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Vol. 22, No. 31 Week of July 30, 2017
Providing coverage of Alaska and northern Canada's oil and gas industry

NEB report sees slowdown

Canadian National Energy Board cites LNG volumes available, low commodity prices

Kristen Nelson

Petroleum News

Advantages, challenges and uncertainties for Canada’s liquefied natural gas industry are analyzed in a report released July 18 by Canada’s National Energy Board, “Canada’s Role in the Global LNG Market: Energy Market Assessment.”

Issues impacting and slowing down potential Canadian LNG projects - costs, LNG price and competition - are the same general issues facing an Alaska LNG project.

While there are no operating LNG export facilities in Canada, projects are proposed for both coasts, with the West Coast dominating - 18 of 24 projects are based on the British Columbia coast, and British Columbia reports that some C$20 billion has been spent on LNG projects in the province. The remaining six are on the country’s East Coast.

The NEB has received 43 LNG export license applications since 2010, and approved 35, with 24 distinct projects.

Canada does have a small-scale LNG industry, composed of liquefaction and regasification facilities serving local markets - LNG used to smooth fluctuating demand, the report says - with has some LNG transported by truck in remote areas for industrial customers and to provide heat in rural areas.

British Columbia focus

The focus for Canadian LNG export projects is in British Columbia because of a significant natural gas supply in northeast B.C. and Alberta, the report says, with many of the largest project proponents also gas producers.

Another reason for the West Coast focus is because of the shorter distance to prime Asian markets, with many projects attracting investors from Japan, Korea, China and India.

West Coast projects with regulatory approvals include the now derailed Pacific NorthWest (see story on side of page 1), Kitimat LNG, LNG Canada and Woodbine LNG. Most projects, the report says, are “waiting for market conditions and project economics to improve before reaching a final investment decision.”

None of the projects which have received NEB export licenses have reached the construction stage, although dozens are at various stages of planning and the small Woodfibre LNG project near Squamish, B.C., has reached a final investment decision. That project would export just 0.3 bcf per day of LNG.

NEB has estimated that Canadian LNG exports from the B.C. coast would start in 2021 and increase by 0.5 bcf per year, reaching 2.5 bcf per day by 2025, making Canada a relatively small contributor to LNG supply.

Canadian advantages

Canada’s LNG industry has a number of advantages, the NEB report says. West Coast projects are fairly close to gas supply from shale and tight gas in western Canada, including the Montney, Deep basin and Horn River plays.

The most competitive of the gas plays, the report says, “supply relatively low cost production,” improving economics of the Canadian LNG trade.

The West Coast projects are also closer to Asian markets than facilities on the U.S. Gulf Coast and do not require passage through the Panama Canal. Canada is also closer to Asia than West African LNG sources such as Nigeria.

On the East Coast of Canada, projects are closer to Europe than U.S. Gulf Coast projects and exporters such as Australia, Qatar and Malaysia.

The report says there is also “a significant financial advantage” to Canadian LNG because of LNG facility tax incentives.

Canadian challenges

The NEB report said there are a number of challenges facing Canada’s LNG industry, beginning with historically low natural gas prices and ample supplies, which make it challenging for Canadian LNG project to secure long-term contracts. “The current market environment is trending towards short-term or spot price-based transactions that generally make it more difficult to finance multi-billion dollar investments in new LNG facilities,” the report says.

Because most proposed Canadian LNG projects would rely on supplies from inland northeast B.C. and Alberta, new long-haul pipelines or expansions would be required. Transportation adds major costs to projects, the report says, and requires regulatory approvals, compared to many global supply regions, such as Australia, which use offshore gas.

Compared to the United States, most Canadian projects would be greenfield, whereas in the U.S. there are projects which have and would be built on existing LNG import facility sites.

The report also cites “growing public concerns over competing uses for land and marine resources, local impacts from hydraulic fracturing, pipeline hauling, safety, and GHG emissions, among other issues,” with an evolving regulatory environment which could impact future LNG project approvals.

And while West Coast Canada is closer to Asia than some projects, the report notes that Australia, Malaysia and Indonesia are significantly closer than Canada to major Asian markets.

Competition is increasing, the report says, with some U.S. LNG facilities already operating and others progressing to final investment decisions - and would be in operation before most Canadian projects. This is in addition to fiscally stable regions such as Australia which already have many operating facilities.

Uncertainties

The report also lists a number of uncertainties for Canadian LNG projects.

One is whether Canada can become an LNG exporter before West Coast U.S. projects, none of which have yet reached final investment decisions.

Then there is the issue of future LNG contracting and pricing, “an area of uncertainty that will dramatically impact global LNG project economics,” the report says.

Another uncertainty the report lists is what the role of natural gas will be in addressing global climate change over the coming decades. “Natural gas and LNG demand may strengthen as economies become less reliant on more carbon-intensive fossil fuels such as oil and coal. Alternatively, natural gas and LNG demand could decline if renewable and/or nuclear energy sources become more prevalent at the expense of all fossil fuels.”

Then there is the competition among LNG projects for labor, expertise and materials - which means LNG projects “could face inflated development costs.” Canadian project proponents are already concerned, the report says, about cost overruns in global LNG projects.



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