Providing coverage of Alaska and northern Canada's oil and gas industry
July 2016

Vol 21, No. 30 Week of July 24, 2016

British Columbia LNG gets further jolts

Final decision delayed on Shell-operated project due to rising cost, drop in LNG prices; LNG Canada will continue site preparation


For Petroleum News

The odds keep piling up against British Columbia’s dreams of ever becoming a global LNG player, with the Royal Dutch Shell-operated project delaying a final decision on the venture because of turmoil in energy markets.

That was accompanied by a clear warning from a retired industry executive that the crowded field of contenders will need to shrink before any proposal enters the commercial phase.

Shell, which owns a 50 percent stake in the LNG Canada consortium, and its partners Korea Gas, Mitsubishi and PetroChina, are unable to match the drop in natural gas prices around the world with project capital costs that are now estimated at C$40 billion, Chief Executive Officer Andy Caditz told a conference call.

“In the coming months, LNG Canada will continue key site preparation activities and work with its joint venture participants, partners, stakeholders and First Nations to find a revised path forward,” he said.

But no attempt has been made to set a deadline for a sanctioning decision, although the consortium is adamant that the project to export 24 million metric tons a year of LNG to Asia “has been delayed ... not cancelled,” Caditz said.

The clouds started to build over LNG Canada in June when Shell said it was backing away from any thought of growing its LNG business after acquiring British gas giant BG Group in February.

In 2014, BG also announced an indefinitely postponement of its own plans for Prince Rupert LNG to initially export 14 million metric tons a year, eventually growing to 21.6 million metric tons a year.

Separately, Doug Bloom, formerly president of Canadian LNG operations with Spectra Energy, whose pipelines carry 55 percent of British Columbia’s natural gas volumes, said it will take until the mid-2020s before a window opens on “big new tranches of supply.”

For now, the challenge facing the industry is to find ways to “really drive down costs,” while LNG proponents wait until global buyers absorb a torrent of new exports hitting markets, which has depressed spot prices far below the level needed to support project construction in Canada.

Global LNG trade moved a record 244.8 million metric tons last year, while another 142 million metric tons of capacity is already under construction, according to the International Gas Union.

Bloom said it is now more likely that the most viable of British Columbia’s proposals will face delays of two to four years before companies unlock their spending.

During that time projects “may look for other ways to share the burden of erecting enormous plants or consolidating or combining,” he suggested.

David Keane, president of the British Columbia LNG Alliance, agreed that plans must be built on a “strong business case and meet stringent economic tests before they can proceed,” adding that the alliance’s member companies are actively working to ensure projects are “properly sited, designed and constructed.”

The next crucial test for the industry will be the Canadian government’s announcement in early October of its ruling on Pacific NorthWest LNG, which is led by Malaysia’s Petronas.

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