Once touted as the best bet in the field of 20 LNG contenders on British Columbia’s coast to leave the starting gate, the Douglas Channel LNG venture has been unsaddled and returned to the stables.
The consortium’s operators, Calgary-based AltaGas, delivered a stinging blow to the province’s hopes by citing worsening conditions in global energy markets for its inability to secure long-term sales contracts.
Partly because the project planned initial exports of only 550,000 metric tons a year, starting in 2018, it was seen as more quick footed given the experience of its partners, Japan’s Idemitsu Kosan, EDF Trading (a united of Electricite de France) and Belgium-based LNG shipper Exmar.
But AltaGas Executive Vice President John Lowe delivered a candid assessment of the project’s outlook after the announcement that the consortium had “withdrawn from the project” in response to global LNG prices.
“We could not secure a customer at any price that would cover our costs,” he said.
Triton LNG on ‘slow burner’
In addition, AltaGas has placed its other proposal, Triton LNG, on the “slow burner” to await more favorable market conditions, although it is still proceeding with a propane project costing up to C$600 million to ship 1.2 million metric tons a year from Prince Rupert.
Lowe said AltaGas was operating on the premise that Douglas Channel could be developed quickly, but got broadsided by a “massive collapse” in the market price for LNG to about US$4.50 per million British thermal units in Japan from a peak of about US$20 when planning for Douglas Channel started.
He said US$10 would be within a “zone of reasonableness” for North American producers, but based on crystal-ball gazing by AltaGas that level would be unlikely before the mid-2020s.
US prospects little better
Prospects in the United States are little better, despite the initial shipment of 3 billion cubic feet of LNG to Brazil from the Sabine Pass facility operated by Cheniere Energy.
The company is also expecting to develop a second export terminal at Corpus Christi, Texas.
A Cheniere executive said those two terminals will ensure that the United States becomes “one of the three biggest global suppliers of LNG by 2020.”
However, an analysis by the Canadian bank CIBC and the U.S. Department of Energy offered a bleaker view, estimating the world’s appetite for North American LNG will be limited to about 6.5 bcf per day by about 2023, noting that Cheniere has regulatory approval for 6.3 bcf per day.
“That suggests trouble for dozens of other LNG projects from Maryland to Oregon,” said the analysis.
Vancouver-based energy lawyer David Austin, with the firm of Clark Wilson, was less pessimistic, telling the Financial Post that the Cheniere plans were not necessarily a sign that British Columbia’s LNG hopes were losing out to U.S.-based rivals.
“The B.C. LNG race is into the Pacific,” with South America and Europe being left to other exporters, he said.
Market will balance ‘sometime’
AltaGas Chief Executive Officer David Cornhill said he believes the LNG market will balance “sometime,” but for now his company has no further spending plans after posting a C$54 million loss in the fourth quarter.
AltaGas had previously delayed Douglas Channel because of a tax dispute with the Canadian government over its floating platform at the deepwater port at Kitimat, although that issue was resolved.
Unlike most of its peers, AltaGas also had the advantage of being able to use surplus capacity on the Pacific Northwest Gas utility pipeline to Kitimat.
The project had previously lost momentum when one of its key backers encountered financial troubles three years ago and ended up in prolonged insolvency proceedings in the British Columbia Supreme Court.
Coleman still hopeful
Natural Gas Development Minister Rich Coleman played down the significance of the Douglas Channel decision, telling reporters he has always hoped all 20 projects would go ahead, “but as I’ve always said, out of 20, we may not get all of them.”
That was close to an about-face from a year ago, when Coleman said AltaGas “has been a strong proponent of LNG in British Columbia.”
“They are firmly committed to the project. The consortium is well placed to achieve the long-term vision for their facility. We look forward to working with the proponents, the community and First Nations to help them reach a final investment decision,” he said.
All that seems to happen now is a series of setbacks, led by the announcement a month ago that the C$50 billion LNG Canada project led by Shell - in partnership with Korea’s Kogas, Japan’s Mitsubishi and PetroChina - had postponed a final investment decision until late 2016.
Also hanging by a thread is the C$35 billion Pacific NorthWest led by Petronas, which has slowed the pace of its decision-making, mostly because of market conditions.
The setback for Douglas Channel is also a blow to the Haisla First Nation, which had assembled land on the western shores for the project in 2013 deals with Rio Tinto Alcan, in hopes of benefiting from a “mini-boom” in construction.
Haisla Chief Councillor Ellis Ross said there is a “lot of disappointment” within the community of 900 now that the LNG proposals are “slowing to a trickle.”
