Petrodollars: The Western Canadian LNG Business Attempts to Launch

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Exports of LNG from the US aren’t the only potential growth story for North America. LNG shipments out of Western Canada are also on tap. Ashok Dutta, in this week’s Oilgram News column Petrodollars, reviews the start-and-go status of the various projects.

It’s nearing a now or never time for getting the much-touted grassroots LNG industry in Western Canada’s British Columbia off the ground.

Home to 1,965 TCF of gas-in-place—located in some of the most prolific plays in North America—there should never be any doubts about the prospects of success.

The National Energy Board has already granted export licenses for nine facilities, and continues to evaluate applications for at least five more projects, yet no one has “shown the money” in terms of a final investment decision.

Four of the nine green-lighted projects have the strong backing of Japanese utilities and trading companies as either equity partners or offtakers, or both, but no FIDs.

The Japanese projects include: the 24 million mt/year Aurora LNG with Inpex and JGC Corp as stakeholders; the 12 million mt/year Pacific Northwest LNG with Japan Petroleum Exploration Company as 10% stakeholder and offtaker; the 12 million mt/year LNG Canada facility with Mitsubishi Corp as founding partner; and the 2.3 million mt/year Triton LNG with Idemitsu as 50% shareholder.

Interest is also growing from India, with its state-owned Indian Oil Corp., eyeing opportunities to further increase its upstream stake and offtake. The company already has a 10% footing in the Pacific Northwest facility and has also put pen to paper for 1.2 million mt/year of LNG.

“For the first time, we have also had interests from European buyers who are looking for stable and secure LNG supplies in the light of the geo-political issues between Russia and Ukraine,” said Rich Coleman, British Columbia’s natural gas development minister.

Yet, like two other leading producing areas in Qatar and Australia, project proponents in British Columbia have the all-too-familiar hiccups that are coming in the way of FIDs being adopted.

In a multi-dimensional industry like LNG the right fiscal framework, cost of resource development, market dimensions, project economics, construction costs and regulatory issues need to be in place before projects can get going, said William Gwozd, senior vice-president for gas services with Calgary-based Ziff Energy.

Another factor that delays financial commitments, typical to British Columbia, is the need to invest in multi-billion dollar pipelines often more than 500 miles long to transport feedstock gas from hinterland areas in the Western Canadian Sedimentary Basin to planned LNG liquefaction terminals along the coastline. These projects almost require as much legwork to get off the ground as the actual LNG plan.

And last, but not the least, is the inability of developers to sign more offtake deals that will make their projects commercially viable.

Until now, Pacific Northwest has only been successful in signing offtake deals for about 7.5 million mt/year or 62% of its total planned capacity.

The delay in FIDs in British Columbia has become a cause of concern for several in the industry.

Michal Moore, area director of energy and environment policy with the School of Public Policy, University of Calgary, said if the province does not act quickly it could soon end up losing out to other jurisdictions, like heavyweights Qatar and Australia and planned debutants namely, the US and Mozambique.

“If BC [British Columbia] doesn’t have LNG plants under construction by 2018, it will become increasingly difficult to get into the market because contracts will have locked up the new demand for gas in Asia,” Moore said in an 86-page report.

“The market [for LNG] is large and it is growing, but there are a lot of countries and companies lined up to provide adequate supply to meet that demand in the short and long term. So, to imagine the market is infinitely large and infinitely growing is simply a mistake,” said Moore.

Mary Hemmingsen, global LNG lead with KPMG, said in late June a “window” of opportunity for Canadian LNG producers will be available again from 2019 to 2022 when several Asian buyers re-negotiate existing offtake deals they have with Middle Eastern suppliers.

At the core of that renewal will be a new form of pricing, with Japanese utilities seeking a range from $10 to $12/MMBtu, Gwozd said, adding their target will be to link LNG pricing with natural gas rather than crude oil.

“Their [Japanese buyers] aim is to link 100% to Henry Hub prices, rather than JCC [Japan Customs Cleared],” said Jihad Traya, associate director at IHS CERA for North America natural gas, but added that in reality it will likely be a cocktail of oil and gas pricing.

The sale price of Canadian LNG will be pitted against a production cost of nearly $10/MMBtu, with little room being left for profits, which is another hurdle toward securing and FID.

In the 1980’s, construction costs for LNG facilities were around $350/mt, declining to $200/mt in the early 2000s. Since then costs have surged to $1000 to $1,600/mt and beyond, a Deloitte report said. —Ashok Dutta in Calgary.

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