Royal Dutch Shell and its four partners in LNG Canada have sanctioned what promises to be the largest industrial investment ever made in Canada.
Late Monday evening, October 1, LNG Canada announced the five partners have approved a final investment decision on the project, at an estimated capital cost of $30 billion for the first stage, and $40 billion at full build-out.
“The Final Investment Decision taken by our joint venture participants shows that British Columbia and Canada, working with First Nations and local communities, can deliver competitive energy projects,” Andy Calitz, CEO of LNG Canada, said in a press release. “This decision showcases how industrial development can co-exist with environmental stewardship and Indigenous interests.”
"Today’s announcement by LNG Canada represents the single largest private sector investment project in Canadian history," said Prime Minister Justin Trudeau. "It is a vote of confidence in a country that recognizes the need to develop our energy in way that takes the environment into account, and that works in meaningful partnership with Indigenous communities.”
“From a macro perspective, it sends a signal to international investors that Canada is actually open for business,” Jihad Traya, manager of natural gas consulting for Solomon Associates, said earlier, prior to the formal announcement. “You can do a large-scale project, which is a very important signal.
Green Party Leader Andrew Weaver said in a statement that he is "deeply disappointed that the NDP minority government’s tax giveaway has resulted in the country’s single biggest source of emissions receiving an FID."
The tax giveaway he referred to are amendments that will scrap the Liberal government's special LNG taxes. Weaver said the NDP government cannot count on his party's support for the legislative changes needed to scrap the LNG tax.
“Our Caucus has been clear that we do not support the government’s LNG regime. The government does not have our votes to implement this regime and will have to work with the B.C. Liberal MLAs if they want this project to go forward."
LNG Canada did not confirm the project's capital cost. But based on PetroChina's share of $4.5 billion, confirmed Friday, the project would be in the $30 billion range. LNG Canada confirmed the project being sanctioned is for a two-train project. It is expected that the project would be expanded to four trains at some later stage.
Later this year, construction is expected to begin on a two-train liquefied natural gas plant and marine terminal in Kitimat, and a $4.8 billion 670-kilometre natural gas pipeline. The project will employ 4,500 to 7,000 workers at peak construction, according to LNG Canada.
Shell and its partners are aiming to see the first shipment of LNG around 2025.
The project has two main components: the LNG plant and marine terminal in Kitimat and the $4.8-billion Coastal GasLink pipeline, which is being built by TransCanada Corp. (TSX:TRP) to bring natural gas from northeastern B.C. to Kitimat.
With 40% ownership, Shell is the lead partner in a consortium that includes Malaysia’s Petronas (25%), PetroChina (15%), Mitsubishi Corp. (15%) and Kogas Canada LNG Ltd. (5%).
An FID was expected in 2016, but it was put on hold, when there was a downturn in both oil and gas. Later, Petronas cancelled its $36 billion Pacific Northwest LNG project in Prince Rupert, but later resurfaced as a new partner in the LNG Canada project.
Petronas has substantial natural gas holdings in northeastern B.C., thanks to its acquisition of Progress Energy for $5 billion.
David Austin, a lawyer specializing in energy for Stirling LLP, points out that Petronas also has customers for its LNG, as does Mitsubishi. It is an important point, since companies need long-term offtake contracts before banks will finance such large investments.
“It was not that long ago that everybody decided that it was the end of the world for LNG,” Austin said. “And I was standing up and saying that you need three things for LNG: You need happy bankers, you need all your permits, licences and approvals, and you need customers. Petronas is a customer. Mitsubishi’s in for 15% – Mitsubishi is a customer.”
The LNG project has the support of First Nations, including the Wet’suwet’en, although one clan – the Unist’ot’en – are bitterly opposed and have occupied an area near the pipeline corridor and have vowed to do everything it can to block the project.
Otherwise, TransCanada has project agreements with all First Nations in the corridor – 20 of them – representing roughly $1 billion.
One of the last pieces of the puzzle to fall into place was assurances from the federal government that 45% tariffs on fabricated steel products from China, South Korea and Spain should not apply to the large LNG modules that will need to be built in Asia.
An exemption on those tariffs has not been formally granted. The federal government is letting formal processes play out, including an appeal to the federal Appeal Court of Canada.
But a federal government spokesperson said the government has the authority to grant exemptions, even if the court does not grant it, and has given Shell and its partners the assurances it needs.
“The decision on the investment is not dependent on the remission,” a Finance ministry spokesperson told Business in Vancouver.
One other hurdle for the project was provincial taxes. The Christy Clark government had implemented special LNG taxes, which the new NDP government agreed was an impediment.
The John Horgan government agreed to scrap the taxes and put the LNG industry on the same footing as other heavy industries, provided an FID is made before the end of November.
Amendments must still be made to eliminate the special LNG taxes. If the Green Party votes against the amendments, the NDP would need the support of the Liberals to pass the amendments.
Weaver’s biggest concern with LNG Canada is how to fit it into B.C.’s new climate action plan. Weaver said he cannot support any plan to extend special carbon tax rebates for LNG, for example.
The provincial government can offer special carbon tax rebates for Emissions Intensive Trade Exposed (EITE) industries. These are industries that compete with companies outside of Canada that don’t have carbon pricing. They could be eligible for rebates on the carbon taxes they pay.
In March, Weaver wrote to LNG Canada CEO Andy Calitz to let him know that there is a risk that the Green Party will bring the NDP government down, depending on how it handles the LNG file.
In his letter, Weaver said that the Greens would have a problem with the government offering EITE’s to LNG Canada. Weaver told Calitz that he supports EITEs for other industries, but that if it is offered to LNG Canada, the Greens would “no longer have confidence in government.”
The LNG Canada project is expected to go into production around the time when global demand – and prices – for LNG is expected to rise. According to the most recent forecast by the International Energy Agency, China will account for 37% of the global increase in gas demand between 2017 and 2023.
But LNG Canada has competition in Australia and the U.S. For example, the Bank of China, the China Investment Corp., China Petrochemical Corp. (Sinopec) and the Alaska state government are partnering on the US$43 billion Alaska LNG project.
Fortunately for Canada, U.S. President Donald’s trade war with China may have just given the Canadian project an edge.
Trump has applied 25% tariffs on Chinese steel, which could add roughly $1 billion to the cost of LNG modules. Also, China has responded by slapping a 10% tariffs on American LNG imports.
