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    Report says LNG Canada could be the last for BC


But others contend economics of BC LNG remain strong

by: Dale Lunan

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Report says LNG Canada could be the last for BC

The first phase of the Shell-led LNG Canada project in British Columbia could be the last liquefaction project built in the province, according to a November 24 report from the Institute for Energy Economics and Financial Analysis (IEEFA).

“Over the last three years (since LNG Canada’s joint venture partners made a final investment decision on the 14mn mt/yr first phase), market shifts and policy changes have tested LNG Canada’s long-term economic viability,” says Omar Mawji, IEEFA’s energy finance analyst for Canada and the report’s lead author. “This project could become a financial albatross for its sponsor investors and it stands as a warning to other natural gas producers in the BC Montney.”

The IEEFA is a US non-profit organisation funded by several philanthropic and environmental groups. Its stated mission is to “accelerate the transition to a diverse, sustainable and profitable energy economy” which doesn’t, from a perusal of its past reports, include natural gas or any other fossil fuel.

Since construction began in 2019, the report notes, several regulatory and operational issues have arisen, “which shed doubt on the project’s future.”

Among these are Covid-related delays in site work at Kitimat, at module fabrication yards in Asia and on the 2.1bn ft3/day Coastal GasLink (CGL) pipeline, a C$6.6bn conduit that will deliver 1.8bn ft3/day of feed gas from the Montney to the liquefaction terminal, with capacity left to supply the nearby Cedar LNG project being advanced by BC’s Haisla First Nation, in partnership with Canadian infrastructure company Pembina Pipeline.

Rising costs for CGL are also causing a rift between its operator, TC Energy, and the LNG Canada joint venture partners, which include Shell, Malaysia’s PETRONAS, PetroChina, Japan’s Mitsubishi and Korea Gas. Under the existing take-or-pay toll methodology for CGL, the JV partners – who will be the only shippers on the first phase of the pipeline – are concerned that rising construction costs will erode the profitability associated with the arbitrage economics between Montney production costs and natural gas selling prices in Asia, the key market for LNG Canada’s output.

Negotiations continue, and both sides expect the issue will eventually be resolved.

North American natural gas prices – including for Montney gas – have been firming in recent months, while Asian gas prices, as represented by a softening JKM benchmark, have weakened, the report notes, as has the potential supply deficit in the latter half of this decade, when LNG Canadas first volumes are expected to hit the global LNG market.

“If the project sponsors assessed the energy landscape today instead of 2018, they would likely have been far more cautious in deciding whether to move forward with Phase 1,” Mawji says. “The conditions do not bode well for other LNG projects in Canada.”

But others have a more optimistic outlook on the prospects for additional LNG developments that would source feed gas from the Montney, a shale gas fairway that straddles the Alberta-BC border some 700 km east of LNG Canada’s location near Kitimat, on BC’s northern coast.

Dulles Wang, research director for Americas gas with consultancy Wood Mackenzie, tells NGW that LNG developers in North America have been looking away from the US Gulf Coast to the continent’s west coast to take advantage of shorter shipping routes to Asia and to avoid logistical and cost issues associated with Panama Canal transit.

“There has also been momentum behind Canadian LNG projects as more established players are lining up behind projects such as Pembina’s involvement with Cedar LNG,” Wang says. “With expected growth in Asian LNG demand, we think there is still room for more Canadian LNG projects to compete in the global market beyond LNG Canada Phase 1.”

And Cameron Gingrich, managing partner for natural gas consulting firm Incorrys, says the same economics that brought the LNG Canada partners to the Montney in the first place can still drive additional LNG development.

“Montney full-cycle costs are world class and among the best in North America,” Gingrich tells NGW. “The Montney resource base could easily support another 10-12bn ft3/day of LNG exports over the long-term, thereby offsetting millions of tons of GHG emissions from coal-fired power in Asia.”

The economics of Montney gas, he adds, also support a near-term final investment decision (FID) by the LNG Canada partners for a second phase, which would add another 14mn mt/yr of liquefaction capacity. A second stage would draw feed gas from third-party Montney producers and trigger a compression-driven expansion of CGL capacity to 5bn ft3/day.

“Completing phase 2 would drive unit costs on Coastal GasLink tolls down by almost 50% and liquefaction costs down 20%, thus increasing overall netbacks and improving the competitiveness of both projects,” Gingrich says.

LNG Canada’s partners are expected to take FID on the second phase before the first phase enters commercial operations in 2025.

Having Pembina partner with the Haisla Nation on Cedar LNG – a “minor” project at about 350mn ft3/day – bolsters the case for CGL, he says, while the fact that Pacific Canbriam Energy recently contracted for 500mn ft3/day of capacity on Enbridge’s T-South gas pipeline system in BC is a positive development for Woodfibre LNG, a 2.1mn mt/yr floating LNG terminal under development by Malaysia’s Pacific Energy (parent also to Pacific Canbriam) near Squamish, about 70 km north of Vancouver. Earlier this week, it awarded an engineering, procurement, fabrication and construction contract to McDermott International.