British Columbia caught in shaky LNG outlook

Gary Park

For Petroleum News

The number-crunching on British Columbia’s chances of becoming a global LNG player continues against the backdrop of spreading unease over the outlook for commodity prices.

A report by Sanford C. Bernstein & Co. said the province may have to settle for only two major projects, down from the revised target of three set by Premier Christy Clark, which, in turn, is two short of the total she had originally targeted by 2020.

Now the Bernstein report projects one project will be on stream in 2021 and a second in 2023, starting with Shell’s C$40 billion LNG Canada venture, followed by the Chevron-operated Kitimat LNG which now has Australia’s Woodside as a 50 percent partner.

“Outside of the United States, we expect continued expansion in Papua New Guinea and the emergence of new centers in Canada and Mozambique over the coming years, assuming costs can be lowered,” the investment bank said in a note to clients.

Bernstein makes no reference to Pacific NorthWest LNG, which was once rated as the frontrunner until Malaysian state-owned Petronas started juggling its timetable because of declining oil prices (which the firm hopes to use to index its LNG sales deals) and a grim outlook for construction costs.

However, Clark’s government and some industry observers remain hopeful Petronas will sanction the project during the current quarter.

The Eurasia Group said in December that British Columbia’s LNG prospects were increasingly facing commercial challenges, including an inability to negotiate sales contracts and construction cost inflation.

Eurasia said that “monitoring both oil prices and cost mitigation in coming months will be crucial to determine whether Petronas could still take its investment decision in 2015.”

“If not, it will be unlikely that that British Columbia would see major LNG production from a mega project before 2020.”

British Columbia, which has a combined capacity of well over 100 million metric tons a year of proposed LNG exports, is also casting a wary eye south of the border where plans are in the works for exports of 278 million metric tons a year from the United States, without even factoring in the chances of an Alaska project going ahead.

The latest spot Asian LNG prices have dropped below US$10 per million British thermal units, down 50 percent from a year earlier because of the efforts to tie contracts to oil prices, softening demand and abundant supplies, said Citibank.

Citibank analyst Seth Kleinman said that if LNG prices slide to US$8-US$10, unsanctioned projects will “look overwhelmingly uneconomic, with even U.S. exported LNG to Asia and Europe uneconomical at current prices.”

Bernstein analyst Neil Beveridge was more emphatic, declaring that most of the proposed U.S. projects will “never be built” because of the slump in crude prices, suggesting buyers’ appetite for U.S. LNG will diminish “as they reappraise supply options in a lower oil price environment.”