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No final investment decisions on B.C. gas until decade’s end, experts say

Co-author of new book on LNG markets says Canada unlikely to export LNG until 2025
LNG gas tanker loading in port | sattahipbeach/shutterstock

When Natural Gas Minister Rich Coleman told BC Liberal Party supporters at a fundraiser last month that he expects a final investment decision on at least one large liquefied natural gas (LNG) project before the May 9, 2017, provincial election, he either was making a promise he likely can’t keep, or has some inside knowledge that experts in global LNG markets don’t have.

Making a final investment decision (FID) on any large greenfield LNG project anywhere in the world in 2017 makes no economic sense, experts say.

In a recording of a talk Coleman gave at a party fundraiser on September 20 – leaked to Business in Vancouver – Coleman said he would likely meet with the presidents of Petronas and its partners in October to try to “restart” discussions on how to move its Pacific NorthWest (PNW) LNG project forward.

Coleman suggested the province is willing to reconsider the terms of a development agreement with Petronas. Coleman was in Malaysia last week and could not be reached to comment.

Since Coleman’s talk with BC Liberal Party supporters, federal Environment Minister Catherine McKenna announced she was giving the PNW LNG project a conditional green light. Coleman was not at the September 27 announcement and did not officially respond to it until October 14.

“British Columbia’s aspiration to build a liquefied natural gas export industry is gaining momentum with Pacific NorthWest LNG’s receiving an extended export licence,” he said.

But “inertia,” not “momentum,” is perhaps a more accurate way to describe B.C.’s LNG industry.

Canada missed the first wave of opportunities to build new LNG projects, and thanks to a sudden oversupply from Australia, and lower than expected global demand, it will now have to wait for the next one – which is now projected to occur between 2025 and 2030.

Because it takes four to five years to build a large LNG project and associated pipelines, that means no company is likely to make an FID on a major new greenfield LNG project anywhere in the world until 2019 at the earliest, according to David Ledesma, a British natural gas and LNG consultant and fellow at the Oxford Institute for Energy Studies.

“Will they take [an FID] for Canada? Maybe they will,” Ledesma told Business in Vancouver. “But you won’t see LNG out of Canada by 2020. You might by 2025. I think you will by 2030.”

Carlos Murillo, an economist who recently analyzed the natural gas market for the Conference Board of Canada, agrees.

“Given the state of the markets, it’s hard to see that they will make a decision next year,” he said.

Ledesma is the co-author of a new book, LNG Markets in Transition. He and co-author Anne-Sophie Corbeau, a research fellow at Saudi Arabia’s King Abdullah Petroleum Studies and Research Center, recently summarized their book for the Center on Global Energy Policy.

One of the questions in their presentation was: “Will there be any Canadian LNG projects within the next decade?”

Their presentation explains why both Petronas and Shell have postponed the FIDs they initially planned to make in 2016, and why they are likely to continue to postpone them now until the end of this decade.

The global LNG market has changed in fundamental ways since Canadian LNG projects were proposed, Ledesma said. The most obvious trend is low oil and gas prices, thanks in part to a renaissance of oil and gas production in the U.S.

Clean coal and renewable energy also may eat into some of the energy markets in countries that rely on LNG for power, and Asian buyers are now reluctant to sign 20-year contracts, given the uncertain domestic gas demand and oil and natural gas price volatility.

Without those long-term commitments, it could become difficult to justify capital investments of $40 billion to $50 billion in greenfield projects when there are brownfield projects in the world that can be expanded at lower costs.

“You’ve got buyers now who’ve got no idea what the price is going to be, they don’t know what their economic growth is going to be, so how can they sign up for 20 years of a supply contract?” Ledesma said.

“They can’t do that without asking for a lot of flexibility, and the more flexibility they ask for, the less likely the banks are going to lend money against the take-or-pay contracts.”

Buyers are more likely to sign off-take contracts to finance brownfield expansion projects, Ledesma said.

“So suddenly you’ve got these projects – expansion projects – that are going to be, by definition, far, far cheaper than the greenfield sites in Canada or, indeed, the greenfield sites in East Africa or other greenfield sites.”

In addition to the market challenges that all energy companies now face, Petronas faces political challenges.

Petronas is a state-owned company, and the state itself, Malaysia, is embroiled in a fraud scandal that has prompted U.S. prosecutors to initiate a civil lawsuit in an attempt to seize assets that it alleges were misappropriated.

Petronas is also facing political problems in Chad. The African nation is trying to extract US$74 billion from Exxon Mobil Corp. (NYSE:XOM) over alleged unpaid royalties, and Petronas is a 35% partner in Exxon’s Chad oil holdings.

Petronas has already invested an estimated $8 billion in Canada on the acquisition of upstream natural gas assets. It would need to spend another $19 billion to build an LNG plant in Prince Rupert and associated pipelines.

Even if it cancels the PNW LNG project, it’s not as though Petronas’ investment in Canada would be a total writeoff.

When it bought Progress Energy, it acquired premium natural gas assets in northeastern B.C. that can continue to produce both gas and natural gas liquids for the domestic market at competitive prices.

So it can put PNW LNG into a holding pattern and still generate revenue from its B.C. gas wells until market conditions improve, said Colin Coe, an independent energy consultant who worked on the Oregon LNG project until the plug was pulled on it in April.

“If there is market uncertainty, then depending on what their pain threshold is, they can continue to do some work without pulling the trigger to start spending billions and billions,” Coe said.

“You’re unlikely to see them construct the pipeline and putting serious dollars into the project terminal, but you can still do a lot of work to line up everything so you can fast-track it when the market signal’s there.”

To date, Petronas has said little about its PNW LNG project.

In response to last month’s green light from McKenna, Petronas issued a terse statement.

“Petronas and its partners will study the conditions imposed by the Canadian authorities and conduct a total review of the proposed project prior to deciding on the next steps forward.”

– With files from Bob Mackin

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