The heat is building on Canada to snuff out hints of rising capital costs and on British Columbia to unveil its promised LNG tax structure, especially as evidence grows that the United States has overhauled Australia as Canada’s major rival in the race to open markets in Asia, various speakers told a Calgary LNG forum in September.
The domestic pressures are being compounded by a concerted move among Asian buyers to slash their current LNG prices.
In an effort to jolt the industry out of any complacency, a former senior cabinet minister in the government of Prime Minister Stephen Harper warned that the prospect of entering the export field is “not eternal.”
Jim Prentice, now vice chairman of CIBC, one of Canada’s five largest banks, warned: “There is a window of opportunity and that window is closing. If Canada is to ultimately win in LNG, we need to pull together and seize the opportunity before the moment passes us by.”
The message from him and others was that numbers alone will not win the day, least of all the list of 13 projects mooted for the British Columbia coast and two for the Atlantic coast.
Hanging in balanceFor British Columbia, the chances of bonanza returns from LNG hang in the balance. The Conference Board of Canada estimates that LNG-related investment in the province could top C$180 billion between 2012 and 2035, while the government of Premier Christy Clark has been holding out hopes of five LNG plants generating C$130 billion to C$260 billion in revenues over three decades.
Four of those proposals are aimed at startup by 2018, followed by three more beyond 2021, but so far the three that have been approved for British Columbia have yet to disclose their off-take contracts or their projected capital costs.
The Canadian Energy Research Institute estimated last year that the cost of building a greenfield LNG project in British Columbia would be about C$1,000 per metric ton, but Derek Thomas, a senior executive with AG&P, a Manila-based modular construction company, said that figure has changed.
He said costs are likely now in the range of C$1,200-C$1,500 per ton, noting that Australian LNG exporters have already absorbed a tough lesson with their final bills coming in close to C$2,000 per ton.
Thomas said the rising costs of steel and concrete are driving costs higher, while municipal officials at Kitimat — the proposed site of three LNG terminals — are doubtful that their region can provide the 3,000 construction workers that might be required in 2015.
The three Kitimat-based operations — BC LNG Co-operative, Kitimat (operated by Chevron) and LNG Canada (operated by Shell) — are designed to export a combined 23.9 million metric tons a year.
Mergers likely requiredBut Thomas suggested that some projects are never likely to get off the ground unless mergers take place.
Jim Brittain, vice president of operations with the engineering firm Fluor, said most LNG projects currently involve capital outlays of US$20 billion to US$30 billion, making risk mitigation a vital consideration for any proponent.
Prentice repeatedly emphasized that if Canada is to be a player in the LNG export field it is facing a “critical period and must do the hard, urgent work of reorienting ourselves to serve the demand of tomorrow and frankly, we need to get on with the jobs because there are others who are equally determined to get into this marketplace.”
He said the U.S. is eager to enter the LNG business “in a big and aggressive way,” noting that the U.S. has increased its LNG approvals to four from just one in a short time period.
Location not only thingPrentice said that Canada’s advantage of being closer to the Asian markets than any of the U.S. schemes is no longer the only consideration.
“If we continue to move slowly, we may well wake up to discover that our competitive advantage has slipped away,” he warned.
“The world has a lot of natural gas, but it doesn’t have an ample supply of reliable, dependable nation states capable of fulfilling their contractual obligations to export that gas over 25 years or more and do so without political, territorial or legal conflict,” Prentice said.
A lawyer with considerable experience in aboriginal law and First Nations issues, he said LNG development in British Columbia would likely need a coastal management regime bringing together the Canadian and British Columbia governments and First Nations.
Just as vital, Prentice noted, is the need for an LNG royalty regime to which the British Columbia government is tying its hopes of a revenue windfall.
But Prentice suggested the province may be counting its chickens before they are hatched.
“In difficult economic times, it’s understandable to celebrate potentially good news, but the key driver of any of these projects should be the overall benefits to the local, provincial and national economy, not simply the potential taxation base,” he said.
Prentice said it is important that the taxes levied on Canadian LNG do not undermine the creation or growth of the sector at a time when the industry is having trouble justifying its financial commitments and is now putting its emphasis on establishing partnerships to share pipeline and terminal costs.
BC’s role questionedThe British Columbia government’s supreme confidence that it will become a major player on the global LNG market has been dented by a report from the International Gas Union, a Norwegian-based agency speaking for most of the world’s gas producers.
“Project costs in Canada far exceed counterpart projects in the United States,” the union said.
The more time drags without a final commitment to the largest projects the more storm clouds gather over long-term LNG prices.
At a September Tokyo conference, Japan’s Economic, Trade and Industry Minister Toshimitsu Motegi said his country aims to cut its LNG procurement costs by 30 percent from current levels starting in 2017 when its imports from the U.S. alone could total 15 million metric tons a year from three projects, or 20 percent of Japan’s needs.
He said the age of “competition has come to suppliers, who have to compete by providing more attractive pricing and trading conditions.”
Henry Hub-linked pricesMichael Smith, chief executive officer of Freeport LNG, affirmed that outlook by noting that his three customers — Osaka Gas, Chubu Electric and Toshiba — are all working to obtain Henry Hub-linked prices, replacing “very high oil-linked” prices that are hurting the Japanese economy.
He said Freeport LNG could deliver LNG to Asia for US$7 per million British thermal units on top of the U.S. price, which would be well below the US$16 Japan currently pays.
The pricing debate is already raging in Asia, where Mohammed Bin Saleh al-Sada, the oil minister in Qatar, the world’s biggest LNG producer, said suppliers “find it difficult to take a price list that is associated with remote market indexes, which affects fundamentals and policies that have no relevance whatsoever for the Asian market.”
But India’s Energy Minister M. Veerappa Molly said a move away from oil-indexed prices “is a necessary precondition for a competitive LNG market to evolve in the Asia-Pacific region.”
To that end, India and Japan have established a regional multilateral group of LNG buyers to push for lower prices.
On the brighter side, China’s quest for hydrocarbon resources in Canada, including LNG, is building.
Dong Ren, international legal director for ENN Group, an independent gas distributor, said there could be an early result from efforts her group is making to acquire an equity stake in upstream and midstream LNG sectors.
She said any deal in Canada “would be on a delivered basis and it will be up to the producer to supply the gas to us in China. We do not intend to charter vessels to transport LNG from Canada.”
Ren said that although ENN has withdrawn from negotiations with Cheniere it is open to talks with other U.S. producers, but, because of shipping distances, its first preference is to source LNG from Canada.