2018 shapes up to be pivotal for Canada’s fading LNG dream
Canada’s hopes to build a new liquefied natural gas industry were floored last year with the demise of the Pacific NorthWest and Aurora LNG projects, more setbacks for a sector still trying to get off the ground.
Despite 18 separate proposals being put on the drawing board to build LNG facilities off Canada’s west coast, not one has been built.
Now, 2018 is shaping up to be a pivotal year for the future of LNG in Canada, and for petroleum producers hoping to find new export markets for the country’s surging natural gas supplies.
A recent rebound in global LNG prices, which have more than doubled since last June, and stronger demand in Asia have observers predicting the window for new investment could reopen sooner than expected, sometime early next decade.
At the same time, discounted prices for western Canadian gas should improve the economics of new projects moving ahead.
“We have gas prices today in Western Canada that are half of the United States and that’s just not going to last forever,” Jackie Forrest, director of research at ARC Energy Research Institute, said Wednesday after addressing a Calgary Chamber of Commerce forum.
“The big opportunity for us is LNG.”
To capture the next wave of demand, Canadian projects will need to be ready to make investment decisions in the next 12 to 24 months, perhaps sooner, because it takes at least four years to build these major multibillion-dollar developments.
The Canadian Energy Research Institute is working on a report examining if LNG projects in the country can compete with rival proposals in the United States and Australia, which already have established sectors in place.
“The question for us in Canada is when are these projects going to be announced for breaking ground,” Dinara Millington, CERI’s vice-president of research, said Wednesday.
“If (final investment decisions) are not issued this year, we are not going to see any projects operating in the 2021-22 time frame.”
There is no lack of effort now underway to firm up various proposals still on the books.
Today, all eyes in the industry are on LNG Canada, potentially a $40-billion development led by Shell.
About 100 people are now working on the proposal. Officials with LNG Canada are busy honing the project, examining costs and timelines. A recommendation will be given to its joint venture partners — Petro-China Co., Korea Gas Corp., Mitsubishi Corp. and Shell — later this year.
“There is a real opportunity for that next new wave of LNG demand to be met by new supply,” Susannah Pierce of LNG Canada said in an interview.
“We want to make sure the project is ready. For us, that means we’ve de-risked it, we’ve made sure we have done everything we can to make it as competitive as possible.”
It will be up to the joint partners to make a final investment decision, but the organization wants to be prepared for that moment in the second half of 2018.
Market conditions have improved since the demise of the two big LNG projects last year.
With demand for natural gas growing around the world — China saw a 46 per cent increase in LNG imports last year — international markets look to exhaust existing supply options as early as 2020-21, analyst Martin King of GMP FirstEnergy said recently.
Geoffrey Cann, a partner with Monitor Deloitte who specializes in the LNG industry, agrees there is an opportunity, but notes Canada’s capital costs are significantly higher than expanding existing plants in Australia or converting U.S. import facilities into liquefaction export terminals.
However, Canada’s relative proximity to Asian markets, large quantities of cheap natural gas and the desire of international buyers to diversify their supplies also play into the country’s favour.
“I would say Canada has a pretty good shot at getting the projects sanctioned. I would not have said that two years ago,” Cann said.
A new report by energy consultancy IHS Markit points out investment in new global LNG projects has been at an impasse for the past two years, with only one large-scale international development receiving a positive investment decision last year.
Other factors could pose a challenge to Canada, from taxes and getting necessary regulatory approvals in place to political opposition and overall economic conditions.
“We need to reduce costs by 20 to 30 per cent to make these projects competitive,” said Ian Archer, associate director of North American natural gas for IHS Markit in Calgary.
“For a made-in-Canada project, I think the headwinds are still fairly strong.”
Developers of projects still on the drawing board agree capital costs and the time needed to build new facilities must come down.
The federal government must also deal with hefty anti-dumping duties on large prefabricated steel components built overseas that are needed in the LNG sector.
“We, as projects, have to keep our costs under control … but you can’t layer things on top,” said Byng Giraud, a vice-president at Woodfibre LNG, which plans to build a smaller $1.6-billion facility near Squamish.
Other projects are also under the microscope.
ExxonMobil and Imperial Oil are evaluating the potential for their WCC LNG export facility at Tuck Inlet in Prince Rupert, B.C., although it remains in the early stages, company officials said.
Meanwhile, Chevron and Woodside Energy International are working on their large Kitimat LNG project. The proposal has not yet received a final investment decision and it “must be cost competitive relative to other LNG supply jurisdictions,” Ray Lord with Chevron Canada said in an email.
Potential pitfalls also lurk in the political realm.
B.C. Premier John Horgan is in Asia this week meeting with potential LNG developers, but Green party Leader Andrew Weaver has threatened to pull his support for the minority government over the issue.
So, is 2018 the year Canadian LNG projects finally gain momentum?
Given the track record, it’s difficult to be an optimist.
But big decisions are coming down the track for a fledgling sector that badly needs a win.