The dream of creating a globally significant Canadian LNG industry, initially based on the West Coast of BC, effectively died in July 2017, at least for the immediate future. But like the global LNG business itself, we may be better served by judging Canada's LNG prospects over a longer term – potentially measured in decades rather than in months or year-by-year. Through that lens, Canada's LNG prospects may not be nearly so bleak: indeed they may even be hopeful.
Canadian LNG: Status
In early July, the NEB published Canada's Role in the Global LNG Market, a fairly tough assessment of Canada's current opportunities in LNG. Shortly after that, the Petronas-led Pacific Northwest LNG syndicate cancelled its plans to develop a $36Bn LNG project near Prince Rupert, BC. It had been the major Canadian LNG project considered most likely to proceed. Two months later, CNOOC's Nexen and INPEX ended the feasibility study for their proposed Aurora LNG project on Digby Island, BC.
The status of the five Canadian LNG projects once closest to a FID, or Final Investment Decision, is now as follows:
|LNG Project||Lead Sponsor||Capacity (MTPA)||Status|
|Woodfibre||Pacific Oil & Gas||2.1||Pre- Construction|
US LNG: Status
In contrast to the situation in Canada, the US LNG industry has one plant actually operating and five more under construction. The most advanced and largest are all on the Gulf Coast (Sabine Pass, Corpus Christi, Freeport and Cameron). Two smaller projects are also under construction– one in Maryland (Cove Point) and one in Georgia (Elba Island). Together they represent 66 MTPA in LNG capacity and on completion will place the US in a position rivalling Qatar and Australia for global LNG leadership.
For the most part, the leading US LNG plants are so-called "brownfield conversions", where older re-gassification plants designed to import LNG are repurposed to provide liquefaction capacity for LNG export instead – at a considerable cost saving compared with constructing new "greenfield" facilities.
The NEB concluded that the problems of the struggling Canadian LNG industry reflect structural rather than transient challenges. The NEB noted that Canadian LNG projects:
- are generally costly (NEB: p. 1, 10 and 18) at least compared to projects on the US Gulf Coast: Canadian LNG plants are generally greenfield facilities in remote locations, while US Gulf Coast facilities have been largely brownfield conversions and are being operated or are under construction in one of the most sophisticated and best connected petrochemical complexes on earth;
- generally require entirely new infrastructure (NEB: p. 18) including, at least for all the BC LNG projects, new pipeline capacity to move gas supply, often in the range of 1000km over difficult terrain; and
- have generally not been able to secure sufficient long-term gas purchase contracts (NEB: p. 18) as the global gas markets transition to shorter-term and/or spot-market arrangements.
Global LNG prices have declined significantly in recent years, largely as a result of the decline in oil prices to which LNG prices have historically been linked. As well, the emergence of substantial new capacity, most of which is in Australia and the US, added to an already depressed global LNG market where supply has recently been out-running demand. As in any market, the resulting pricing and margin pressure has generally precluded higher cost plants, such as those in Canada, from proceeding and has tended to limit new market entrants to those facilities previously committed to or which are at the very lowest end of the cost range.
In its prescient 2013 Global LNG Survey, Ernst & Young noted the cost advantage enjoyed by the US Gulf Coast facilities. New greenfield projects in Canada and elsewhere were expected to cost upwards of $2Bn per MTPA (E&Y 2013: p. 12) while brownfield conversions on the US Gulf Coast were expected to cost as little as $550M - $650M per MTPA (E&Y 2013: p. 9). When a midsize LNG plant is in the range of 10 MTPA and a large LNG plant is in the range of 18 to 24 MTPA, this represents a material – maybe even a decisive - cost advantage in favor of the Gulf Coast facilities.
Still, there are some encouraging longer term trends for LNG in Canada:
- global LNG trade has grown substantially in recent years: from just over 100 MTPA in 2000 to over 300 MTPA in 2016 (NEB: p. 14);
- prospects for LNG growth generally are good: in its 2016 World Energy Outlook the International Energy Agency expects gas to grow by 1.5% annually through to 2040 and for LNG to grow even faster – to essentially double over current levels (IEA 2016: p. 7);
- Canadian LNG – at least on the West Coast – enjoys relatively good proximity to abundant and relatively low cost gas supply from the Montney, Deep Basin and Horn River gas plays (NEB: p. 4-5 and 18); and
- Canada has enduring locational advantages among North American LNG producers in that BC is 5000 miles closer to major LNG markets in Asia than the Gulf Coast while no US West Coast facility has been approved yet and Canadian East Coast LNG is 2000 miles closer to Europe than potentially competing US sites (NEB: p. 18).
Moreover, Shell recently suggested that a Final Investment Decision on its massive LNG Canada project could come as soon as the next 18 months or so and may coincide with LNG markets starting to tighten again. It would normally take at least 5 years to construct, test and make an LNG plant fully operational suggesting the earliest in-service date would be roughly in or just before the mid-2020s.
In order to participate in the next wave of LNG development, sponsors of proposed Canadian LNG projects will have to:
- work on getting costs down;
- nurture and maintain government commitment to the industry;
- maintain and enhance existing partnerships with key stakeholders, particularly affected Aboriginal peoples; and
- proactively seek ways to further reduce the carbon profile of the LNG industry.
Depending on market conditions and on the nature and extent of additional competition, there is still an opportunity for Canadian LNG to emerge as a meaningful participant in the global LNG markets – albeit sometime in the middle of the next decade rather than toward the end of this one.
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