British Columbia is well-positioned to compete in the global LNG marketplace, but there are significant challenges that must be tackled before exports start moving overseas, participants said at a conference in Vancouver that concluded May 23.
Panelists in back-to-back sessions on B.C.’s position in the global market and the province’s advantages concurred that the potential benefits of B.C.’s nascent LNG industry outweigh the possible negative impacts. But some panelists warned it’s not a given that the province will be able to market its vast supply to China and the rest of Asia. They asserted that B.C. could miss a moving window to enter the global market if it does not develop the industry properly.
Echoing the sentiments of Petronas president and CEO Shamsul Azhhar Abbas participants in the sessions said a certain, clear and fair provincial fiscal framework will be crucial to the industry’s success. Panelists also stressed the need to align with First Nations, secure an adequate labour supply and manage logistics carefully.
B.C. must also be aware of the emerging U.S. market, Australia’s soon-to-come heavyweight status and other global rivals.
“We see a real opportunity for Canadian LNG, but we’d also emphasize that opportunity is somewhat limited,” said Greg Pardy, the Royal Bank of Canada’s co-head of global energy research. “As you heard from [Shamsul], we are seeing fierce and intensified competition elsewhere globally and, certainly, the United States would be foremost amongst them.”
Russia, which signed a 30-year, $400-billion deal with China last week, along with East Africa also need to be considered.
By 2020, said Pardy, gas liquefaction in the U.S. should reach a capacity of 10.4 bcf per day while Canadian facilities could process two bcf per day. The Canadian forecast is based on the assumption that Petronas will decide later this year to go ahead with its Pacific Northwest LNG project near Prince Rupert. And, he anticipates that the Royal Dutch Shell plc-led LNG Canada project will come online towards the end of the decade.
By comparison, he expects the global LNG market to expand by three bcf per day per year into 2020 and reach just under 400 million tonnes per annum (mtpa), or 53 bcf per day.
“To put it another way, we expect this market to grow by at least two-thirds between now and the end of the decade,” said Pardy.
The growth is based on two large assumptions: the influence of Japan’s nuclear policy, and that China will be a big driver of growth.
With seven greenfield projects now underway, Australia is clearly “leading the charge” on LNG development.
“We expect Australia, by 2018, to surpass Qatar as the global heavyweight from an LNG standpoint, with a capacity of about 11.5 bcf per day,” said Pardy.
But, pointing to Shamsul’s comments that Australia’s revised fiscal regime is causing cost increases, he forecasted that Australia will, indeed, “take a pause” before embarking on its next phase of LNG expansion. The lull will be “quite good news” for B.C., because the province will be the first in line to provide other sources of LNG to global market.
Canada has a very nice advantage when it comes to an upstream supply cost, of about $3.60 per unit, compared to the U.S. rate of $10-$12, Pardy contended, and B.C.’s distance to Japan is comparable to Australia’s proximity to the Asian nation.
B.C. well positioned to help offset global shortfall
Jeff Lehrmann, president of Chevron Canada Limited, said Asian demand for natural gas is expected to expand 75% by 2025, while global LNG demand is expected to double by 2025. As a result, there is a potential shortfall of 150 million tonnes per year.
Noting most analysts expect the U.S. brownfield projects to meet one-third of the shortfall, he said that B.C. is well-positioned to supply 100 million tonnes annually.
“But there are challenges, though, to both the buyer and to the seller in bringing these greenfield projects online,” he said.
The need for highly-skilled expertise has caused construction backlogs, while the costs of wages, goods and services have increased substantially since 2009. He warned that high wages and pipeline costs could negatively impact the budgets of both brownfield and greenfield projects.
While everyone recognizes the industry’s potential, he said, B.C. must place realistic expectations within its fiscal framework.
While the province’s LNG sector can benefit British Columbians, First Nations and all Canadians, there is a “window of opportunity” that “won’t last forever.” For LNG to succeed, he argued, project proponents need access to significant capital investment that can monetize the resource, while buyers require a reliable supply that’s competitive with all of their long-term business needs.
Opportunity promising but success not guaranteed
Doug Bloom, president of Canadian LNG for Spectra Energy Corp., called B.C.’s potential LNG sector “a once-in-a-generation opportunity.”
“We have looked at LNG a couple of times in British Columbia now, going back to the [1970s] and [1980s],” he said. “This time, it looks like it’s different.”
But, with considerable competition mounting elsewhere in the world, in such places as Russia, Mozambique and Tanzania, he warned, success is not guaranteed. He noted that Texas and Louisiana have 20 proposed LNG projects between them.
While Ottawa, B.C. and Alberta have worked hard to avoid duplication in the regulatory review process, he contended Asian markets are watching closely as Canada’s LNG fiscal framework unfolds. Bloom said Canadian LNG projects, which are mostly greenfield opportunities, will require $30-$50 billion in capital while American, mostly brownfield, ventures will need just $10 billion.
Projects becoming more difficult to build
In order to capitalize on global market conditions, said Alex Pourbaix, executive vice-president and president of development for TransCanada Corporation, the Canadian LNG industry must gain access to pipeline infrastructure in a timely manner.
“The problem is that building these projects has become more difficult recently due to what we would describe as unfounded opposition,” he said.
Five years ago, companies such as TransCanada thought they should focus on obtaining commercial agreements and then let permits and stakeholder support for a project come with time. But conditions have changed.
“That situation has reversed right now. It seems like there are lots of commercial opportunities, and the challenge for development companies is to get that [stakeholder] permission for your projects,” he said.
He predicted that consolidation of proposed pipeline projects will occur, and there will be one pipeline corridor going to Kitimat and another leading to Prince Rupert.
“I don’t think we’re going to have an infernal number of pipeline routes heading across the province,” said Pourbaix.
Time for Canada to prove its benefits
Andy Calitz, CEO of LNG Canada, the Shell-led project, said companies in Canada have a chance to launch an LNG industry here, just as firms did in Africa, Australia, Russia and elsewhere. The implication: The private sector, rather than governments, will lead the way.
But noting that “the customer is God,” and not just king, he said Canadian LNG developers must be extremely competitive with the rest of the world. While B.C. Premier Christy Clark has dismissed the potential effect of China’s 30-year, $400-billion deal with Russia on the province’s LNG industry, Calitz said the Sino-Russian pact is “not good” for the Canadian industry.
In Calitz’s view, it’s “just complacency” to think large markets around the world need B.C. LNG.
“In Canada, the fundamentals feel great,” said Calitz. “We must prove that. Get into the market.”
Three to five B.C. LNG plants expected
Panelists predicted that three to five LNG projects will eventually be built in B.C.
Madeline Whitaker, vice-president of BG Canada, said it is “quite clear” the world will need LNG from B.C., and the province is well-positioned to provide it. But because of challenges getting facilities built, the global market will be “tighter longer.”
BG predicts that the global supply gap will reach 150 million tonnes by 2025, with the U.S. filling about 60 million tonnes.
Price growth not pivotal to project success
Barry Munro, Canadian oil and gas leader with Ernst & Young LLP, predicted that with global commodity prices expected to be flat in the future, LNG project viability will be “made or broken” on upstream costs, not the price increases that are occurring now.
He called on the provincial government to provide clarity and certainty on all aspects of its forthcoming fiscal regime -- not just the so-called LNG income tax-- so that the industry can start preparing investment decisions.
“It is not sufficient just to say we’re not going to do what we did in Australia anymore. Frankly, we’re not going to do what we did in the Canadian oilsands a decade ago,” he said, referring to high inflation levels.
In Munro’s view, the industry’s relationship with First Nations could be the LNG sector’s biggest advantage, because it will get them involved in the full development of the resource. But, if not done right, the relationship could also be the biggest challenge.
