LNG outlook in Canada darkening, says IEA

There will be no LNG projects starting production in Canada over...

There will be no LNG projects starting production in Canada over the forecast horizon of a recently released natural gas market report by the International Energy Agency, which examines gas markets and provides forecasts to 2020.

Despite their proximity to Asian markets, Canada’s LNG projects are at a disadvantage to United States projects, the IEA stated. U.S. projects under construction today are all brownfield facilities, resulting in much lower capital costs per unit of capacity, as operators can leverage existing regasification infrastructure.

By contrast, all but one of the proposed Canadian plants are greenfield units.

Additionally, they also follow the traditional integrated upstream model whereby the LNG plant and the connected upstream asset are developed in an integrated fashion. This adds to the project’s upfront costs and, for Canada, specifically dedicated pipelines must be built to connect LNG plants on the coast with inland gas fields in remote areas.

Procuring the required skilled labour is more difficult and costlier in this environment. Proceeding with such large cost items is challenging under any market condition, “but the plunge in oil prices will certainly make companies think twice before pushing ahead.”

“As a result, deferrals are likely. Not surprisingly, in late 2014, Pacific NorthWest LNG, which was understood to be close to taking FID, announced it would postpone making a final decision on the project.”

The Petronas-led Pacific NorthWest LNG on Thursday issued a “conditional” final investment decision on the project, although it still hasn’t received regulatory approval, nor has it received a blessing from First Nations.

The first condition for FID is approval of the project development agreement by the Legislative Assembly of British Columbia, and the second is a positive regulatory decision on Pacific NorthWest LNG's environmental assessment by the Government of Canada.

"In parallel with work to support the final investment decision, Pacific NorthWest LNG will continue constructive engagement with area First Nations, local communities, stakeholders and regulators," said Michael Culbert, president of Pacific NorthWest LNG. "The integrated project is poised to create thousands of construction and operational careers in the midst of the current energy sector slowdown."

Progress Energy Canada Ltd. and the North Montney joint venture partners will continue to invest in its North Montney natural gas resources. The investment to date has proved and probable natural gas reserves of over 20 tcf with $2 billion-plus invested annually, representing approximately 4,000 sustainable jobs in northeast British Columbia.

“Yes, it would be more prudent to go FID on the project when the firm is ready to do so,” Kenneth Medlock, senior director, Center for Energy Studies with Rice University’s  Institute for Public Policy, told the Bulletin. “In fact, it cannot really do so without final capability to go forward.

“However, the announcement could be signaling of [a] willingness to move quickly. This can sometimes be done to send a signal to any competitive interests, of which there are plenty in B.C. That said, I am still unconvinced that a project in the region will move all the way through to completion.”

Chevron Corporation, which is planning the Kitimat LNG project with Woodside Petroleum Limited of Australia, said it was “significantly pacing” its spending on Kitimat LNG project due to current market conditions. Woodside has said the focus this year will be on the upstream assets connected to the project, particularly in the Liard Basin. Woodside in April outlined plans for seven appraisal wells to begin in the second quarter of 2015 in the Liard Basin in northeast B.C.

In February 2014, the government of British Columbia proposed provincial LNG taxation that was heavily criticized for placing too much of a burden on the industry and thus undermining the competitiveness of West Coast projects.

Fiscal terms were ultimately sweetened in the final version of the proposal unveiled in October 2014.

Amid falling oil prices, the Canadian federal government pushed through further investment-friendly policies in February 2015, agreeing to grant tax breaks to British Columbia projects and thus allowing LNG investors to recover capital costs more quickly.

Competition from United States clouds production outlook

Canada’s upstream sector continues to be undermined by rising competition from the United States, the IEA stated, particularly from its northeast shale formations with impressive productivity. With limited domestic demand growth, mainly linked to oilsands development, Canada is struggling to find marketable opportunities for its own gas.

“Prospects for LNG projects have deteriorated and no plant is expected to be operational over the time horizon of this report,” the IEA stated. “There are several new pipeline projects for bringing gas from U.S. Northeast into the U.S. Midwest and Central/Eastern Canada, which could cause further volumes of Alberta’s gas to be backed out from its traditional core markets.”

Between 2007 and 2014, Canadian gas exports to the United States dropped by 30 bcm; 60 per cent of that relates to exports through the New York State entry point. The displacement reflects soaring production from the Marcellus shale and its fast penetration into the nearby markets of New England and Mid-Atlantic.

So far, Alberta volumes into the Midwest have held up relatively well while those into the West Coast have nudged higher.

For Canadian production, the main issue is how fast and how competitively U.S .Northeast gas can penetrate the Midwest market (which accounts for about a quarter of total U.S. gas consumption) and possibly Central and Eastern Canada. Further displacement seems likely when judging from the pipeline of new projects.

The start-up of the East–West project on the REX pipeline later in 2015 will allow for up to 12 bcm of Northeast gas to reach the Midwest market. Some projects are also looking at transporting U.S. gas into Canada: the proposed reversal of the Iroquois pipeline that originates near Montreal and heads south into New York State is one of them.

While Canadian production will remain challenged, there are limits to the degree of displacement that can take place, particularly looking towards the end of the period, the report stated.

Between 2014 and 2020, the call on U.S. gas from LNG buyers and Mexico will increase by 75 bcm. The United States’ own consumption is also set to grow, increasing by about 35 bcm. If the United States can keep adding large quantities of gas at a price that remains competitive compared to Canadian volumes, then more displacement will occur. However, with export demand for U.S. gas set to increase rapidly, Canadian production might ultimately find some room in the North American supply system to feed into a growing call from abroad.

Daily Oil Bulletin