An update on Canada’s LNG industry
May 2016 | EXPERT BRIEFING | SECTOR ANALYSIS
Canada, which ranks fifth in the world in terms of estimated shale gas reserves, is competing within the highly competitive global market for liquefied natural gas (LNG) with a number of other countries to build the infrastructure necessary to export LNG to key Asia Pacific markets. Finding new markets for Canadian shale gas reserves is of critical importance to Canada given the anticipated economic benefits that will flow to Canadians from the development of an LNG industry. This need has become more pressing in light of the US – our traditional natural gas export market – being awash with natural gas as a result of its own highly prolific shale gas reserves. Not only has this resulted in lower Canadian exports of natural gas to the US, it has also resulted in a number of US-based LNG development projects working towards final approval or, in the case of Cheniere Energy’s Sabine Pass Facility, delivering first cargoes.
Most of the LNG projects currently under development in Canada are located near the Prince Rupert and Kitimat areas in the northwest corner of British Columbia (BC). These areas benefit from both proximity to the major shale plays, as well as relatively short transit times to Asia Pacific markets. There are currently 21 LNG projects proposed along Canada’s west coast representing aggregate LNG capacity of more than 250 metric tonnes per annum (mtpa) (based on publicly available initial and expansion plans). Of these proposed projects, one project (LNG Canada) has received a 40 year export licence from the National Energy Board to export LNG from Canada, while 16 other projects have received 25 year export licences.
250 mtpa of LNG capacity is a tremendous (and unrealistic) amount of proposed new LNG capacity. To put things in perspective, according to the International Gas Union’s World LNG Report – 2015 Edition, global LNG trade was 241 mtpa in 2014, while global liquefaction capacity at the end of 2015 was 301 mtpa. Clearly, based on these global metrics, not all of the Canadian west coast’s proposed LNG capacity will be built.
In 2014 – before the precipitous drop in the price of oil – there were several promising Canadian LNG projects sponsored by international LNG participants, including Chevron and BG Group. But by the end of 2014, and throughout 2015, several projects announced significant delays. Of the major west coast LNG projects, two frontrunners remain, the first of which is the LNG Canada. This project is a proposed 12 mtpa (with option to expand to 24 mtpa) LNG project to be located at Kitimat, British Columbia, led by Shell Canada Energy which holds a 50 percent stake in the project. Shell Canada is a wholly-owned subsidiary of Royal Dutch Shell. The other owners include subsidiaries of CNPC (15 percent), Mitsubishi Corporation (10 percent) and Korea Gas Corporation (10 percent).
The second such project is the Pacific Northwest LNG project (PNW LNG), a proposed 12 mtpa (with option to expand to 18 mtpa) project to be located at Lelu Island near Prince Rupert, BC. The project will be led by Progress Energy Ltd, a wholly-owned subsidiary of Petronas, which holds a 62.5 percent stake in the project. The other owners include subsidiaries of Sinopec (15 percent), JAPEX (10 percent), Indian Oil Corporation (10 percent) and Petroleum Brunei (3 percent).
The challenges for these projects are numerous, and are both global and domestic. From a global perspective, headwinds have included a slowdown in key overseas markets, particularly in China and India; a wave of new global supply of natural gas driven, in large part, by the shale gas revolution in the US; the Australian LNG projects coming on stream; pricing challenges from Asian buyers no longer prepared to link the price of LNG to the price of crude oil; the development of volatile spot-market sales; and the trend away from traditional, long-term fixed contracting for supply. Domestic challenges have included a renewed focus in Canada on the need to reduce global greenhouse gas (GHG) emissions following the Paris climate talks, environmental opposition and the need for ‘social licence’ from Canada’s First Nations groups.
The LNG Canada project is perhaps the farthest along in terms of the regulatory approval process. The Canadian Environmental Assessment Agency (CEAA or the Agency) has approved the LNG Canada project and the BC Environmental Assessment Office issued an Environmental Assessment Certificate for the LNG Canada project in June 2015. The LNG Canada project is also currently the only LNG project to have received a facility permit from the BC Oil & Gas Commission. Further, the Haisla First Nations group –whose traditional territory may be affected by the project – has given its support to the LNG Canada project. Nonetheless, the sponsors of the LNG Canada project announced in February 2016 that they were delaying their final investment decision (FID) until the end of 2016 to ensure that the project is economically viable in the current environment.
In contrast to the LNG Canada project, the sponsors of the PNW LNG project made a conditional FID for the PNW LNG project in 2015, pending receipt of federal environmental approval from the Agency and from the BC government for project-specific fiscal arrangements with the province of BC. The fiscal arrangements were approved by the BC government in June 2015. However, the project continues to await receipt of federal environmental approval from the Agency, this was delayed once again pending a further request for information by the Agency in March 2016.
Changes introduced by the previous federal government in 2012 to the federal CEAA review process for major resource projects were intended to expedite the process, such that reviews would be completed within 365 days. This hasn’t been the case in respect of the PNW LNG project.
The environmental review of the PNW LNG project, which remains ongoing, began in April 2013. Delays in the environmental assessment process are largely due to the Agency’s requests for additional information on the potential impacts associated with sensitive eelgrass beds in the Flora Bank located within the Skeena River estuary. Particular concern has been voiced in relation to the proposed suspension bridge designed to convey LNG from the liquefaction plant on Lelu Island to the proposed offshore marine terminal, originally designed to limit the project’s impacts to the Flora Bank and minimise dredging related impacts to fish and fish habitat.
These concerns, coupled with First Nation groups’ dissatisfaction with the federal government’s consultation efforts to date have contributed to the project’s inability to conclude a benefits agreement with one of the principle first nations groups who assert aboriginal rights and title in the project area – the Lax Kw’alaams Band. Despite offering a benefits package valued at approximately $1.1bn in benefits to the Lax Kw’alaams over the life of the project, the offer was rejected by a majority of the members of the Lax Kw’alaams, underscoring the difficulty of reaching an agreement with all potentially affected aboriginal stakeholders in the area. The province remains active in trying to facilitate discussions with the Lax Kw’alaams and a moderator has been appointed in order to try to resolve their outstanding concerns, including investigating whether the suspension bridge design can be modified, or the location changed, in order to address concerns pertaining to potential impacts to fish and fish habitat. Despite these efforts, an agreement has yet to be reached. The project sponsors have publically indicated their belief that they can address the concerns of the Lax Kw’alaams and that they are hopeful of eventually reaching an agreement with the group that will facilitate moving forward with the project.
Additionally, early this year the federal government announced that it would require a number of projects currently within the environmental and regulatory review process to consider upstream GHG emissions as a component of the review and approval process and would otherwise extend the review process to facilitate additional consultation with potentially affected aboriginal groups. The PNW LNG project was one of the projects subject to the government’s new approach to environmental assessment. Initially the upstream emissions associated with the overall project were estimated by Environment and Climate Change Canada to be in the range of 6.5 to 8.7 million tonnes of CO2e per year with the proponent later providing a project specific estimate of less than 5 million tonnes of CO2e per year. In its draft assessment report, the Agency noted that at these estimates the project would represent 10 to 14 percent of provincial emissions per year. As a result – and despite the Agency’s inability to find any measurable environmental effect in the project area and its concession that GHG related climate change could only result from cumulative GHG emissions on a global basis – the Agency concluded that the project is likely to cause significant adverse environmental effects in its draft assessment report.
Despite these challenges, Petronas continues to indicate that it is still moving towards making an unconditional FID and has denied reports that it will walk away from the project.
In our view, notwithstanding low commodity prices and other challenges, the economic fundamentals for constructing at least two LNG projects projected to come on stream in the next five to seven years appear to remain sound. Domestically, construction and labour costs are much lower than they were when the Canadian economy was running hot. Both proposed LNG projects are working hard to ensure that they have, and can maintain, social licence and the support of affected First Nations and local communities. While there is currently a global oversupply of natural gas, including LNG, the lack of investment in the development of key resource plays for an extended period is likely to be more keenly felt in the next two or three years than today. On the demand side, while growth in Asia has slowed, there is still growth and there will continue to be growth for many years to come. The need to address climate change and environmental sustainability will continue to remain a global priority. The shift from coal power to natural gas power to meet the energy requirements of Asian countries (particularly China and India) will require a significant increase in natural gas supplies for this purpose. And while Japan may be bringing some of its nuclear facilities on-stream, several of its nuclear facilities are older and will be decommissioned.
Sponsors of both the LNG Canada project and the PNW LNG project have invested hundreds of millions of dollars in their projects to date. They have been both patient and resilient in the face of a volatile and uncertain domestic and global environment. We continue to have high expectations that both projects will make positive FIDs in 2016 or early 2017 providing Canada the opportunity to become a player in global LNG markets.
Alicia K. Quesnel and Evan W. Dixon are partners at Burnet, Duckworth & Palmer LLP. Ms Quesnel can be contacted on +1 (403) 260 0233 or by email: firstname.lastname@example.org. Mr Dixon can be contacted on +1 (403) 260 0162 or by email: email@example.com.
© Financier Worldwide
Alicia K. Quesnel and Evan W. Dixon
Burnet, Duckworth & Palmer LLP