How Canada blew its chance for a multibillion-dollar LNG industry
How Canada blew its chance for a multibillion-dollar LNG industry
B.C. natural gas producers who can’t move gas to the West Coast could be supplying LNG producers on the U.S. Gulf Coast
July 25, 2017, 1:50 p.m.
The prospects for a West Coast LNG industry appear to be growing dimmer by the day, confirmed this week by Petronas with the announcement it will not proceed with the Pacific NorthWest LNG project.
That’s one of 18 proposed LNG project for the West Coast, with just one—the small-scale Woodfibre LNG project—reaching a final investment decision.
Canadian projects have been beaten to market by Cheniere Energy in the U.S.
If B.C. gas ends up being exported to foreign markets, it might not be from the West Coast, but from the Gulf Coast. Cheniere, which has a three-train LNG terminal in production on the Sabine Pass River in Louisiana, and four more trains under construction, has already inked a contract with at least one natural gas producer on the Alberta side of the Montney region and is said to be actively courting producers in B.C.
“We’re very happy to get as many molecules from Canada as we can logistically supply to our two facilities at Sabine and at Corpus [Christi],” Cheniere executive vice-president and chief commercial officer Anatol Feygin recently told Bloomberg.
Pat Ward, president and CEO of Painted Pony Energy, notes that U.S. companies are already buying natural gas from Canadian producers at $2.50 per million British thermal units (MMBtu) and selling it to Mexico for $3.50 per MMBtu.
“They’re basically buying cheap Canadian gas and selling it to the Mexicans,” said Ward, whose company is invested exclusively in the Montney of northeastern B.C.
The Montney, which straddles B.C. and Alberta, is considered by some to be the most prolific and lowest-cost shale oil and gas play in North America. Some producers invested there in the hope of seeing new markets in Asia open up via West Coast LNG plants. Others are there for the liquids—condensate, propane and oil—with the dry gas being sold almost as a byproduct.
Getting gas to the West Coast would require new pipelines, at a cost of roughly $7 billion each. Petronas’ two-train LNG plant in Prince Rupert would cost roughly $11 billion. Generally, a two-train LNG project and pipeline like those proposed by Shell and Petronas would have a capital cost of $35 billion to $40 billion.
So while the gas is inexpensive to produce in B.C., it would be costly to move it to the West Coast, whereas there is already an extensive pipeline network in North America that would allow B.C. gas to flow into the U.S. system and to the Gulf Coast to feed Cheniere’s rapidly expanding LNG terminals.
“I guarantee you I can land that AECO gas in the Gulf Coast cheaper than they can move that AECO gas to the West Coast,” Feygin boasted at a recent conference in Houston, according to a brief by Stream Asset Management. (AECO, an acronym for Alberta Energy Co., represents the Canadian benchmark price.)
In a report released last week, the National Energy Board (NEB) acknowledged that Canada is a latecomer. Despite the country’s vast reservoirs of cheap gas, the NEB acknowledges that Canadian LNG projects face major hurdles such as high capital costs, eroded margins from low LNG prices and competition from the U.S. and other rival producers.
“Certainly the economics are tight for projects in Canada,” said NEB market analyst Colette Craig. “The U.S., they’re able to convert those brownfield projects—those regasification projects—to LNG export projects, so that has given them a fair bit of an advantage, whereas Canadian projects are all greenfield projects.”
The B.C. advantage for producing LNG includes abundant, low-cost natural gas, short shipping routes to Asia and a cold climate, which reduces the cost of chilling gas into liquid form.
The U.S. advantage includes existing LNG import terminals that were easily converted to export terminals, an existing North American gas pipeline system, a more competitive tax system for LNG producers and a competitor—Canada—that suffered self-inflicted regulatory paralysis.
While Canada dithered, America pivoted, and now B.C. gas producers may face the same problem Alberta oil producers face: an inability to move their gas to markets outside of the U.S.
“It’s unfortunate, because we’re stuck with the same problem we have with oil – we can’t get our product to an international market, and that’s what LNG is all about,” Ward said. “As a country, we’re killing ourselves. The disappointing part is Canada started down the LNG track at the same time [as the U.S.]. It’s very frustrating.”
Ward said the federal government squandered an opportunity by taking too long to approve Petronas’ Pacific NorthWest LNG project. Jihad Traya, manager of natural gas consulting for Solomon Associates, said the BC Liberal government blew it by creating a new LNG tax before the industry had even developed.
“The B.C. government was a rent-seeking agent at the most crucial time, when these investment decisions needed to be made,” he said. “So they created a lot of fiscal uncertainty.”
The companies that proposed LNG plants in B.C. have deferred making final investment decisions, and now face a new provincial government that may well put additional regulatory hurdles in the way. The Woodfibre LNG project in Squamish is the only LNG project in B.C. that is moving forward to construction.
There is a glut of LNG on the world market, which has pushed prices down to about US$7 per MMBtu. Developers would need prices to be at US$10 per MMBtu to sanction a multibillion-dollar LNG project, Traya said.
While B.C. missed the first window of opportunity to lock up long-term LNG contracts, a second window is expected to open around 2024—possibly earlier—when new supplies balance out with growing global demand. That means any major investments in new LNG projects would need to happen by about 2019 or 2020.
The International Energy Agency recently projected that global gas demand will grow by 1.6% per year for the next five years, with China accounting for 40% of the increase. The Chinese government has announced a new target to increase natural gas consumption for power generation. Gas currently accounts for 6% of the country’s power generation; China plans to raise that to 10% by 2020.
But growing Asian demand could be served by producers in Australia and Qatar. Qatar recently announced plans to boost its LNG production by 30%.
Assuming the new BC NDP government co-operates in the development of an LNG industry, it would need to sit down with producers and renegotiate the tax regime put in place by the Liberals, Traya said.
He said the new Cheniere plant in the U.S. has changed the conversation, because LNG developers can now point to American competitors who enjoy a more favourable business environment.
“They’ll have a tax advantage and they’ll also have an infrastructure advantage,” Traya said. “All the [smaller infrastructure] and the piping is already there. The fiscal certainty conversation is going to be predicated on what’s happening at Cheniere.”
Asked if he thought an NDP government would be willing to scrap the Liberal LNG tax system and give the industry a better deal, Traya said: “They have no choice. They have zero choice. That’s just the market condition they’re in.”
David Austin, a lawyer specializing in energy at Clark Wilson LLP, disagrees with Traya. He thinks Canada still has advantages over U.S. LNG producers, and he points out that the LNG tax the Liberals put in place is only charged on profits once the capital investments are paid for. In fact, he thinks it’s possible the government might not collect any LNG tax revenue at all.
“It all depends on the inputs for the calculation of the tax,” he said. “Until you know what those inputs are, it’s premature to conclude that any tax would ever be payable.”