Woodfibre LNG’s corporate parent investing in Chinese LNG terminal

Window of opportunity for gas sales closes for Japan, but new ones open in China, Korea

Byng Giraud, Pacific Oil and Gas’ Canadian vice-president of corporate affairs for Woodfibre LNG: “the obituary of exporting LNG in Canada has been written a little too prematurely” | chung chow
Earlier this month, Royal Dutch Shell (NYSE:RDS.A) announced it was planning to refocus its priorities to concentrate on chemicals, deepwater oil, shale oil and “new energies,” raising concerns that its multibillion-dollar liquefied natural gas (LNG) projects in B.C. and Australia could be shelved.

Shell is restructuring its business as part of its US$54 billion acquisition of the BG Group, which has raised some doubts whether a $40 billion to $50 billion LNG project – LNG Canada in Kitimat – can still fit within its new capital spending priorities.

But it’s not just budgetary constraints at play. As S&P Global Platts pointed out in March, an LNG supply glut coming on stream – mostly from Australia – has resulted in several new LNG projects failing to secure long-term contracts with major buyers.

Japan’s ambassador to Canada has warned that the window is closing for long-term contracts in Japan, the world’s largest LNG market.

But even as that window closes, new ones appear to be opening in China and South Korea. Earlier this month, Platts reported that the South Korean government plans to phase out some of its older coal plants, which will require increased LNG supplies.

And at the end of May, Royal Golden Eagle (RGE) – the Singapore-based parent company of Pacific Oil and Gas Ltd., which is behind the $1.7 billion Woodfibre LNG project in Squamish – announced a $3.9 billion investment in a new LNG receiving terminal and natural gas power plant in Rizhao city, in Shandong province, China.

“The obituary of exporting LNG in Canada has been written a little too prematurely,” said Byng Giraud, Pacific Oil and Gas’ Canadian manager and vice-president of corporate affairs for Woodfibre LNG. “The market is not collapsing; it’s expanding. It’s just not expanding as fast as everybody thinks it should be.

“When you see larger companies withdrawing from investments here and around the world, that’s an individual company’s choice. But in the broader perspective, what you are seeing in Asia, certainly as those economies become more developed … China’s growth curve is still good.”

RGE’s new terminal in China would have a receiving capacity of two million tonnes of LNG per year, which happens to be how much the Woodfibre LNG plant would produce.

Giraud said it’s unlikely that Rizhao city would become a new buyer for the LNG that would be produced in Squamish. Woodfibre’s production might already be spoken for.

The company already has a tentative off-take agreement with one customer in China for one million tonnes of LNG, and a memorandum of understanding with another customer in China for an undisclosed volume.

One of LNG’s climate change selling points is that it can lower carbon emissions if it’s used to replace coal power. And in both China and South Korea, there is a push on to phase out coal power plants and replace them with natural gas and renewables.

The new gas power plant that RGE is investing in is expected to reduce greenhouse gas emissions by 53% because it will be replacing coal power.

But there are also counter-pressures that put LNG at a disadvantage – financial ones.

Henan Xu, an energy analyst for S&P Global Platts Analytics, said China’s total demand for natural gas is expected to grow by about 10 billion cubic feet per day (bcf/d) by 2020 to a total of 28 bcf/d.

But Xu said LNG imports will account for only 2.6 bcf/d of that additional demand. The rest would come from growing domestic production and imports from Central Asia.

“The barrier for higher gas demand in China is that gas prices are high, [because] most of the LNG import contracts are indexed to oil,” Xu wrote in an email to Business in Vancouver.

He said gas prices are “almost three times more expensive than coal.”

But the pressure to replace coal with gas isn’t just a climate change imperative. In China, it is also driven by health concerns, because coal power also produces emissions that are harmful to human health.

South Korea is under similar pressures to improve air quality by weaning itself from coal power. It currently generates 53% of its power from coal and 25% from natural gas, according to Platts.

The use of LNG in Korea has fallen in recent years, because coal power is considerably cheaper than LNG. But earlier this month, the South Korean government announced plans to start shutting down some of its older coal plants to address air quality issues.

Korea’s natural gas power plants are operating under capacity. The Korean government says it plans to shut down 10 of its older coal plants, which will require generating more power from natural gas.