Despite the absence of any final corporate sanctioning of projects, British Columbia is coming to life with some renewed hope for an LNG industry.
The Pacific NorthWest joint venture, headed by Petronas, will make a decision by the end of June to go ahead with its plans, providing it can lock up a deal to sell another 10-12 percent equity stake to another Chinese partner.
Three executives from the Malaysian state-owned giant emerged from three months of hibernation to meet with the British Columbia government, prompting Natural Gas Development Minister Rich Coleman to suggest that an approval might be in the offing.
He said the proponents reported progress in lowering the capital costs from prospective contractors and suppliers.
“Evidently, those costs have come down dramatically,” Coleman reported to the provincial legislature Feb. 26.
Optimism was bolstered by the make-up of the Petronas delegation - incoming Chief Executive Officer Wan Zulkiflee Wan Ariffin, incumbent CEO Shamsul Azhar Abbas and Executive Vice President Wee Yiaw Hin.
Shamsul told reporters that talks to add a sixth partner could open the way for Petronas to farm-out 50 percent of the project.
With nearly 90 percent of the plant’s 12 million metric tons per year of output contracted to Chinese, Indian and Japanese buyers, the venture is in good shape to make a final decision, he said.
Estimated C$36 billion
The current co-owners - Petronas 62 percent, China’s Sinopec 15 percent, Indian Oil Corp. 10 percent, state-owned JAPEX 10 percent and Petroleum Brunei 3 percent - estimate the project will need C$36 billion in capital investment to start exports to Asia in 2019, including C$6.7 billion for two pipeline projects and C$11.4 billion for a liquefaction plant and tanker terminal near Prince Rupert.
Pacific NorthWest President Michael Culbert said Petronas and the British Columbia government have built a “constructive relationship over the last two years,” as demonstrated by the advances made towards the first world-scale LNG facility in Canada.
Final approval still needs a number of regulatory pieces to fall into place, including a review that is expected to wrap up in June by the Canadian Environmental Assessment Agency, a federal government regulator.
Clearance has already been received by the British Columbia Environmental Assessment Office.
Although the partners called a timeout in their decision-making process 11 weeks ago, they are still proceeding with planning their engineering, procurement and construction phase. Once the submissions from three competing EPC bidders are evaluated, the future of the project can be determined.
Shamsul said the delay by Pacific NorthWest has yielded unexpected benefits because the drop in oil prices has helped lower construction costs, improving the project’s economics.
“The price of equipment has dropped, the price of steel has dropped,” he said. “If prices are falling we might as well wait until they stabilize before we commit ourselves.”
Frustration over pipeline estimates
Coleman said the delay announced in December was also partly the result of frustration within the partnership over the cost estimates for two pipelines by TransCanada - the C$5 billion Prince Rupert Gas Transmission project and the C$1.7 billion North Montney Mainline - to carry gas from northeastern British Columbia’s gas fields to Prince Rupert.
Meanwhile, the announcement in February of federal tax relief for Canadian LNG terminals could translate into billions of dollars in breaks for three major export terminals.
University of British Columbia accounting Professor Kin Lo calculated the tax measure could save companies C$75 million to C$100 million over seven years for every C$1 billion.
The cash windfall stems from an accelerated capital allowance for equipment to super cool natural gas to 30 percent a year from the original 8 percent.
The allowance enables companies to write off their investments more quickly, leaving them with better returns from the early years of a project.
However, Lo said he did not think investment decisions by LNG developers were likely to be swayed too much by the tax concession, adding that the selling price for LNG is a much bigger factor.
Other cost estimates
In addition to the capital cost estimate for Pacific NorthWest, Shell Canada has pegged its Canada LNG scheme at C$25 billion to C$40 billion, while the Chevron-led Kitimat LNG project was earmarked at C$4.5 billion in its early days.
Coleman, as the chief government salesman for LNG, said he expects the industry to “take flight” this year and is counting on three plants coming on-stream by 2020.
But Jackie Forrest, vice president of research at Calgary-based ARC Financial, cautioned that the dip in oil and gas prices will be a drag on the Canadian LNG plans for a number of reasons, including the competition for financing from new developers in the United States and Mozambique.
While optimistic Canada will become an LNG player, she said startups will likely be delayed until past 2020.
In a report to clients, Bernstein and Co. senior analyst Neil Beveridge said the LNG business is suffering from an “anxiety attack” because of uncertainty over global demand.
The Bernstein report targeted startup dates of 2021 for LNG Canada, 2023 for Kitimat LNG and 2024 for Pacific NorthWest LNG.
World-class supplies
Barry Munro, Ernst and Young’s Canadian oil and gas leader, said British Columbia, despite the challenges it faces from capital costs, offers world-class, potentially low-cost natural gas supplies,
“I don’t know if there will be one, three or five (LNG projects in the province), but there’s definitely room in the global supply-demand picture for LNG from Canada,” he said.
Another promising assessment came from David Cornhill, chief executive officer of AltaGas, the lead partner in the Triton LNG project, which includes Japan’s Idemitsu and a strategic partnership in the Montney gas plays with Painted Pony Petroleum.
He told analysts that the market for Montney gas remains encouraging, although “the timeline is a little cloudy at this point,” with 2018-19 now viewed as “realistic.”
AltaGas has signed a deal to build and operate a gas processing plant with capacity of almost 200 million cubic feet per day and agreed to buy C$50 million worth of Painted Pony shares.
Cornhill said the plant is expected to cost up to C$350 million, but the in-service date is now set for mid-2016, six months behind the original timetable.
