had downward pressure on them because in the absence of being able to export out of continental borders, the price was generally lower than it was in the rest of the world. Now that Cheniere can export 7 per cent, and others are exporting as well, all of a sudden North America is participating in higher-priced markets.
But what does this mean to Canada? Well, companies like ARC Resources, who are major producers of natural gas, can now pipeline their gas all the way to the Gulf Coast, and send it out to the global market.
“We think North America has a huge role to play in the world in supplying low cost, high efficiency energy to the world,” says Berrett. “Specifically, Canada has a very large integrated network of pipelines. We have about 17 BCF a day of production, and even though we have a very high demand market here, we also have high exports to the US and as ARC started to look at where does global pricing go, and where does North American pricing go with exports in the US increasing, we felt that we really needed to take advantage of opportunities to access international pricing. And we think our size and scale and the pipeline access that we have allows us to participate with partners such as Cheniere to get that access.”
While big producers engage with companies like Cheniere, the Canadian LNG terminal on the west coast of BC is coming on in 2025. That brings up the question of production… storage levels are low right now.
“We see some moderate production growth over the next few years,” says Berrett. “I think we’ve come off a period of substantial production growth in North America, where over the past decade, North American production has doubled, and we’ve been waiting for demand to catch up to that. And we’re now in a position where we’re actually having demand pull out of North America, and that might change some direction in terms of how prices impact production. That being said, I think capital discipline, capital efficiency, and returns to shareholders are still at the foremost of every producer.”
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Episode 161 Transcript
Disclosure:
The information and opinions presented in this ARC Energy Ideas podcast are provided for informational purposes only and are subject to the disclaimer link in the show notes.
Announcer:
This is the ARC Energy Ideas podcast with Peter Tertzakian and Jackie Forrest. Exploring trends that influence the energy business.
Jackie Forrest:
Welcome to the ARC Energy Ideas podcast. I’m Jackie Forrest-
Peter Tertzakian:
And I’m Peter Tertzakian. Well, welcome back. It is now officially summer. It is officially the Calgary Stampede.
Jackie Forrest:
Yahoo.
Peter Tertzakian:
Yahoo. Boy, there’s a lot of energy, pardon the pun, in the atmosphere. It’s the first full stampede in two or three years, and it’s a lot of fun.
Jackie Forrest:
And it’s great to see the city out. We’ve got every politician from across Canada showing up, and it’s just really nice to see everyone out and enjoying it.
Peter Tertzakian:
Yeah, yeah. The grounds are packed, the events are packed, so it’s all good. As we record, the price of oil is about $104, the price of natural gas is $6.40 cents US at Henry Hub. And there’s a lot of volatility in the markets, but the $100 oil and $6+ gas. And that gas price would be higher, were it not for that outage at the Freeport LNG export facility in the United States.
Jackie Forrest:
Yeah. Watching these commodity prices is a bit like watching the rodeo.
Peter Tertzakian:
Yeah, up and down.
Jackie Forrest:
Like a bull rider, up and down. But gas prices have really softened, now in the sixes, where we had them near $8 or $9 in North America, at Henry Hub, in May and June. Oil prices obviously made a big drop last week. We’ll talk about that a bit more on a future podcast. But we did say, one of our predictions this year was a lot of volatility. That’s turning out to be true.
Peter Tertzakian:
There you go. I point out that the price of natural gas was $8 or $9 in the spring, and I think natural gas is something we’re going to talk about a lot more as we come into the fall. Today, the date we’re recording, July 11, is the day that the Russians cut off the Germans from the Nord Stream 1 Pipeline.
Jackie Forrest:
It’s supposed to be temporary.
Peter Tertzakian:
Temporary for maintenance, but there’s a lot of here that it’s just not going to come back up, and that winter prices are going to go higher. We’ll talk about some of that right now, actually, because we have two very special guests who are very qualified to help us unravel what’s going on in the world of natural gas, natural gas exports in particular. We have with us, and we’re delighted, Anatol Feygin. He’s the executive vice president and chief commercial officer at Cheniere, which operates those LNG plants on the Texas Gulf Coast. And to help fill the pipes and the LNG facility from here, we have Ryan Berrett. He’s the senior vice president of marketing at ARC Resources here out of Calgary, and they supply gas all the way down there, so let’s talk about it.
Jackie Forrest:
Welcome.
Ryan Berrett:
Thank you.
Anatol Feygin:
Thank you. Thanks for having us.
Jackie Forrest:
Okay. So, there was some big news in May, where there was a press release that ARC Resources has agreed to sell gas for 15 years to Cheniere, and as Peter said, you’re a major LNG exporter out of the US Gulf Coast. In fact, I think you were the very first cargo in the modern age that left the North American shores came from Cheniere’s plant. And the plan is that ARC Resources, some of the gas that they produce here in Western Canada will go out of the Corpus Christi Stage 3 LNG terminal when it is built. The gas price will be linked to Asian prices, and we just have lots of questions about that for both of you.
Jackie Forrest:
So, the topics we’re going to cover today are we’ll start maybe just with some general context on LNG in the North American natural gas market, lots of changes in the last three or four months. In fact, we did have a previous podcast, so that you guys are aware, talking about the fact that North American gas is going global, and that was going to cause a structural change in the gas markets here in North America. And then the second part is we want to talk about sourcing LNG gas from Canada. The economics, the practicality of it all, but let’s get started with the North American markets update. Maybe Peter, you could ask the first question here.
Peter Tertzakian:
Yeah, great. Anatol, from the Cheniere perspective, maybe you can just talk about the history of when we got started. I think it was 2016, the first LNG export facility opened up. It really unbottled North American natural gas. You got it exporting, and it altered really the pricing structure here, and indeed the world, as the United States is a huge exporter now.
Anatol Feygin:
Thanks, Peter. And again, thanks for having us. It’s a pleasure to be on here with Ryan. As you guys mentioned, we did formalize our relationship going forward, which is great because in many ways, our efforts with the producer community were started by Seven Gen, which of course is now part of the ARC family, and we’re very happy to be in a position to grow together. As you said, we started exporting in early ’16, but our founder and the team really saw the need for this, granted, after the colossal failure of building a re-gas facility late last decade, around 2009, 2010.
Anatol Feygin:
And we’re in earnest moving down the path of exports at that point, where when unfortunately, the Fukushima tragedy occurred in the spring of ’11, March 11th of ’11, and really started to put US, world scale exports on the map. Unfortunately, we can never say that we’re the first because of the Alaska canal LNG export facility, which was mothballed in 2016 just as we were starting up, but in terms of world scale and putting the US exports on the map operationally, we started that in February of ’16.
Anatol Feygin:
Now we’re at 2,300 cargos exported from both the Sabine Pass facility, which was first, and Corpus Christi, which was the first greenfield facility in the lower 48 that started to come online about three years ago. And now Cheniere is second only to Qatar Energy in terms of volume that we operate-
Peter Tertzakian:
Anatol, can you put that in perspective a little bit? The United States now produces about 95 billion cubic feet of natural gas a day, Canada is about 17, and BCF per day-
Anatol Feygin:
About seven.
Peter Tertzakian:
… How much does Cheniere export? About seven. So, say over 7% of the US production goes out, and that’s certainly enough to affect North American prices and get the higher LNG prices that certainly, the Europeans are paying now. Jackie, what are they paying?
Jackie Forrest:
I think it’s around $40 today because of the concerns around this pipeline being shut, but it’s been over $30 lots of days over the last few months.
Anatol Feygin:
Yeah. Very challenging time for our friends and partners in Europe. It was really the European buyers that put Sabine Pass, certainly, and to a large extent, Corpus Christi trains one and two on the map. One very important distinction or nuance here is that the vast majority of the volume that we produce, like Ryan’s volume in the future, and current offtakers, is controlled by our customers and not by Cheniere itself. And what Cheniere brought to the table, which really dramatically changed the global LNG industry, is freedom from destination restrictions. Our customers can take that volume wherever they want. And so, 80% or so of the volume that Cheniere has produced year to date has been moved to Europe, but a very small percentage of that 80% is moved there by Cheniere. The overwhelming majority is moved there by our customers who select to go to the optimal market for them.
Jackie Forrest:
I wanted to talk a little bit too about the pricing paradigm. I think Cheniere really changed the market by not linking to oil. Before, in the history of LNG markets, they were always linked to oil. Is today most of the long-term contracts backed based on the natural gas prices in North America, not oil pricing?
Anatol Feygin:
Through the cycles, when US became a viable import market, so early in the 2000s when actually, Cheniere started to develop the re-gas business, LNG contract started to be indexed to Henry Hub on a delivered basis. I was at a conference in the mid 2000s, and some presenters said, “Henry Hub is spreading across the world like a bad virus.” So that was in the re-gas days, and of course, in the export days, it’s ebbed and flowed, but has tended to be about 20% of the total contracted volume, which is a reasonable number if you think that the LNG market today is about a 400-million-ton market. US is approaching about 100 million tons of exports, a little less than that today, so 20%-ish feels right. But then of course, given everything that’s happened here year-to-date, the overwhelming majority of the long-term contracts signed to date have been indexed to Henry Hub. Ryan’s is actually one of the exceptions.
Peter Tertzakian:
Now natural gas is its own market, and it’s also its own globalized market from a North American perspective, because in the absence of being able to export natural gas out of the continental borders of Canada and the United States, the price of natural gas was generally a lot lower than it was in the rest of the world. But now that you’re exporting 7%, and then others are exporting as well, and more to come, all of a sudden North America participates in those much higher priced markets, and the whole structure comes up. Now, we’ve talked about that before on the podcast, and we’re going to talk about it a lot more, but let’s move on to now what that means to Canada, because that means that companies like ARC Resources, who are major producers of natural gas here in Canada, can now, through the continental grid of pipelines, take their gas all the way to the Gulf Coast, the Cheniere facilities, and send them out. So, Ryan, can you tell us a little bit about that?
Ryan Berrett:
Thank you, Peter, and thank you Jackie, for having us on. Anatol, great to see you and talk to you again. Anatol talked briefly about the transaction that we had with Seven Generations a year ago, which effectively doubled the size of our company to allow us to pursue the types of opportunities such as these, that give us the size and scale to allow us to use our integrated network of pipelines to access international markets. You talked a little bit about why pricing is moving towards Henry Hub-based pricing and indices. Really, we view that as North America is a low-cost supply basin. We’ve talked a lot about recently security of supply, and with all the unfortunate situations going on in Ukraine, security supply has been first and foremost amongst the European buyers.
Ryan Berrett:
So that combined with the liquidity that we see in North America, we think North America has a huge role to play in the world in supplying low cost, high efficiency energy to the world. Specifically with Canada, Canada has a very large integrated network of pipelines. As you talked about, Peter, we have about 17 BCF a day of production, and even though we have a very high demand market here, we also have high exports to the US And as ARC started to look at where does global pricing go, and where does North American pricing go with exports in the US increasing, we felt that we really needed to take advantage of opportunities to access international pricing. And we think our size and scale and the pipeline access that we have allows us to participate with partners such as Cheniere to get that access.
Jackie Forrest:
All right. Well, we’re going to get into the details of the economics of transportation and all that, but I do want to take a step back here and talk about the opportunity for North America. We all know there’s competition, that other suppliers want to replace Russian gas in Europe, and just for context, Russia delivers about 20 BCF per day to Europe. If you just look at EU it’s a little bit smaller, it’s around 15 BCF per day, but it’s a massive opportunity. If Russia is not going to be welcome in those countries, there’s an opportunity for other suppliers to position themselves. However, Canada and United States are just one group of suppliers. There’s others, like in Qatar and Australia, who also want this market. Maybe, Anatol and Ryan, you could comment a bit on what is our competitive advantage? Can we get this market? It really is a race, I think, to supply market and replace Russia.
Anatol Feygin:
Yeah. Thanks, Jackie. Maybe I’ll start. If we go back six months ago, our simplifying assumption of where the LNG will come from was overwhelmingly three places. That was US Gulf Coast, the Qataris, and Arctic Russia. And today, as we reassess, the Arctic Russian piece of that stool clearly is in question. And as Ryan said, the tragedy that’s unfolding, given a hot war in Europe and Russia’s aggression, has put that into question along the execution front, along the politically viable front, commercial front, et cetera. Qataris will be there, moving forward aggressively with the North Field expansion, four mega trains. There’ll be two more trains behind that. North Field South, there’ll be two more trains behind that shortly, is our assumption, and that will be the base load of future LNG growth with a very low cost, very scalable resource. That, to us, is a foregone conclusion.
Anatol Feygin:
Australia, being a significant supply growth market, we don’t really see. It is still a very high cost, very difficult to execute. Some say that Gorgon was the most expensive infrastructure project ever built, at almost $70 billion. I doubt you’ll see a lot of repeat of that. You’ll obviously see the Pluto 2 expansion that our friends at Woodside have moved forward on, and the other big question outside of the US and North American supply is what other areas might we see move forward? Is East Africa going to have a resurgence, after all the issues in Mozambique and perhaps even Tanzania are addressed? We think that’s a lower probability than large scale growth out of US and Canada, so we think that the slope for LNG demand and gas demand general, especially given this Russia issue, is up and to the right, and we think that the opportunity there for the US and North American producers is quite attractive.
Jackie Forrest:
So, Ryan, maybe you could comment a bit. That’s great. I do think we’re well-positioned in North America. What about Canada? Do you think you’re going to see, outside of LNG Canada, more export of facilities that actually come off the Canadian coast, east or west?
Ryan Berrett:
Yeah. And I think the one thing I would just add to what Anatol said before that, Jackie, is from a cost perspective, we’ve seen liquefaction costs come down dramatically over the past several years. One of the advantages Canada has is our shipping time to Asia and Asian markets, and it’s roughly half the time from Canada’s West Coast versus the US Gulf Coast. And I think that’s something that we look at in terms of what is the overall net back, and what is the cost advantage that we have to accessing these markets? Specifically in Canada, obviously a big game changer will be LNG Canada Phase 1, which is projected to come on in 2025.
Ryan Berrett:
And we’ll have a massive impact with the Canadian gas balances when about 2 BCF a day of the 17 starts leaving, going west into Asia. As we look at other projects sequentially after that, obviously, LNG Canada Phase 2 has a high probability. And also, we’re starting to hear some really positive dialogue from leaders around East Coast projects as well, which is what the European crisis is driving that. Canadian LNG in particular has a strong ESG profile, which is still important to European nations, and we offer security supply at a low cost, and it’s something that we are really excited about going forward.
Peter Tertzakian:
Okay Ryan, but I want to key in on the seventeen BCF a day that Canada produces. And so now you, and there’s the other couple of other big producers, are engaging with people like Anatol to send the gas out the back door, and then LNG Canada, our Canadian LNG terminal on the West Coast of BC, is coming on in 2025. You mentioned another 2 BCF a day is going out that way. If layered on top of that, if you look at Canada’s natural gas production profile, it’s nudged up a bit, but it hasn’t really grown that much in the last 20 years. So, I’m looking at the storage numbers here and they’re pretty darn low in advance of winter, and so as our molecules of gas go chasing higher priced payers around the world, where’s the gas coming from? As a producer, can you give us some sense of are we going to up our production to serve all these new supply trends?
Ryan Berrett:
Yeah. I think broadly speaking from a production standpoint, Peter, I think that we see some moderate production growth over the next few years. I think we’ve come off a period of substantial production growth in North America, where over the past decade, North American production has doubled, and we’ve been waiting for demand to catch up to that. And we’re now in a position where we’re actually having demand pull out of North America, and that might change some direction in terms of how prices impact production.
Ryan Berrett:
That being said, I think capital discipline, capital efficiency, and returns to shareholders are still at the foremost of every producer. We see some moderate production growth at ARC in the 5% range is what we’re talking, and I think in terms of growth beyond that, at this point we are not contemplating anything. I think we also see a big global restructure, or North American restructure, in where balances sit. And you talk about Canada specifically, and production being around 17 BCF a day. And right now, our local demand is 6 to 8 BCF a day in winter months, so we see probably some exports to the US probably falling off during periods where prices locally are strong.
Jackie Forrest:
Right, especially when you consider LNG Canada and more of that gas going to different markets.
Peter Tertzakian:
Yeah, that’s right.
Jackie Forrest:
Okay. Well, let’s just sit back then. We’ll ask Anatol this question. If we’re in 2030 on this podcast, how much gas do you think is being exported out of the Gulf Coast? Today it’s around it can be 12, I guess it’s a little lower right now because of Freeport. Where do you think it’s going to be by 2030?
Anatol Feygin:
I think it’ll be around 20 BCF a day. A lot of that is already dialed in. The Venture Global Project is going to add about 2 BCF a day to that. As well, Golden Pass, the Qatar Exxon project that comes on across the river from us, and Cheniere and Ryan are moving forward with Corpus Stage 3 which is another one and a half, so that takes you pretty close to that 20 number. One of the enabling constructs of the ARC/Cheniere relationship is that both sides control a large amount of infrastructure. ARC has for a long time, as do other producers, but to date, Cheniere is the only LNG company that controls upstream infrastructure.
Anatol Feygin:
It was by design a different business model, a business model that was initially more complex than the other projects operating today. Cameron, Freeport, Elba, and Cove point are all tolling facilities, so in their case, it is their capacity holder that is responsible for gas supply, is responsible for infrastructure. As a result of that decision, Cheniere contracts in any given year is typically the largest firm capacity holder on pipeline infrastructure, and that has enabled us to do these transactions like the one with ARC, where ARC delivers off its controlled infrastructure into Cheniere’s controlled infrastructure.
Anatol Feygin:
That’s going to be a key issue going forward, because what drove the lower 48 production growth over the last decade has been the Northeast, the Marcellus and Utica formations. Highly unlikely that is a big driver going forward. It has just become much too difficult to build large diameter infrastructure in certain parts of the lower 48. Fortunately for us, intrastate Texas, intrastate Louisiana are a very different regime, and the ability to execute those projects on an intrastate basis is still much more feasible and much more attractive than a FERC jurisdictional project like what has enabled the Northeast to be such a big engine of production growth. So we think that that’s going to be a key differentiating factor and a key constraint going forward, and whether we can get much above the 20 BCF a day number is ultimately going to be decided, we think, by those infrastructure solutions.
Jackie Forrest:
Producers may not be growing so much, and there’s all these new demands for offtake, so Cheniere having that strategy of locking in supply and the pipes that are there today could be a real strategic differentiator if it’s a tight market, and there actually is not maybe enough gas to meet all the different demands.
Ryan Berrett:
And I think this is something we’ve seen in Canada over the past 10 years, in terms of market egress and holding transportation to get to key consuming regions. ARC specifically has pipeline egress into five different consuming regions. We’re moving our supply from our production basin into consuming regions, and I think it’s a very similar strategy to what Anatol’s talked about, is holding this capacity as a strategic advantage over the long-term. One of the key differentiators of this deal to us was being able to link our Alliance Pipeline capacity right into Chicago, into Cheniere’s network of transportation that gets gas down to the Gulf Coast. This is something for us that allowed us to preserve capacity that we do have in the Gulf Coast right now, and in the future. So, I think this alignment is very key.
Peter Tertzakian:
So, Ryan, let’s talk about that, moving the gas notionally from Northeast BC, Northwest Alberta, taking your gas to Chicago, into the grid, all the way down to the Gulf Coast. Seems like a long way, and then liquefaction, and then halfway around the world. So, what has changed here that makes the economics of doing this possible? Because for a long time, I think for 10 years almost, it’s like we had natural gas prices here that were $2 or $3. As we said earlier in the program, now we’re at $5 or $6, potentially going higher. Is that what it is?
Ryan Berrett:
I think we believed that prices were too low, and in many cases, the prices in different regions within North America weren’t covering the cost of transport to get to those markets. As we’ve seen demand pull happen and prices rise, you know how pipeline capacity, that we would call in the money, and it pays to move into these regions. So specifically, with the transaction with Cheniere, this is utilizing Alliance Pipeline capacity from one of our key assets, our Kakwa asset, which is equitable origin certified ESG platform, and this allows us to move gas down Alliance for the term of the contract into Chicago, from Chicago down to the Gulf Coast using Anatol’s capacity, and then we would have fixed shipping and fixed liquefaction rates for the term of the contract. All in, we’re roughly $5 to $6 US per MMBtu of cost to get into the Asian market. So, in today’s market, which we believe isn’t sustainable. obviously, things look really good, but going forward, we still think there’s a disconnect.
Peter Tertzakian:
Can you just give us a sense then, going that Chicago to Gulf Coast route versus the upcoming Coastal GasLink, which is new and crosses a couple of mountain ranges, so those add to the expense to the BC Coast? Can you contrast those two routes?
Anatol Feygin:
Crossing the real Rockies, as you guys call them.
Ryan Berrett:
A massive pipeline project. And we don’t have all the commercial details of what’s going on with Coastal GasLink, but anecdotally, we would say we can probably get down to the Gulf Coast for a comparable fee as getting to the West Coast on Coastal GasLink. Obviously, a much longer distance, but a fully depreciated pipeline network versus a new build. And we would say our liquefaction costs in the Gulf Coast would be cheaper than liquefaction on the West Coast, and our shipping costs in the Gulf Coast would be slightly higher than our shipping cost to Asia from the West Coast. So all in, we feel this is actually very competitive with moving gas off the West Coast into Asia versus the Gulf Coast.
Jackie Forrest:
Anatol, maybe from your perspective, I just look at this and say well still… Ryan, you’ve convinced me for a Canadian producer it may make sense because that’s your option, but for you on the Gulf Coast, wouldn’t it be cheaper just to buy gas from the Permian than pay all these transportation costs to get it from Chicago, and also to incent a Canadian producer to send it all the way to Chicago? To me, it’s quite expensive if you actually go look at the tolling costs on all these different pipes to get it to you.
Anatol Feygin:
Great question, Jackie. And the answer, as usual, is it depends. So, we have a very large portfolio of infrastructure, as we’ve discussed, that allows us to access different points of liquidity. Ryan said that he has five outlets. We have roughly that, a little bit more inlets, if you will. And every day, we go out and procure from roughly 70 different producers on roughly two dozen infrastructure systems. You said something earlier about how it’s a strategic advantage to have the committed production from ARC, and you’re absolutely right. We were talking about infrastructure first, and that gives us access to potential molecules, but then doing these transactions with ARC and other producers gives us the certainty of molecules into that infrastructure.
Anatol Feygin:
And these transactions take a long time to bring to fruition, and all of those issues, of course, are considered and haggled over, and ultimately, Ryan and the team and the Cheniere team came to a solution that was favorable to both sides. But you’re absolutely right, sometimes things fail because the infrastructure costs are too high, or the productive capacity is too low or the credit quality is not there. So, these are difficult, very long-term, very complex transactions to negotiate, and there’s a lot of room for those deals to fail, whether that’s based on transport costs or production economics or credit quality, et cetera.
Peter Tertzakian:
Yeah. I guess it actually even speaks to the cost competitiveness of the Canadian Basin that it makes economic sense to transport such a distance. It basically means we’re competitive, which is a good thing.
Jackie Forrest:
Yeah. Yeah, I guess so. And then, because the Montney has got a low cost of supply in terms of its production, and we do price at a lower price than at Henry Hub, so that enables us to absorb some of those transportation costs. All right. Before we wrap up, I want to talk a little bit about ESG attributes. Ryan, you talked about the fact that you were certified as a responsible producer. In fact, we had Marty Proctor here from Seven Generations on a podcast in May of 2020, talking about that. So, I wanted to talk a little bit about do the buyers of LNG see value in that, and do you think that’s the future? And also, does it allow you to have a bit of a price premium or not?
Ryan Berrett:
Responsible energy has long been a core for ARC, and I think you talked about Seven Gen, Jackie, and a merger with Seven Gen and ARC, and I think this was one of the key drivers. Besides the size of scale, we had to be competitive from an ESG perspective. Right now, we have one of the lowest GHG emissions intensities among our Canadian upstream peer group. Over 95% of our assets have been certified under the Equitable Origin Global Standard for Resource Development, which represents the largest independently certified production base in Canada, so we view that as a huge competitive advantage. As we’re seeing where the buyers are coming from more recently, specifically with Europe, obviously this has been on front of their mind for a number of years, and I think even with what’s going on, it still is in front of their mind. And maybe, Anatol, you can talk to what you’re seeing from the European buyer side.
Anatol Feygin:
Yeah. Thanks, Ryan. Thanks for the question, Jackie. We transitioned from being a developer of these projects to an operator. I guess we started that transition in early ’16, and unlike Seven Gen and ARC, were probably somewhat later arrivals to the ESG commitments. We unveiled our climate principles in 2018, and four pillars to that I won’t bore you with. But really, externally, the deliverables only started to be seen a little over a year ago. We started off in ’21 with an announcement that in ’22, we would provide an emissions profile for every cargo that we send out. We just implemented that last month. Now every cargo that leaves Sabine Pass in Corpus Christi has, effectively, a tag that shows its emissions profile.
Anatol Feygin:
In the summer of last year, we published our peer reviewed life cycle analysis. We’re the first LNG company globally to have done that. As a building block, probably most importantly, we’ve entered into a number of studies and efforts together with our partners and with institutions to do the quantification measurement reporting and validation of emissions with upstream partners, with infrastructure partners, and with shipping companies. And all those will be key building blocks, and all of those are now part and parcel of the commercial discussions that we have.
Anatol Feygin:
In the last year. I don’t think we’ve executed a transaction that doesn’t include our commitment to provide these cargo emission profiles. I’d say it’s fair to say we’ve had a varying degree of requirement for different commitments, and as Ryan said, there are some European counterparties with whom engagement simply would’ve been impossible without those milestones achieved, without CSR reports that are comprehensive and auditable being filed, and without our commitments. But to be fair, that is not a universal standard yet. We do have discussions that are not that ESG centric. We firmly believe, as does ARC and Ryan, that that is the direction the world is heading in, and the commitment to a transparent and a constantly reducing emissions profile is going to be a key part of having a seat at the global table.
Peter Tertzakian:
So that’s where we’re headed. Can you definitively say today, Anatol, that the buyers want natural gas with a certain ESG profile that’s less than a threshold?
Anatol Feygin:
No, I can’t say that today. The buyers don’t know what the threshold is, and there’s a very large range of buyers. No one objects to having the transparency and the emission profile known, but part of your question was do you get to charge a premium for that? My answer to that is no. It’s hard to compare and hard to say definitively, but what I can say also definitively is there are just some tables that I simply would not have a seat at if I was not committed to this transparency and improvement.
Peter Tertzakian:
Right. Well, the premium is the security premium that’s being paid right now, and of course, the number one issue that the world, and certainly the Europeans are dealing with. So as a consequence of that, I’m assuming that that’s something that’s not going away anytime soon, do you both see more Canada to Gulf Coast gas arrangements coming to pass?
Ryan Berrett:
I think it’s a really good question, Peter. Obviously, the network of pipelines allow us to do that. I think not every producer can entertain these types of deals, in terms of the long-term nature, the credit requirements, and having the established pipeline network that some of the larger producers have within Canada. From an economic standpoint, yes, absolutely. I think there’s still the hope and the feeling that Canada West Coast and East Coast LNG will go, and I think that’s something I think many producers are involved with at different levels, and that probably has just as good a chance of having the ability to participate in as a Gulf Coast project.
Jackie Forrest:
Well hey, thanks to both of you. I’ve learned a lot from this. This is my takeaways. I think we’re going to see more North American LNG exports, but you also reinforced the fact to me that the market in North America is going to become increasingly tight, because we’re going to have more gas leaving. And Ryan’s telling me, “Hey, producers aren’t actually growing that much,” and to me that means a super tight market, and that means LNG exporters are going to be looking to secure their supply because it’s not guaranteed that they can just buy it off the spot market. So I think we’re going to see more of these, and maybe hopefully from Canada. I’m sure we’ll see them from U.S. producers as well.
Peter Tertzakian:
Well, I think the conclusion really is that the decade of $2 to $3 gas prices here in North America are over. We’re becoming much more of a globalized natural gas market, and so we’re going to be able to achieve, as Ryan and Anatol’s deal suggests, much higher prices internationally.
Jackie Forrest:
Good. Well, thank you.
Ryan Berrett:
Great. Thank you very much.
Anatol Feygin:
Thanks for having us. Thanks for the excellent questions.
Jackie Forrest:
And thanks to our listeners. If you enjoyed this podcast, please rate us on the app that you listen to, and tell someone else about us.
Announcer:
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