February 2013 was the height of optimism regarding the LNG export facilities that were being proposed for the West Coast of British Columbia. At that time almost 20 projects of varying sizes were at different stages of development. Caught up in that excitement and perhaps guilty of some wishful thinking, the province released budget papers that included a forecast for its future revenues from LNG. The province’s forecast was based on assumptions about future growth, about which the province could not and did not give assurances. The assumptions included the completion of two large-scale and three smaller-scale LNG facilities by 2020 producing in aggregate 82 million tonnes per annum (MTPA) of LNG. LNG production at that level would have placed BC among the first rank of global LNG producers such as Australia and Qatar.

For 12 to 18 months after 2013, global demand for LNG was and remained high, particularly in Asia. Prices for LNG delivered to Asian markets were over US $16 per million btu (mmbtu) at their peak in 2013. However, by 2016 the global LNG market was affected by new production – principally from Australia and prospectively from the United Sates. In addition, the price of oil (to which the price of LNG has historically been linked) declined by more than 50%. That resulted in the price for Asian-landed LNG declining from US $16/mmbtu or more to US $6/mmbtu or less.

The implications for BC LNG of these changes in the LNG markets were nicely summarized recently by Nelson Bennett in Business in Vancouver who concluded that:

The next window for long-term LNG contracts will not open for about four or five years once demand and supplies balance out…David Ledesma, a British natural gas and LNG consultant and fellow at the Oxford Institute for Energy Studies, told Business in Vancouver that it's unlikely that any large LNG project in the world will get a FID [Final Investment Decision] before 2019.

Source: "Lead contractor on Shell LNG Canada project cancels bidding" from Business in Vancouver, December 7, 2016.

In these circumstances many of the proposed BC LNG facilities have either been abandoned or deferred. The following table shows the current status for the five proposed LNG facilities which were previously considered most likely to proceed:

Project

MTPA

Status

First Gas

Woodfibre

2.1

FID Issued

2020

Pacific NorthWest

18

FID Deferred

-

LNG Canada

24

FID Deferred

-

Kitimat LNG

10

FID Deferred

-

Douglas Channel

0.55

Cancelled

-

Woodfibre

Woodfibre LNG holds all material regulatory approvals including export licences from the federal government and environmental assessment certifications from both federal and provincial governments. The Woodfibre project also submitted to an environmental assessment process conducted by the Squamish First Nation, in whose traditional territory the project and its associated pipeline is to be constructed. The process of complying with various conditions imposed by the Squamish First Nation is well advanced but is not yet complete. Among other things, the Woodfibre LNG plant was redesigned in part to abandon a proposal to use a seawater coolant process to allay environmental concerns raised by the Squamish First Nation.

Woodfibre has indicated that construction is expected to start in 2017 and to be completed by 2020. It would not be unreasonable, however, to expect that actual construction could be tied to the BC provincial election, scheduled for May 2017. If the current provincial government, which has been a strong proponent of LNG project development in BC, was defeated it is conceivable that there could be a reassessment of the timing for construction of Woodfibre, and possibly a reconsideration of whether to proceed at all.

Pacific NorthWest LNG

For the last few years all eyes have been on the Pacific NorthWest LNG project, led by Petronas, Malaysia's state-sponsored petroleum company. The Pacific NorthWest project has attracted attention because of its sheer size and because its sponsors were widely expected to have reached a Final Investment Decision by now.

As to its size, the Pacific NorthWest sponsors have proposed an 18 MTPA liquefaction facility, which together with related facilities, has been estimated to cost approximately $36 billion. The associated Prince Rupert Gas Transmission Project is expected to cost its sponsor, Trans Canada PipeLines, a further $5 - $6 billion. Costs to acquire and develop upstream gas fields are expected to add tens of billions more to project costs.

Pacific NorthWest's sponsors were originally aiming to make a Final Investment Decision in respect of the project by the end of 2014. However, regulatory approvals –particularly under federal environmental assessment legislation – took longer to obtain than anticipated. Final federal regulatory approvals were not received until September 2016. Given the combination of regulatory delays and material adverse changes in the global LNG markets, Pacific NorthWest did not make a Final Investment Decision on receipt of regulatory approvals. Instead, its sponsors commenced a thorough strategic review of the project which is expected to take months to complete. There have been press reports that this review could be concluded by April 2017. But rumours have recently surfaced that the Pacific NorthWest project could be reconfigured to significantly reduce capital costs. In these circumstances, any Final Investment Decision could be pushed back further into 2017.

Given the size of the project, potential changes both to its design and its sponsorship, and the unsettled global market for LNG generally, this project appears to be subject to substantial uncertainty. It is entirely possible that a Final Investment Decision could come in 2017 or be deferred for a period of years. It is also entirely possible that any Final Investment Decision, whenever announced, is ultimately implemented slowly and/or in stages to tie expenditures for the massive capital costs of the project to hoped for improvements in market conditions.

LNG Canada

In 2016, Shell completed its merger with British Gas and also deferred indefinitely any Final Investment Decision on its LNG Canada project. The BG merger made Shell a global leader in virtually all phases of the LNG business. Shell appears to have taken the position that, given the precarious state of the LNG markets in the short and medium term, it has a satisfactory position in LNG for now and will not be making material LNG-related capital expenditures in BC or anywhere else until global markets recover.

Kitimat LNG

Although Kitimat LNG was the first major project to go through the regulatory process – and was the first to receive all material regulatory approvals – Chevron has consistently taken the position that no Final Investment Decision would be taken unless the LNG off-take from Kitimat LNG was fully spoken for, at prices satisfactory to the sponsors. There has been no suggestion from Chevron over the last several years that its criteria for proceeding with the Kitimat LNG project are close to being met.

Douglas Channel

Douglas Channel LNG was a small scale LNG project – producing 0.55 MTPA – proposed by an experienced and highly qualified group led by AltaGas. Douglas Channel was small enough to be exempt from environmental assessment review and held all other material and required approvals. However, in February 2016, AltaGas announced that, due to market conditions, they were halting work on the Douglas Channel project. A few months later, Idemitsu, AltaGas' principal partner in North American LNG, announced it was withdrawing from Triton LNG – a larger and related project being undertaken with AltaGas. News reports have suggested that, at least for now, Idemitsu was withdrawing from the North American LNG market altogether to pursue other opportunities.

LNG Developments in the United States

The comparative disarray in the BC LNG market can be contrasted with the situation in the United States. The following table shows the current status of the leading LNG export projects in the US:

Project

MTPA

Status

First Gas

Sabine Pass

27

FID Issued

2016

Cove Point

5.25

FID Issued

2017

Cameron

15

FID Issued

2018

Freeport

14

FID Issued

2018

Corpus Christi

22.5

FID Issued

2019

Most of these projects are brownfield conversions. And most of them are located on the US Gulf Coast, which hosts the world's largest petrochemical complex and where the energy industry enjoys substantial political and public support for new facilities. All of the US LNG projects are served by a web of existing pipelines to provide gas feedstock with minimum new construction. As a result, capital costs for these projects are estimated to be substantially less than for comparable Canadian facilities. As a result of these various factors, the US LNG industry was able to move much faster to line up contractual commitments with global LNG buyers and to authorize completion of LNG export terminals and related facilities. The US LNG industry is on course to be producing 60-80 MTPA by 2020. The US may actually have, by 2020, the kind of fully-formed LNG export industry that BC was originally hoping for.

Conclusion

We have been politely skeptical of some of the more aggressive forecasts of BC's LNG prospects in the short term and have considered them to be overly optimistic. See for instance our prior posts on the evolving status of BC LNG – Reality Bites and One Step Forward – One Step Back. But the view that there is a single window of opportunity that, once missed, precludes the eventual emergence of a BC LNG industry is too pessimistic. There are broad global and secular trends at work supporting growth in long term demand for natural gas generally and for LNG in particular, including that natural gas is expected to steadily displace higher carbon-intensity fuels such as coal in the non-OECD world in particular. See ExxonMobil – 2016 Outlook for Energy: A View to 2040.

Perhaps it would be better for us to start thinking of the emergence of a BC LNG industry in the same terms and with the same perspective that major LNG sponsors have and focus more on the pace of development measured in decades. And we should recall that projects of this size and type tend to proceed based on current and foreseeable market terms and conditions, not political imperatives or deadlines.