Surveying LNG’s Future

Hot button issues facing an industry whose future hangs in the balance

June 24, 2014

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There are already over a dozen proposed LNG projects for British Columbia, most of which are big enough to stand alone as the largest capital project in the province’s history. But it needs to be kept in mind that not a single one of these megaprojects has received a final investment decision. Project proponents are holding their cards close to their chests, watching apprehensively as market, fiscal, social and regulatory conditions evolve. Many look upon the dramatic budget blowouts at Australia’s LNG projects as a cautionary tale for Canada. Some worry that the LNG race may become self-defeating as it could lead to global oversupply and lower prices.

To better understand which risks pose the greatest threat to these LNG projects, Alberta Oil spoke to experts on the issue. Barry Munro, Canadian oil and gas leader at EY, enjoins the worrywarts to stay calm. Meanwhile Mary Hemmingsen, KPMG’s national sector leader for power and utilities, reminds us it may be unwise to remain complacent about the status quo. What follows is the results of a questionnaire that surveys the most significant issues facing Canada’s nascent LNG industry.

Global LNG Glut

A surge in LNG project proposals worldwide could lead to a doubling of current global capacity (approximately 300 mmtpa) by 2025. In fact, data from Ziff Energy Group show that cumulative projected capacity from proposed North American LNG terminals is more than triple the forecast growth in Asian gas demand by 2020. The possibility that the dozens of multibillion-dollar LNG export terminals in North America could likely lead to an overbuild and depressed prices is of real concern to new project proponents.

How would you rate the severity of the risks of a possible global LNG oversupply for B.C. LNG project to developers?

Supply and Demand

The National Energy Board has issued licenses allowing up to 18 billion cubic feet per day (bcf/d) of natural gas to be liquefied for export, even though aggregate Canadian production is currently only 13-14 bcf/d. Some experts believe Canada is poised for a manufacturing renaissance in the petrochemical sector similar to what American industrials are experiencing as a result of abundant, affordable shale gas. Massive LNG exports and/or burgeoning domestic industrial demand could raise gas prices and clip this development in the bud.

How likely could increasing domestic industry demand for natural gas and natural gas liquids undermine the economic viability of B.C. LNG projects?

Labour Bottleneck

The build-out of Canada’s LNG export capacity involves upstream drilling, pipeline infrastructure and terminal construction – all of which will require huge human resources. LNG project developers are holding back on final investment decisions as they work toward securing financing and long-term supply contracts with Asian customers, but the HR bottleneck is undoubtedly another issue that keeps them up at night. If only five of the dozen-odd proposed British Columbian projects do get built by 2021, they will require approximately 21,600 workers at the peak of construction, according to estimates from Grant Thornton LLP.

The currently available domestic skilled labor pool is considered insufficient to meet the needs of even two LNG projects on the West Coast. How would you rate the quality of provincial and federal employment training measures to address this insufficiency?

Foreigners to the Rescue

When the construction phase of LNG projects gets into full swing, B.C. Premier Christy Clark acknowledges that demand for workers will exceed domestic supply. “Our commitment is this: British Columbians first, Canadians second and then, when we have maxed out every opportunity to put Canadians to work on these projects, we will need to begin to look overseas for temporary workers,” she said recently. BG Canada executive David Keane, a member of Clark’s working group on labor-related LNG issues, cautioned Canada against creating “overly restrictive immigration policies.”

How would you rate the importance foreign temporary workers programs in meeting the labor needs of B.C.’s emerging LNG industry?

Re-Nuclearizing Japan

After the 2011 Fukushima nuclear disaster, Japan began shuttering its fleet of almost 50 nuclear reactors that had generated 30 per cent of the country’s power. The shift to greater use of coal, oil and natural gas raised energy costs, placing its heavy industries at a disadvantage to foreign competitors. A recent government plan would reboot Japan’s network of reactors, potentially affecting 11.3 bcf/d of natural gas demand, according to Peter Tertzakian, chief energy economist at ARC Financial Corp. “If (when) Japan goes nuclear again, the natural gas price differential to Canada could easily thin out a few more dollars,” he wrote.

Prime Minister Shinzo Abe has suggested Japan may soon restart a significant portion of its shuttered nuclear reactors. How would you assess the impacts of this move on Canada’s nascent LNG industry?

A Question of Prices

Gas prices are typically indexed to oil products, except in North America where gas is also a traded commodity with its price linked to benchmarks set at infrastructure nodes such as Louisiana’s Henry Hub or Alberta’s AECO Hub. The price indexation to oil in places like Europe is eroding, however, as competition increases and multiple sources of gas emerge, largely through the increased use of LNG. Kenneth B. Medlock of Rice University believes that “the price differentials we see today are not going to persist.”

If hub-based prices were to prevail over oil-indexed prices as the industry norm in LNG supply contracts, how would you assess the resulting economic impact on Canada’s LNG industry?

Fiscal Competitiveness

B.C.’s LNG tax regime is two-tiered and applies to net income. A minimum tax of 1.5 per cent will be applied to net proceeds after production begins. The second-tier tax of up to seven per cent will then apply to net proceeds after payout. The initial minimum tax is credited against the second tier profit-based tax. “It’s clear that the rate has to be globally competitive,” Shell Canada spokesman David Williams is reported to have said. But added, “We’re concerned that the top end of that range in the second tier will not achieve that level of global competitiveness.”

How competitive would you rate B.C.’s LNG tax regime in relation to rival projects in other exporting jurisdictions like Australia and the U.S.?

Flating LNG

With the dramatic rise in costs for Australian LNG projects, developers are evaluating floating LNG facilities (FLNG) that can be fabricated at a lower cost in locations such as Korea and China. As an example, Woodside Petroleum and its partners are considering FLNG for the Browse project. Inshore floating liquefaction plants are also a possibility in Port Lavaca, Texas, where the LNG barge cost is less expensive than the onshore Sabine Pass project. FLNG facilities have also been discussed for the ill-starred Douglas Channel LNG project in Kitimat.

How would you gauge the potential impact of the rapid worldwide deployment of floating LNG terminals (with the prospect of their reduced capital and operational costs) to the competitiveness of LNG projects in B.C.?

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One Response to “Surveying LNG’s Future”

  1. William Cameron Rutherford says:

    It seems the situation overall is quite complex. Notably there are 5 natural gas pipelines proposed to transit from east to west in Northern British Columbia. These seem likely to receive popular support. However there are obviously, timing, strategic and political factors to long term natural gas based LNG export by supertanker. As apparently LNG carriers generally use bunker oil, stored in the bottom of the hull, as fuel for their engines an incident on the coast of British Columbia could result in wide spread opposition. A large Russian natural gas project and numerous others are scheduled for completion in a similar time frame, roughly 2015 to 2025. Notably Russia has the large reserves of natural gas compared to Canada, and has already signed a long term (30 year) supply contract with China for about two thirds of the capacity of a new pipeline. The remaining capacity of the Russian 56 inch, 2000 mile long pipeline seems most likely destined for LNG export to the Pacific Rim, sometime in 2019. It may be possible to increase the flow capacity of this line merely by adjusting the gas conditioning systems. From a Canadian energy strategy perspective we would apparently like to optimise exports in proportion to our reserves, so as to ensure long term sustainability, maximise returns on investment, and minimise risk to ecosystems. From the perspective of potential customers they would apparently most likely prefer to optimise their cost per joule and environmental factors in a reliable and sustainable manner. This arrangement might be most flexibly maintained by offering a portfolio of products, including oil sands derivatives, indexed to underlying factors, so as to reach an ongoing balance. If a long term LNG oversupply situation develops, Canada is at a disadvantage due to the ratio of reserves, combined with potentially less competitive infrastructure costs. As such a more balanced offering of petrochemical products to Pacific Rim markets would be very advantageous, enabling us to maintain economic factors.