On October 13, 2011, the National Energy Board granted KM LNG Operating General Partnership an export licence for its proposed Kitimat LNG Project, an LNG export facility on the west coast of British Columbia. This export licence represented the last major regulatory authorization needed for the Kitimat LNG Project to proceed. It also represents the first time since deregulation of Canada’s natural gas markets that the National Energy Board has considered an export of LNG from Canada. This decision serves as an important precedent for industry participants that wish to export LNG from Canada in the future. The decision also sends a strong signal that exporting LNG from Canada to Asia is in the Canadian public interest and that the NEB will not impose undue restrictions on Canadians’ abilities to access these markets.

Background

Export licences are required from the National Energy Board (NEB) whenever oil or natural gas is proposed to be exported for a term exceeding two years. Historically, export licences were used to export natural gas from Canada to major utilities in the United States under long-term purchase and sale contracts. Increasingly, however, export licences have fallen out of favour with industry because short-term export orders may be obtained relatively quickly and easily from the NEB and because the modern North American natural gas market allows participants to buy and sell natural gas at liquid hubs for short-term durations. KM LNG Operating General Partnership’s (KM LNG’s) application for an export licence in December 2010 represented only the second application for a natural gas export licence from the NEB since 1999 and the first time that the Board had considered an export in the form of liquefied natural gas (LNG) since deregulation of the Canadian natural gas industry in 1985.

Kitimat LNG Project

The proposed Kitimat LNG project involves the construction of an LNG export terminal near the Port of Kitimat on the northern coast of British Columbia. The export terminal will have an initial capacity of 0.7 billion cubic feet per day (Bcf/d) of natural gas, with expansion capacity to add an additional 0.7 Bcf/d. The Kitimat LNG terminal will connect to the Pacific Trails Pipeline (PTP), which is a proposed 1.4 Bcf/d pipeline running approximately 463 kilometres from the export terminal to Spectra Energy’s existing pipeline network, which ties into the broader North American natural gas grid. The proponents of both the Kitimat LNG terminal and the PTP are partnerships between Apache Canada, EOG Resources Canada and Encana Corporation.

In 2007 and 2008, the Kitimat LNG terminal and the PTP received environmental assessment approvals from both the federal and provincial governments. An export licence from the NEB to allow the Kitimat LNG Terminal to export the equivalent of 1.4 Bcf/d of LNG to the Asia Pacific region represented the final major regulatory authorization needed for the project to proceed.

Traditional Export Licence Requirements

The NEB’s traditional requirements for export licence applications are well suited for exports via pipelines to the United States. Strict reliance on those requirements, however, creates problems for any LNG export proposal to the Asia Pacific region. For example, the NEB has traditionally required the filing of export sales contracts with the Board to ensure that Canadians are able to purchase natural gas on similar terms and conditions as the proposed export. During the hearing into KM LNG’s application, however, KM LNG presented evidence that prospective Asian buyers are not comfortable entering into long-term LNG purchase and sale contracts if there is even a risk that those contracts will become publicly available.

KM LNG’s position was that any requirement to file copies of export sales contracts with the Board was unacceptable to Asian buyers and would prevent KM LNG or any other prospective exporter from exporting Canadian natural gas in the form of LNG to the Asian marketplace. KM LNG suggested that other evidence on the record, such as the costs involved in converting natural gas to LNG or typical Asian LNG prices relative to North American domestic prices, demonstrated that the terms and conditions of the export were less favourable to Canadian consumers than the terms and conditions under which Canadian consumers are able to purchase natural gas in the domestic market. KM LNG thus requested that the Board interpret its traditional export licence requirements flexibly when considering export licence applications to the Asia Pacific region.

National Energy Board’s Decision

The NEB accepted KM LNG’s arguments on each of the key issues raised during the hearing. The Board held that some of its traditional requirements, including the requirement to file copies of export sales contracts, were not appropriate for KM LNG’s application and that KM LNG was therefore exempt from these requirements. The Board was satisfied that based on the evidence on the record of the proceeding, the export would not occur on terms and conditions more favourable to the export market than to a Canadian market participant, and that the export would not cause Canadians any difficulty in meeting their energy requirements at fair market prices. The applied-for export licence was granted on precisely the terms and conditions that KM LNG requested.

Implications for Industry

The NEB’s decision on KM LNG’s export licence is tremendously important for the Canadian natural gas industry and potential future LNG proponents. The Board recognized that changing market dynamics in North America are reducing demand for Canadian natural gas and that Canadian natural gas producers must target new markets for their product. As a result, the Board applied its traditional requirements in a flexible manner to allow Canadians to participate in the Asian LNG marketplace. This decision will therefore serve as an important precedent for future LNG export licence applications. The decision also sends a strong signal that LNG exports from Canada to Asian markets are in the Canadian public interest and that the NEB will not impose undue restrictions on Canadians’ abilities to access these markets.