National Post (National Edition)
LNG PROJECT RAMPS UP DESPITE COST ISSUES
CALGARY • LNG Canada says it is disappointed with its pipeline contractor TC Energy Corp. over announced delays and cost overruns for the Coastal GasLink pipeline, as construction ramps up on its massive export project.
“Like any other relationship or friendship, sometimes you disagree on certain issues,” LNG Canada CEO Peter Zebedee said of Calgary-based
TC Energy, which is building a pipeline to connect northeast British Columbia's gas fields with his company's $30-billion liquefied natural gas (LNG) export terminal in Kitimat, B.C.
“To be frank, I was disappointed with the comments that were made,” Zebedee said, referring to TC Energy's comments last month that work had temporarily stopped on the 2.1-billion-cubic-feet-per-day Coastal GasLink pipeline due to COVID-19 protocols and that the project would likely be delayed and exceed its $6.6-billion budget.
“We do expect Coastal GasLink to live up to their commitments around costs and schedule,” Zebedee said in an interview.
TC Energy is now signalling it intends to negotiate higher tolls on the pipeline.
“We are working with LNG Canada on establishing a revised project plan for Coastal GasLink,” TC Energy president and CEO François Poirier said on a Feb. 18 earnings call. “We expect that project costs will increase and the schedule will be delayed due to scope increases, permit delays and the impact of COVID-19, including the provincial health order.”
British Columbia's chief medical officer issued an order at the end of December, requiring all major project work in the province's north to submit new plans on COVID-19 mitigation. The order caused a work pause for both Coastal GasLink and LNG Canada, though work is now scaling back up with the workforce is expected to rise from 1,200 people to 3,000 people by the end of the month.
Construction is ramping up on LNG Canada and the first pre-fabricated steel modules are expected to arrive on site later this year from Asian construction yards, at which point the workforce will expand further until it ultimately reaches 7,000 people.
As work progresses, the two companies are working to contain costs.
“Coastal GasLink will continue to mitigate these impacts to the extent possible and these incremental costs will be included in final pipeline tolls, subject to certain conditions,” Poirier said.
Zebedee said the company was in “ongoing discussions” with TC Energy over the costs related to Coastal GasLink and said higher pipeline tolls would only be acceptable if higher costs were incurred prudently.
Higher pipeline tolls would affect economics of shipping gas from Canada to Asia, and would likely be resisted by LNG Canada's joint-venture partners, which include Shell Canada Ltd., Malaysia's Petroliam Berhad Nasional (Petronas), PetroChina Canada, Mitsubishi Canada Ltd. and
Korea Gas Corp. (Kogas).
In addition to disagreements over timelines and costs for the pipeline, the project has faced similar pressures as a result of COVID-19, which has limited work at the project site.
“Have we seen pressures, yep, absolutely,” Zebedee said of how COVID-19 has affected the timeline and budget for the mega project. He said the costs for the project are “within range” of the company's cost target and LNG Canada still expects to be shipping gas from Kitimat to Asia by the “middle of the decade.”
That timeline could coincide with a boom period for the energy source with LNG demand expected to outstrip supply.
Royal Dutch Shell Plc. released its annual LNG outlook report on Feb. 25, which forecasts LNG demand to almost double from 360 million tonnes in 2020 to over 700 million tonnes by 2040, driven primarily by increasing gas demand in Asian countries.
“As demand grows, a supply-demand gas is expected to open in the middle of the current decade with less new production coming onstream than previously projected,” the outlook states.
Shell noted that LNG proponents were expected to approve projects capable of delivering 60 million tonnes of LNG in 2020. But given market volatility last year, significantly fewer projects have started to date with a combined capacity of producing only three million tonnes per year.
Similarly, the Doha, Qatar-based Gas Exporting Countries Forum, a group of LNG exporting nations, released a market outlook last month predicting that global natural gas demand will increase by 50 per cent to reach 5.9 billion cubic meters per day, or roughly 209 billion cubic feet per day, by 2050.
LNG Canada project is being built in two phases, each capable of producing 14 million tonnes of LNG for export. The second phase has yet to be approved for construction by the joint-venture partners and Zebedee said the company doesn't have a timeline for when a final investment decision would be made.
“Phase 2 remains a key part of LNG Canada's future,” Zebedee said, noting that some costs have been mitigated in the first phase due in part to the fact that the export terminal is the only LNG project currently under construction in Canada.