This article provides an overview of the key areas of the legal landscape downstream of liquefaction terminals in the context of Canadian LNG projects. This will be of particular interest to those involved in Canada's nascent LNG industry, including project proponents, buyers and sellers of LNG, and owners and operators of LNG carriers and other vessels intending to load LNG, either as cargo or bunker fuel, from a terminal in Canada.
Canada's LNG industry has had a rocky start in some respects, with many projects having been shelved and a number of the remaining projects facing an uncertain future due to market conditions, regulatory obstacles, and other challenges. However, there continue to be many factors supporting the development of LNG liquefaction capacity in Canada, including the desire to supply the world with responsibly sourced, cost-effective, and relatively clean fuel, and it is expected that a number of projects will ultimately proceed.
The supply and transportation of LNG from such projects once they become operational will engage the body of maritime laws governing the operation of ships in Canadian waters and, where relevant, Canada's export laws. Other requirements may additionally apply by virtue of the contractual arrangements typically entered into in connection with such activities. Such regulatory and other requirements, and their place within the broader LNG value chain, are the subject of this article.
- The LNG value chain
- Maritime and Export Regulations
- Other requirements
Canada is one of the world's top producers of natural gas, with a reported 184.7 billion cubic meters produced in 2018 and 1.9 trillion cubic meters of proven reserves at the end of 2018.1 Most of the marketable production in Canada comes from onshore reserves in British Columbia and Alberta, but reserves are found across the country both onshore and offshore. Canada has historically been a natural gas exporter, with most exports being transported south via pipeline to the United States. In the last 15 years, however, technological advancements and abundant supplies have shifted market dynamics, reducing American demand for Canadian natural gas.
These market factors have hurt many western Canadian producers, causing some to look for alternate markets overseas. With low commodity prices, a stable political regime, and proximity advantages, Canada is well-positioned to compete in markets beyond North America. However, as has been seen in recent years, the development of infrastructure projects in Canada can face a variety of challenges including regulatory obstacles, requirements to engage with Indigenous groups, and the risk of protests and blockades by those opposing such projects. Nevertheless, the impetus of growing global energy demand and the aspiration to supply that demand with cleaner-burning and responsibly sourced fuel has generated significant momentum in the Canadian natural gas industry, particularly with respect to liquefied natural gas (LNG).2
Canada's LNG industry began decades ago, with small-scale facilities serving local markets, including as peak-shaving facilities (due to the relative ease by which LNG can be stored and regasified to meet demand) and to provide fuel to remote areas without gas pipeline infrastructure.3 There are also existing LNG import and export operations in Canada. On the import side, in 2009, prior to the shift in Canadian energy strategy, the first large-scale Canadian LNG regasification terminal, Canaport LNG, began operations in Saint John, New Brunswick, importing LNG from overseas and supplying gas to eastern Canada and the northeastern US. With the growing demand for export capacity, it was proposed that this facility would be converted into an export terminal, but the proposal was reportedly put on hold in 2016.4 On the export side, FortisBC's Tilbury liquefaction facility in Delta, British Columbia has been operating since 1971 and reportedly exported its first shipment of LNG to China by ISO container in 2017.5 While this facility is currently relatively small, plans exist for its expansion.6 Additionally, in order to maximize the potential of Canada's LNG export industry, the development of additional liquefaction capacity has been proposed on both the east and west coasts.
Emissions imperatives and the need for cheaper energy to support a growing population with higher living standards have fortified global demand for LNG, which has become the fastest-growing commodity market in the world.7 In 2019, global demand was reported to have increased by 12.5 percent to 359 million tonnes, and is expected to reach 700 million tonnes by 2040.8 Asia, and particularly China, is expected to remain the dominant market for LNG exports from western Canada; however, European demand is also significant with many countries taking steps to reduce their reliance on natural gas transported by pipeline from Russia. This is driving demand for LNG from eastern Canada.
To address the increasing demand, at least 18 LNG export facilities have been proposed in Canada to date: 13 in British Columbia, two in Quebec, and three in Nova Scotia.9 Several projects have since been reported to have been cancelled or put on hold due to financial or regulatory obstacles, low natural gas and LNG prices, and other market factors. Many commentators have expressed frustration over the length of time it has taken to develop these projects in Canada. They have raised concerns that, with large-scale liquefaction facilities already having been operating for many years in other major gas-producing countries such as the US, Qatar, and Australia, and other projects expected to come on stream in the near future and capture market share, the window of opportunity for Canadian projects to satisfy Asian and European LNG demand may be narrowing. The plentiful supply of LNG on the market that has been created by existing projects, together with concerns over demand (both in the short-term due to events such as the COVID-19 pandemic and in the longer-term, for example, due to the slowing of China's economic growth) have led to a softening of global LNG prices. This has caused investor apprehension over the relatively high cost and long lead times associated with the development of LNG projects in Canada.
The COVID-19 pandemic has had a significant impact on the LNG market globally, including with respect to the projects proposed in Canada. The disruption to businesses and other gas consumers resulting from the pandemic has reduced demand for LNG and caused many of the world's leading buyers of LNG to declare force majeure or seek to defer shipments. In Canada, the economic impacts of COVID-19 and the measures taken to reduce the spread of infection have resulted in delays to investment decisions and construction.10 However, there remain many factors supporting the development of LNG projects in Canada in the longer-term, including the desire to supply the world with responsibly sourced, costeffective, and relatively clean fuel. Given the expectation that the market will rebalance over the coming years and global demand for LNG will continue to increase over the long-term, many remain positive about the future and potential benefits of the Canadian LNG industry. With at least one major project already under construction and others likely to follow in the near future, Canada is expected to join the large-scale global LNG export trade within the first half of this decade. At the time of writing, the status of the Canadian LNG export projects appear to be as follows.11
Table 1: Status of proposed Canadian LNG export projects
|Project Name and Proponents||Province||Status|
|LNG Canada - Shell, PETRONAS, PetroChina, Mitsubishi Corporation, and KOGAS||British Columbia||Final investment decision made on 1 October 2018. Construction of Phase 1 is underway and, while the construction workforce has been reduced due to the COVID-19 pandemic, the project is still expected to begin exporting LNG by 2025.12|
|Woodfibre LNG - subsidiary of Singapore-based Pacific Oil and Gas Ltd.||British Columbia||Approvals are in place, but the project is still awaiting a final investment decision. On 24 March 2020, Woodfibre LNG applied for a five-year extension to its Environmental Assessment Certificate as a result of delays caused by COVID-19 and the bankruptcy of a preferred contractor. Construction is reportedly expected to begin in the summer of 2021.13|
|Kitimat LNG - Chevron Corp. and Woodside Petroleum Ltd.14||British Columbia||Proposed. A final investment decision has not been made, but is expected by some analysts to be made in the middle of this decade.15|
|Tilbury LNG - FortisBC -and- Tilbury Pacific LNG Jetty - WesPac Midstream||British Columbia||FortisBC's facility is currently operational, with an initial phase of expansion underway. A second phase of expansion has been proposed and is under environmental review, but appears to be awaiting a final investment decision.16 WesPac's proposed marine jetty which would be utilized by the LNG terminal is also under environmental review.17|
|Énergie Saguenay - GNL Québec Inc.||Quebec||Proposed. Environmental Assessment in progress. Final investment decision expected at the end of 2021.18|
|Bear Head LNG - Liquefied Natural Gas Limited||Nova Scotia||Proposed. Planned target date for reaching a final investment decision is uncertain and the project proponent is reported to have entered voluntary administration on 30 April 2020.19|
|Goldboro LNG - Pieridae Energy Limited||Nova Scotia||Proposed. A final investment decision has reportedly been delayed due to the COVID-19 pandemic and key deadlines have been extended under the project's 20-year offtake agreement with Uniper Global Commodities.20 A final investment decision is now expected to be made by 30 June 2021 and, if the project proceeds, commercial deliveries of gas are expected to start between 31 August 2025 and 28 February 2026.21|
While the future of some of these projects remains uncertain, it is hoped that many will proceed with development in the near future. For the projects that do go forward, it is expected that they will be developed primarily for the export of LNG to other markets, but some will also supply LNG to meet Canada's domestic demands and the growing LNGbunkering sector. In any case, there is expected to be an increasing number of LNG carriers and other vessels calling at Canadian ports to load LNG once these facilities become operational.
Transportation of LNG from shore-based liquefaction facilities will engage a broad range of rules and regulations in Canada governing the operation of ships in Canadian waters and, where relevant, the export of LNG. A variety of non-regulatory requirements will also apply to those involved in such activities as a result of the contractual arrangements invariably entered into when using terminals, port facilities and related services, when chartering and operating ships, and when buying and selling LNG.
This article provides an overview of the key areas of the legal landscape, including both regulatory and other requirements downstream of liquefaction terminals in the context of Canadian LNG projects. The supply and transportation of LNG and their associated legal concepts exist within the larger framework of the LNG value chain - a sequence of largescale operations with co-dependent processes and economics.
The LNG value chain
In order to contextualize the supply and transportation of LNG from Canadian ports, as well as introduce some of the participants who may be involved, the first part of this article provides a general overview of the LNG value chain, which is typically comprised of the following elements running between the wellhead and the end user: (1) gas production; (2) pipeline transportation; (3) gas processing and liquefaction; (4) LNG shipping and trading; (5) regasification; and (6) distribution to end-users.
Figure 1: The LNG Value Chain
Each element of the value chain is intended to add economic value, and although each of these phases are linked, each is a substantive, capital-intensive operation in its own right. The manner in which the value chain ties together, and the related contractual arrangements, depend on the financial and operational structure of the project and the individual risk profile and capabilities of the various participants. There are myriad ways in which the LNG value chain can be structured among multiple participants. From the perspective of a downstream utility or other energy company requiring a supply of LNG or gas, for example, there are various ways for it to enter the value chain in order to ultimately source such LNG or gas, including those illustrated in the figure below, that will offer varying degrees of control over supply and associated risk.
Figure 2: Illustration Of Options For Participation In Multiple Elements Of The Lng Value Chain
While a single sponsor could theoretically invest in the development of an entire value chain for secure supply (including the gas production assets, pipeline, liquefaction facility, LNG carriers, regasification facility, and even downstream pipeline and power generation facilities), in practice it is more common for one or more sponsors to invest in only certain portions of the value chain. For instance, there have been a number of examples of multiple participants investing in the upstream portions (with co-ownership of production assets, pipelines, or liquefaction facilities). Full chain participation by multiple sponsors is less common, as proponents will usually have downstream commitments in different locations, requiring the use of different shipping routes, regasification facilities, and downstream pipelines. Generally speaking, the fewer the participants involved and the more integrated the chain, the more control the participants will have over the supply, but the higher their capital investment (and associated exposure) is likely to be.
Other LNG projects may be structured with less integration and each element of the value chain may be an independent and free-standing operation by independent participants, who are driven by the economics of their individual operation rather than the LNG project as a whole. For instance, a gas producer may sell gas to a liquefaction facility operator, who may sell LNG to a buyer (transported by LNG carriers chartered from a third party shipowner), who may regasify the LNG using third party owned facilities to fulfil gas supply commitments in the destination country. For this type of structure, contractual commitments play a particularly crucial role in managing competing interests and allocating risk among the participants.
Irrespective of whether or not the elements are integrated, the LNG value chain ultimately links together through connections between the infrastructure of each successive phase, and contractually at each interface between two or more participants. Each element is codependent on the others. If, for instance, gas pipeline transportation to the liquefaction plant is interrupted, this may impact all other elements of the value chain both upstream and downstream of the pipeline, making alignment between contractual arrangements at each stage of the value chain desirable where possible.
A. Gas Production
The upstream segment of the natural gas industry typically refers to the operations involved in exploration, development, and production of natural gas. In Canada, a gas producer will generally first obtain rights (either directly or indirectly) under a mineral permit, licence or lease from the Crown, or a freehold lease if the minerals are privately held. The vast majority of gas that is expected to be fed into LNG projects in Canada is expected to be sourced from onshore reserves, but, if the reserves are offshore, their development will be subject to a different legal regime requiring exploration, significant discovery, and production licences.22 In any case, once a deposit has been selected for development, a production well will need to be drilled. The method of developing the well will be dependent on the geology of the reserve. For conventional natural gas, where the formation exists directly below the earth's surface, vertical wells may be drilled straight down into the rock formations. Where the formation cannot be accessed vertically, the producer may extract the gas using horizontal drilling. This method incorporates a flexible drill pipe that can be directed horizontally at a desired depth. In the case of unconventional gas, primarily shale gas that is trapped in less porous rock, producers may use multi-stage hydraulic fracturing. This relatively new production method has contributed to the changing economics of the natural gas market, particularly in the US, transforming it from an importer to one of the largest exporters of LNG in a short period of time. However, this production method has not been universally popular, which has created an important role for conventionally sourced natural gas, and the LNG derived from it.23
B. Pipeline Transportation
Once natural gas has been extracted, it will typically be transported via one or more pipelines to a liquefaction facility to be processed and liquefied into LNG. If the pipelines are owned by third parties, gas transportation agreements will typically be entered into between the gas pipeline operators and the shippers of the gas (which could be the owner of the gas or the operator of the liquefaction facility if, for instance, it has agreed to receive gas upstream of the plant and arrange some or all of the pipeline transportation). The gas shipper will generally pay the pipeline tariffs, which factor into the economics of the sale and purchase of gas or LNG downstream and the project as a whole. As with gas production, it is critical to the reliability of any downstream commitments to supply LNG or gas that sufficient firm pipeline capacity be secured in order to ensure the reliable transportation of gas to the liquefaction facility.
C. Gas Processing And Liquefaction
The processing and liquefaction of natural gas at a liquefaction terminal can be structured in a variety of ways, but most projects will be structured based on one of the following fundamental models.
1. MERCHANT MODEL
In this model, the LNG terminal operator purchases and takes title to the natural gas upstream of the facility (typically by way of a natural gas sale and purchase agreement, which, in Canada, will often be based on one of the GasEDI or NAESB standard forms), processes and liquefies the gas, and sells it as LNG downstream of the facility (typically by way of an LNG sale and purchase agreement (SPA)). Any LNG offtaker (which may not be the same person that sold the corresponding volumes of gas to the LNG terminal operator) will contract directly with the operator of the LNG terminal for the purchase of LNG and the cost of the gas and liquefaction process will generally be incorporated into the price of the LNG.
1. "BP Statistical Review of World Energy" at 30–32, online: (www.bp.com/content/dam/ bp/businesssites/en/global/corporate/pdfs/energy-economics/statistical-review/bp-stats-review-2019-fullreport.pdf).
2. LNG refers to liquefied natural gas consisting mainly of methane which is cooled to approximately -162 degrees Celsius. In its liquid state, such natural gas is reduced to approximately 1/600th of its volume in a gaseous state, making it easier to transport to overseas markets by ship.
3. See Canada Energy Regulator, Canada's Role in the Global LNG Market – Energy Market Assessment (Ottawa: Canadian Energy Regulator, 2019), online: (web.archive.org/web/20190922050756/http://cerrec.gc.ca/nrg/sttstc/ntrlgs/rprt/2017lngmrkt/cndslnglndscp-eng.html).
4. Robert Jones, "Repsol Scraps Plans to Convert Canaport LNG to Export Gas," CBC News (16 March 2016), online: (www.cbc.ca/news/canada/new-brunswick/repsol-canaport-conversion-scrapped-1.3493617).
5. "BC Companies Making Waves with Canada's First Shipment of LNG to China," online: ( www.fortisbc.com/news-events/stories-and-news-from-fortisbc/stories-news-from-fortisbc/2017/12/15/20171214-BC-companies-making-waves-with-Canadas-first-shipment-of-LNG-to-China).
6. Nelson Bennett, "FortisBC Plans $3 Billion Expansion at Tilbury," Alaska Highway News (3 March 2020), online: (www.alaskahighwaynews.ca/business/fortisbc-plans-3-billion-expansion-at-tilbury-1.24088924) (Bennett, "FortisBC Plans Expansion at Tilbury").
7. Jude Clemente, "9 Things To Know About The Booming Global Liquefied Natural Gas Market," Forbes (12 July 2019), online: (www.forbes.com/sites/judeclemente/2019/07/12/9-things-to-know-about-thebooming-global-liquefied-natural-gas-market/#66ef361a4d39).
8. Royal Dutch Shell, "Shell LNG Outlook 2020," online: (www.shell.com/energy-and-innovation/ natural-gas/liquefied-natural-gas-lng/lng-outlook-2020.html#iframe=L3dlYmFwcHMvTE5HX291dGxvb2sv).
9. Natural Resources Canada, Canadian LNG Projects (Ottawa: Natural Resources Canada, 2020), online: (www.nrcan.gc.ca/energy/natural-gas/5683) (although it is noted that a number of the projects listed on this website are understood to have been abandoned).
10. See e.g. JWN Energy Group, "China's Long-term Need for LNG Still Huge; Short-term Demand Uncertain Due to COVID-19," Glacier Media Group (23 April 2020), online: (www.mining.com/chinas-long-term-need-for-lng-still-huge-short-term-demand-uncertain-due-to-covid-19/) ("China's Long-term Need for LNG").
11. This list is not intended to include every LNG project that has been proposed in Canada to date and includes only those that are reported to be actively proceeding at the time of writing.
12. Brent Jang, "Shell, Petronas Back Ottawa's Push for Paris Climate Accord Credits Through LNG Exports to Asia," The Globe and Mail (10 September 2019), online: (www.theglobeandmail.com/business/article-shell-petronas-back-ottawas-push-for-paris-climate-accord-credits/); "China's Longterm Need for LNG," supra note 10.
13. "Woodfibre LNG Extends Timeline on Squamish Project," The Squamish Chief (24 March 2020), online: (www.squamishchief.com/news/local-news/woodfibre-lng-extends-timeline-on-squamish-project-1.24104727).
14. In December 2019, Chevron announced plans to sell its 50 percent stake in the project: "Chevron Canada Update re Kitimat LNG Project," online: (canada.chevron.com/our-businesses/kitimat-lngproject); Woodside Petroleum Ltd is also reportedly looking to sell down its interests: Geoffrey Morgan, "Pembina Sees Opportunities in LNG as Foreign Companies Pull Out," Financial Post (28 February 2020), online: (business.financialpost.com/commodities/energy/pembina-sees-opportunities-in-lng-asforeign-companies-pull-out).
15. Nelson Bennett, "Kitimat LNG Gets 40-year Export Licence," Alaska Highway News (6 December 2019), online: (www.alaskahighwaynews.ca/business/kitimat-lng-gets-40-year-export-licence-1.24029575).
16. Bennett, "FortisBC Plans Expansion at Tilbury," supra note 6.
17. Tilbury Pacific, News Release, "WesPac Files Marine Shipping Assessment with EAO" (9 December 2019), online: (tilburypacific.ca/wespac-files-marine-shipping-assessment-with-eao/).
18. Geoffrey Morgan, "Warren Buffett's Exit from $9-billion Quebec LNG Project After Rail Blockades 'A Signal' to Investors," Financial Post (5 March 2020), online: (business.financialpost.com/commodities/energy/warren-buffett-reportedly-pulls-out-of-lng-project-in-quebec-due-to-challenges-incanada).
19. Shaina Luck, "Lacking Customers and Suppliers, Cape Breton Natural Gas Project Faces Uncertain Future," CBC News (2 January 2020), online: (www.cbc.ca/news/canada/nova-scotia/bear-head-lngconstruction-permit-extension-1.5411707); PricewaterhouseCoopers Australia, ASX Release, "Liquefied Natural Gas Limited: Appointment of Voluntary Administrators," online (pdf): (lnglimited.com.au/site/PDF/ee920a6f-9400-47c4-939f-ee79d82f3494/AdministratorsAppointed).
20. Scott DiSavino, "Pieridae Delays Nova Scotia LNG Export Plant Decision Due to Coronavirus," Reuters (16 April 2020), online: (www.reuters.com/article/us-canada-pieridae-energy-goldboro-lng-c/pieridaedelays-nova-scotia-lng-export-plant-decision-due-to-coronavirus-idUSKCN21Y22V).
21. Pieridae Energy Ltd, News Release, "Pieridae & Uniper Agree to Extend Key Deadlines in their Long-Term LNG Agreement," (5 May 2020), online: (pieridaeenergy.com/latest-press-releases/65-pieridaeuniper-agree-to-extend-key-deadlines-in-their-long-term-lng-agreement).
22. Offshore oil and gas development in
Canada is currently only proceeding on the east coast
(predominantly in Newfoundland and Labrador), with offshore oil and
gas activity in British Columbia having been subject to what is
effectively an informal federal moratorium since 1972. Panel
Conducting the Public Review of the Federal Moratorium on Oil and
Gas Activities Offshore British Columbia, Report of the Public
Review Panel on the Government of Canada Moratorium on Offshore Oil
and Gas Activities in the Queen Charlotte Region, British
Columbia, Prepared for the Minister of Natural Resources
Canada, 29 October 2004, Appendix A1, online:
23. For example, Pieridae Energy Ltd is reported to have promised to supply Uniper Global Commodities with only conventional gas from its Goldboro LNG project: "Opportunities for LNG from Canada Increase," online: pieridaeenergy.com/on-the-spot/opportunities-for-lng-from-canada-increase
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