IT’S ALL ABOUT THE TIMING
A pair of LNG projects is waiting in the wings
This week, just seven days after B.C. Premier John Horgan and his NDP cabinet were sworn in, global energy heavyweight Petroliam Nasional Bhd killed its mega-project Pacific NorthWest LNG, citing poor market conditions.
With a price tag of $11.4 billion for the liquefied natural gas (LNG) plant and a docking terminal that would have loaded tankers bound for new markets in Asia, another $6 billion for a pipeline to carry gas from northeast B.C., and billions more needed to develop gas resources, this was no small cancellation.
There were as many as 4,500 jobs estimated for the project’s construction peak and another 300 or so estimated permanent jobs in northwest B.C., which has been hit hard by thousands of permanent job losses in the forestry sector, including from pulp mill and sawmill closures.
LNG was a nascent sector that had been touted by former Premier Christy Clark and her Liberal government as a new underpinning for the province’s economy.
In the run-up to the 2013 election, the new sector was promoted as a $1-trillion economic windfall that would fill a $100-billion prosperity fund, wipe out B.C.’s $60-billion debt and create as many as 100,000 jobs.
Clark vowed, that by 2020, there would be three plants in operation. That much-hyped dream is long dead.
The big question now: is there any future for LNG in British Columbia?
During the push on LNG by the B.C. Liberal government, 20 proposals were floated. None are under construction.
But there may still be a flicker of life in the LNG sector.
“I don’t think it’s the death knell of LNG in Canada,” said Warren Brazier, a Vancouver-based energy lawyer at Stirling LLP, of the cancellation of Pacific NorthWest LNG.
In B.C., the Indonesian company behind a much smaller project than Pacific NorthWest LNG — the $1.6-billion Woodfibre LNG project near Squamish — continues to insist it will be built.
And two other large global energy players with regulatory approval from the B.C. and Canadian governments say they are trying to position themselves to be ready to make a decision on building their own billions-of-dollars of mega-projects in northwest B.C. to coincide with increased demand they forecast could kick in by the middle of next decade.
Those projects are LNG Canada led by Royal Dutch Shell plc and Kitimat LNG, a 50-50 venture of Chevron and Australian-based Woodside Energy.
It’s not going to be easy, however, noted Brazier, pointing out that natural gas is a global commodity not differentiated as might be cedar wood or high-quality coal used to make steel from B.C.
Even under the continued possibility of an LNG export sector in B.C., those projects will continue to have to compete against companies in the U.S. Gulf Coast that have aggressively and successfully launched an LNG export industry ahead of B.C.
There are also existing global players such as Qatar, the largest LNG producer in the world, which has said it plans to boost production by 30 per cent in the next seven years.
The northwest B.C. projects would require a decision to build by 2019 or 2020 — possibly 2021 at the latest — in order to be ready for the forecast increased demand, as construction of an LNG facility takes about four years.
Despite the loss of billions of potential investment because of the Pacific NorthWest LNG cancellation, the remaining investment at stake is considerable: Up to $40 billion for LNG Canada in Kitimat and another $3.5 billion for Kitimat LNG. Nearly $7 billion in pipelines is needed for these projects.
And Brazier noted that B.C.’s world-class natural gas resources are not going anywhere, adding it was always going to take time to build the regulatory and tax framework for the new LNG export industry in B.C., now largely in place.
Brazier also said it is not uncommon for major energy players to spend hundreds of millions or billions of dollars on multiple prospective projects and decide not to go ahead with one in favour of another.
The prospect of an NDP government, and potential increased costs from its four conditions that included guarantees of jobs and training to British Columbians and “a fair return” from the resource, could have been a factor in Petronas’ decision, but the larger issue was the continuing poor global price for natural gas, he said.
“B.C. is getting a taste — an introduction — to the global energy market. A lot of things are outside of your control,” said Brazier. “Companies have to keep their shareholders happy. They are not going to build a project if it’s not profitable.”
The B.C. Liberals were quick to blame the cancellation on the NDP’s “closed for business agenda.”
The Liberals said, for example, the NDP’s plan to impose a higher, non-revenue neutral carbon tax sends a clear signal that B.C. is not a friendly market to invest in.
The NDP plan to increase the province’s carbon tax to $50 by 2022 from its current $30, a move the federal government has said it wants to see all provinces make. Recently, the B.C. Liberals said they would do the same.
Michelle Mungall, B.C.’s new energy and mining minister, has stressed that Petronas had cited market conditions for its cancellation decision.
It was a point that Anuar Taib, an executive vice-president at Malaysian state-controlled Petronas and chairman of Pacific NorthWest LNG, also stated this week.
In a call with reporters, Taib said he continued to believe there was a future for LNG in B.C. “for the right project at the right time.”
And while the company was not moving ahead with the LNG project, Taib said they would continue to develop and market its vast natural gas resources in northeast B.C. owned by its company Progress Energy.
After the announcement that Pacific NorthWest LNG was cancelled, Mungall said she had discussions with the proponents of LNG Canada, Kitimat LNG, Woodfibre LNG and Aurora LNG (a joint venture of Chinese statecontrolled CNOOC and Japanesebased INPEX), a project still working its way through regulatory approval.
Mungall said the companies told her they remain committed to their proposed projects.
“All agreed those (NDP) four conditions are not roadblocks but road maps. They see themselves as able to meet them, if they are not already,” she said.
“There is absolutely a future,” said Mungall of the prospect of an LNG export sector in the province.
There’s no sign of companies walking away. We don’t believe it’s dead at all.
According to energy analysts, a recent window of opportunity — where demand outstripped supply and the price justified the huge capital expenditures — was missed by LNG Canada and the other large B.C. projects.
To have capitalized on the opportunity, the projects would have already had to be completed or under construction. Instead, LNG Canada and Kitimat LNG simply put off making an investment decision.
Now, to position itself to take advantage of the next window of opportunity, LNG Canada has cancelled a contract to a consortium of firms that would have overseen engineering, procurement and construction management and put it back out for new bids.
The idea is to drive down costs and shorten construction timelines. Similar exercises are underway for Kitimat LNG and also the smaller Woodfibre LNG project.
“We keep hearing that LNG is dead and an opportunity lost,” said Susannah Pierce, director of external affairs for LNG Canada. “We are working our hearts out to make this happen. Our team and our joint partners are committed.”
Pierce said Shell forecasts an opportunity where new supply will be needed for world markets in 2023.
In an effort to be able to move as quickly as possible if a positive investment decision is made, Canada LNG is continuing site work in Kitimat.
The company — whose consortium also includes PetroChina, Korea Gas Corp. and Mitsubishi Corp. — is dismantling storage tanks on the Methanex industrial site they purchased in 2011 for their LNG plant.
And this summer, staff of LNG Canada and its contractors will start moving into the apartment Haisla Centre in Kitimat. The company has a 10-year lease on the building owned by the Haisla Nation, which supports the LNG sector.
Pierce noted that as many as 100 people in Calgary, Vancouver and Kitimat continue to work on the project.
The other proposed project in the community, Kitimat LNG, is re-evaluating its original project design, also to drive down costs.
The company — an equal joint partnership of Chevron and Australia-based Woodside Energy — is continuing to carry out modest site work, including dismantling some infrastructure at the former Eurcan pulp mill site purchased in 2014, to be used as a construction staging area. Chevron Canada spokesman Ray Lord said they are still very much committed to the Kitimat LNG project.
“We are focused on creating a globally competitive project to be ready at the right time, aligned with LNG market demand,” said Lord. “We believe there will be a significant opportunity for a competitive project to supply LNG sometime in the middle of next decade.”
Energy analysts say while it is true that natural gas demand is forecast to increase in the coming decades, the challenge is that today’s prices don’t justify building an LNG mega-project in B.C.
Ed Kallio, a principal of Calgarybased Eau Claire Energy Advisory Inc., said he is not optimistic about a large LNG project in B.C. making a positive final investment decision any time soon given the fall-off of natural gas prices in Asia.
The B.C. projects were predicated on exporting abundant, low-cost gas, in the $2 to $4 US per 1,000 British thermal units range, to Asia where prices were as high as $18 in 2013. By 2016, prices had plunged to below $6 and have shown little sign of increasing.
Kallio said, however, that if the project has a longer-term view, proponents might make a decision to build.
The company and its board of directors — whether that’s a company such as Shell or Chevron — has to make a decision on its willingness to take the risk that demand will build and prices will rise enough to cover the costs.
“Right now, you wouldn’t do it,” said Kallio, referring to the current natural gas pricing in Asia.
Kallio’s point of view is underscored by a recent report by the National Energy Board — Canada’s Role in the Global LNG Market: Energy Market Assessment.
The report concluded Canada is a late entrant to global LNG markets and the next several years will be critical to the development of a Canadian LNG industry.
“With LNG prices falling in recent years, the margins needed to justify this type of capital-intensive development have eroded. Increased competition has also made it difficult for Canadian projects to sign long-term supply contracts,” said the report.
In May, the NDP formed an alliance with the Greens, who hold three seats, to give them a one-seat majority in the B.C. Legislature.
While the Liberals championed LNG and the NDP had a more cautious approach, the Greens are not in favour of development of the new sector.
However, LNG proponents don’t seem overly concerned by the government change, or of the uncertainty that a razor-thin majority brings to B.C.’s political situation.
While Horgan has strongly opposed Kinder Morgan’s $7.4-billion Trans Mountain oil pipeline expansion, he has shown conditional support for the LNG sector.
Lord also said he believes they can work with any government, noting the support of the project by First Nations.
In Kitimat, community and business leaders remain bullish that an LNG project will be built.
Hundreds of people turned out to recent informal project update meetings, which included free pizza at the Canada LNG session and a barbecue at the Kitimat LNG event.
Senior Chevron executives also attended the community session.
Kitimat Mayor Philip Germuth, who attended both information sessions, said he believes it is not a matter of if, but when one of the LNG projects goes ahead.
He said given the four- to fiveyear construction time frame needed to build a plant — and the fact there will be another window when demand is forecast to outstrip supply in the mid-2020s — the community hopes to see a final investment decision late in 2018 or in early 2019.
“There’s no sign of the companies walking away,” said Germuth. “We don’t believe it’s dead at all.”
Thom Meier, general manager of 101 Industries in Kitimat, is also optimistic an LNG project will move forward in the community of 8,300.
He said his firm — a steel fabrication, sheet metal, machining, roofing, heating and plumbing contractor — is offering its local expertise for the new contract bidding process for LNG Canada, designed to lower costs.
He said the community has continued to see a very visible presence from both LNG Canada and Kitimat LNG. “That’s what really fuels optimism,” he said.
The two Kitimat projects have had some advantage over Pacific NorthWest LNG, as they have universal First Nation support at the terminal location. The Petronas’ project did not have that luxury.
Last year, Woodfibre LNG, owned by Singapore billionaire Sukanto Tanato, made a decision to build the project. However, no date for construction has been set.
Woodfibre LNG project is having two competing firms examine its engineering design to reduce costs. There’s no definitive timeline on that exercise, but it could be complete by the end of the year.
Said Byng Giraud, Woodfibre LNG’s vice-president of corporate affairs: “It takes time. We are working as hard as we can. We are not downing tools. We are hiring more people.”