PRIMED FOR TAKEOFF
LNG CANADA’S huge facility is poised to end A long string of major energy project failures
Four and a half years CALGARY after moving to Vancouver to get the massive LNG Canada project ready for a final investment decision, or FID, Andy Calitz likens the state of the mega-energy venture to that of a peak-performance Olympic athlete in the final seconds of a gold-medal race.
It’s beating competitors at that point that makes the difference between winning and losing, said the Royal Dutch Shell PLC executive, one of the world’s top guns in LNG development.
It’s a good thing, then, that after a tortuous seven-year struggle to find a way to deliver Canadian LNG at the lowest possible price to Asia, the South African engineer is feeling optimistic about building an LNG export terminal in Kitimat, B.C.
“Apart from this relentless, Olympic-style competition to the last moment of getting costs down, down, down, there is not a single other major stumbling block to getting this project to FID,” Calitz, chief executive of LNG Canada, said in an interview at Shell’s Calgary headquarters, where he spends half his work week.
“I have spent the last four-anda-half years thinking of nothing else. Is there something that I am not seeing? No. It’s the competitiveness at the time of the FID that will either do this, or this,” he says, turning his thumb up, and then down.
LNG Canada will cross that go/ no go moment some time after June 30, when its team will finish preparatory work and the boards of the four global energy giants backing the joint-venture project — Shell (50 per cent), PetroChina Co. Ltd. (20 per cent), Korea Gas Corp. (15 per cent) and Mitsubishi Corp. (15 per cent) — will convene separately to decide the project’s fate.
It’s a highly anticipated moment, but it’s not the first time the project has been here. In 2016, the partners decided to delay their FID on the $40-billion project — Canada’s largest ever — after energy prices collapsed and demand in Asia weakened.
The investment involves building an entire LNG value chain: developing natural gas now stranded in Montney and Duvernay formations; building the Coastal GasLink pipeline through the Rocky and Coast mountain ranges; building a liquefaction plant and port in Kitimat; and then delivering gas to customers in China, Japan, Korea and beyond via two channels to the Pacific Ocean.
The project would be built in two stages, with construction of the first expected to start later this year and completed in 2024.
The project is so large that at full capacity it would soak up a third of the gas production in Western Canada, or about 4 billion cubic feet a day, which could lift prices long depressed by excess supplies.
Success would also put an end to a long streak of major energy project failures, including three other LNG projects proposed in the same B.C. region that folded in the past year, but that’s not all.
It would be a major building block for economic reconciliation with First Nations, signal that Canada can competitively produce hydrocarbons under its new aggressive greenhouse gas reduction targets and make Canada the 20th LNG-producing country.
Calitz lists several reasons why he is optimistic, in addition to the fact that development plans are well-advanced and that environmental approvals are already in place.
A big one is that the global supply/demand market has improved since no new LNG projects were launched in either 2016 or 2017. Indeed, according to a recent Shell LNG outlook, the global market will be short of LNG supplies starting in 2020 because demand growth has defied expectations.
Other reasons for optimism include recovering energy prices that have normalized, considerable buyer interest in Asia and that the fabrication yards in Asia that would build half of the plant’s big pieces are hungry for work after finishing work on Russia’s Yamal LNG project.
LNG Canada would also benefit from a first-mover advantage since it would have access to a large pool of labour in B.C. and the rest of Canada. If it moves forward, the project would hire between 15,000 and 20,000 craftsmen over a fiveyear construction period for upstream development, as well as the pipeline, plant and port.
Finally, both Ottawa and, most recently, B.C.’s NDP government are on board.
B.C. Premier John Horgan’s government, which needs the support of the anti-fossil-fuel Green Party to stay in power, could have easily played spoiler.
Horgan was critical of the sector during last year’s election campaign, but has since moderated his views. Indeed, on Thursday his government offered new conditions and tax incentives for LNG projects in the province in a move to attract investment.
“Potential opportunity is extraordinary. Potential risks are significant,” Horgan said. “I believe LNG Canada is working diligently to address those risks and I believe it’s the responsibility of the government to make sure we’re working to develop those opportunities for all British Columbians.”
In January, Horgan embarked on a trade mission to Asia to meet with the chief executives of PetroChina, Kogas and Mitsubishi. “The meetings were really, really positive, both ways,” said Calitz, who accompanied the premier.
B.C. Green Party leader Andrew Weaver has threatened to bring down Horgan’s minority government if LNG projects move forward, arguing B.C. would fail to meet its greenhouse-gas reduction commitments.
The project would generate four megatonnes of greenhouse gases a year, but proponents said it will be the world’s greenest from a CO2 intensity perspective and reduce global carbon emissions by replacing coal in Asia.
Calitz is well aware challenges remain and need careful handling — LNG Canada is the third project he has helped bring to fruition.
LNG Canada is so large it would boost global supplies by 10 per cent, or 28 million tonnes, per year at full capacity, so the addition has to be carefully introduced to avoid swamping the market. It also has to be more competitive than options from the U.S. Gulf Coast, Australia, Indonesia, Russia and Mozambique.
Compared to the U.S. Gulf, its closest rival, Canada has three advantages that outweigh two competitive disadvantages, Calitz said.
On the plus side: Canada’s proximity to Asia, which shortens travel time by eight to 10 days for tankers, depending on weather along the route; the cost of producing gas in the Montney and Duvernay is lower than buying gas at Henry Hub in the U.S.; and it has an attractive 40-year export licence from the National Energy Board with no limitations on where the LNG can be exported.
On the other hand, building LNG capacity in Canada is twice as expensive than in the U.S. because of higher labour costs, lower productivity and bad weather; it’s also costly to build a pipeline through two mountain ranges.
Reducing costs is the final bigticket item on LNG Canada’s todo list. To that end, the project is working with two engineering, procurement and construction (EPC) contracting groups competing to build the project: TechnipFMC PLC and KBR Inc. (LNG BC Contractors), and JGC Corp. and Fluor Corp. The winner will be picked in the coming weeks.
A native of Cape Town, the 59-year-old joined Shell 20 years ago in business development. His first big LNG assignment involved building the Sakhalin project in Russia. His second was the Gorgon LNG project in Australia. Both were massive undertakings and helped establish LNG in their respective countries.
The Australian experience made things tougher for B.C.’s fledgling LNG industry, Calitz said.
Indeed, after suffering from cost increases and schedule delays in Australia, LNG Canada’s jointventure partners warned him: “You have to have the capability and the confidence and the plans and the government support and the First Nations support and the permits, etc., to have de-risked the execution process so that you can be on the cost and on schedule as was advertised at the time of taking first FID.”
In Canada, the LNG team is split between Vancouver and Calgary. Vancouver handles relations with governments, communities, regulators and First Nations. The larger Calgary group manages engineering contractors and the relationship with TransCanada Corp., which would build the pipeline. If the project goes ahead, the Calgary team would relocate to Kitimat, where the project already owns land for the plant site.
Of course, LNG Canada has had plenty of hurdles to overcome.
An important one is fitting into Canada’s reconciliation agenda with First Nations. That means value — jobs, training and benefits — has to flow back to First Nations in different ways during development, construction and then 40 years of exports.
It also means paying special attention to mitigating environmental impacts. “We have studied impact at every level … at weight level, noise level, light level, nitrogen oxide level, sulphur oxide level, CO2 level, at traffic-through-town level, at roads to be made and rivers to be crossed,” Calitz said.
So far, LNG Canada is on track. None of the 24 First Nations “touched” by the project — from Dawson Creek where the gas fields are located to Triple Island off Prince Rupert where tankers would leave the Canadian coast — is opposed. Altogether, First Nations signed 35 benefits agreements with LNG Canada, TransCanada and the B.C. government.
LNG Canada also has a big champion in Ellis Ross, the former chief counsellor of the Haisla Nation near Kitimat and now a Liberal MLA. The plant is located in traditional Haisla lands. Ross embraced LNG development early on, persuaded other bands to do the same, and fended off green lobby efforts to instigate Indigenous opposition.
Benefits from the project have already paid for renovations to Haisla facilities, sports and youth groups, roof replacements for elders’ homes and funeral expenses, Ross said. Now the band is looking forward to $100,000-a-year jobs, instead of the typical $20,000 income on reserves, where 60 to 80 per cent are unemployed. He believes there will be jobs for everyone who wants to work once construction gets underway.
“Andy Calitz from Day one has been honest and forthright,” Ross said. “His compassion for the region and the people is incredibly inspiring.”