LNG: Promised Economic Saviour, or Bust?

Background

The last BC election saw the Liberals pitching Liquified Natural Gas (LNG) as the new export industry that would make BC a royalty rich oasis similar to what Alberta has enjoyed for decades. 

Expanding markets in Asia, declining use of coal and nuclear, and a geographically well positioned supply of natural gas and deep sea ports were touted as reasons for optimism.

The idea resulted in much discussion that LNG projects would push gas demand and soak up remaining extra pipeline capacities, putting pressure on prices in the near future. 

While local pipeline and LNG proponents are only to happy to fan those flames, it seems a more practical understanding of the market would have helped avoid much concern.

While a lot of political rhetoric was thrown around, no one ever seemed to discuss the practicalities. 

What no one figured on was the fact that all of North America, as well as other regions are now awash in natural gas: BC has no monopoly. As well many of these supplies are situated close to ports, pipelines and existing LNG handling facilities. For example, many US import terminals already have zoning, transport access, and equipment that can be easily refitted to liquefaction.

On June 5, 2015 the International Energy Agency reported that the world is “awash “ in LNG, dashing any dreams that any LNG plants will see operation before 2020, if at all. 

As well, the national Energy Board points to a significant number of competing facilities around the continent that could see only a few of the BC projects proceed to the next stage. 

Finally, environmental and First Nations issues are not yet settled for the proposed projects, adding to any completion timelines.

Reduced demand for gas for LNG reduces market expectations and along with that, futures prices. Currently, Sumas futures are trading at a discount and while this is not due to specifically the lack of LNG projects, one would expect that a number of projects in the approved stage would be creating excitement and pushing prices higher

LNG has become a viable option from the supply point of view because of one thing: fracking. The advent of increasing efficiency of fracking techniques beginning around 2005 has released an enormous amount of natural gas  into production, a run of expanding deliveries almost ten years long now. More than that, the technology has put huge amounts of natural gas into the reserve side of the portfolio.  

Experts suggest that North America will be energy-independent within a few years – that is, we will produce more energy than we consume. 

To some degree it’s a misnomer to call the “shale revolution”, so named because shale rocks deep underground contain most of the natural gas released by fracking, a natural gas revolution. In reality it was high oil prices that drove fracking projects in the continental mid-west. 

It turns out that much of the shale basin contains a mixture of gases and liquids. Natural gas liquids, or NGL’s, are a direct source of semi-refined petrochemicals that can be made into a host of fuels and feedstocks but without much of the refining required of crude.

Often only the value of the NGL’s was enough to drive exploration and drilling, and in the early days the natural gas was a nuisance by-product, often just flared at the well-head. Thankfully, pipelines have caught up and now the NGL recovery produces a huge amount of recovered natural gas. It’s helpful that much of the shale gas is found in the flat prairie making feeder pipelines and collection grids both easy and cheap to build.

Natural gas, by it’s nature , is hard to store. It takes up a large volume for a low energy content when compared to other fuels, such as gasoline or oil. Storage is limited to seasonal storage of summer over-production for winter use. This helps to maintain steady year round deliveries from natural gas wells, much desired by well operators.

In the early 2010’s the amount of new natural gas seemed certain to require either new markets and consumption within the US and Canada, or wells would need to be shut-in, limiting production and economic benefit for producers. The final option, exporting natural gas, was the only other option and LNG became the “new oil boom” across North America.Much of the carbon demand around the world is for energy, but much of it is also for feedstocks for plastics and fertilizer production. 

The only way to practically transport natural gas, outside of compressed within pipelines, is in a liquified state. Liquid Natural Gas . or LNG, is natural gas that has been cooled to minus 160 degrees celsius. At that temperature it passes from gaseous to liquid state and its volume decreases about 600 times. In this liquid state natural gas is extremely safe, unable to explode or burn not dissimilar to other liquid fuels. Fuels can only burn when they vapourize and mix with in air, creating a combustible mixture. 

For LNG sitting in a cup, the vaporization rate is so slow one can dip a burning match into the liquid and extinguish it. If LNG were to spill, it would flow as a liquid onto the ground or water, and slowly vaporize into the air . While it could be ignited, it is easily manageable. With no residual environmental impact from a LNG spill, and low risk of explosion, LNG seems like a dream fuel.

The difficulty for B.C. is that the world is awash in natural gas, and what’s more of an issue, LNG terminals are very well developed in many countries around the world. North America represents a significant new supply source and many companies are eager to get a leg up.  

Many eastern seaboard facilities, for many years importing LNG during winter months, have begun”flipping” their existing plants around, turning them into relatively cheap and quick export facilities. 

And while northern BC has significant shale gas reserves, so does every region around North America, making just about every coastal jurisdiction a competitor for export terminals. Logic dictates that terminals will be built, barring international competition, on both the west and east coasts and BC will have a chance to vie for some of that business. 

However, with a couple of dozen projects just within BC looking for markets, never mind the competition across the continent, some are sure to be mothballed sooner or later.

 The significant barriers to BC LNG are the long time horizon for environmental approvals, plus the additional factors for meeting consultation expectations with first nations as well as other stakeholder groups. 

Other regions either don’t have these, as in the case of existing import facilities, or have less restrictive conditions around consultation. It may be that, by the time local projects get approved, the market is saturated.

One consideration is that natural gas can easily be piped around the continent and can be delivered from northern BC to Boston for export to China via other shipping routes. Of course the shipping cost is higher but the immediacy of establishing the markets may have an impact.

Many of the BC projects have connections to or are First Nations initiatives which implies that one stakeholder process towards approval is assumed inherent, however other stakeholders, such as environmental and community groups, as well as multiple levels of government will need engagement. 

Pricing and long term contracting are issues. Most greenfield projects require large upfront investment in soft (engineering, consulting) costs as well as hard (pipes,tanks, etc) costs. Added to that are royalties, payments to First Nations, and other community costs and payments. The large cost requires financing and financing requires either long term supply contracts, for security, or substantial corporate guarantees and credit ratings, The bet would be, on this basis, on the big money.

LNG terminals, once built, usually do not require large staffing levels. There will be dock jobs for the terminal, and technical jobs for the upkeep and operation of equipment. Typically, employment levels are low and jobs are highly technical.

So, what’s the conclusion? We can expect that some facilities will go ahead but competition is going to be fierce.

Below is a list of the projects currently proposed in British Columbia. It is worth noting that many are small expansions of existing utility facilities, and others are small capacity. The list is sourced from the BC Ministry of Energy website:

Aurora LNG  Location: Digby Island

Website: http://www.cnoocltd.com

Proponent: Nexen Energy (subsidiary of CNOOC Ltd.)/ INPEX Corporation / JGC Corporation

Cedar LNG Location: Douglas Channel, Haisla project lands

Website: http://haisla.ca

Proponent: Cedar LNG Export Development Ltd.

Discovery LNG Location: Campbell River

Website: www.discoverylng.com 

Proponent: Quicksilver Resources Canada

Douglas Channel Energy project Location: Kitimat 

Proponent: AIJVLP, a limited partnership between AltaGas Ltd. and Idemitsu Kosan Co., Ltd., EDFT Trading and EXMAR

Grassy Point LNG Location: Grassy Point, Prince Rupert

Website: http://www.woodside.com.au

Proponent: Woodside Energy

Kitimat LNG  Location: Kitimat

Website: http://www.kitimatlngfacility.com/

Proponent: Chevron Canada and Woodside Energy

Kitsault Energy project Location: Kitsault

Website: www.kitsaultenergy.com/ 

Proponents: Kitsault Energy Ltd.

LNG Canada Location: Kitimat

Website: http://lngcanada.ca/

Proponent: Shell Canada and their co-venture partners – KOGAS, Mitsubishi, and PetroChina

NewTimes Energy Location: Prince Rupert area

Proponent: NewTimes Energy Ltd.

Nisga’a LNG Location: Nasoga Gulf

Website: www.nisgaanation.ca/   

Proponent: Nisga’a Nation

Orca LNG Location: Prince Rupert

Website: http://orcalng.com/

Proponent: Orca LNG Ltd.

Pacific Northwest LNG Location: Prince Rupert

Website: http://pacificnorthwestlng.com/

Proponent: PETRONAS / JAPEX / PetroleumBrunei / Indian Oil Corporation / Sinopec / Huadian 

Prince Rupert LNG Location: Prince Rupert

Website: http://www.princerupertlng.ca/

Proponent: BG Group 

Steelhead LNG Location: Sarita Bay, Vancouver Island

Website: www.steelheadlng.com

Proponent: Steelhead LNG Corp. and the Huu‐ay‐aht First Nations

Stewart Energy LNG Location: near Stewart, British Columbia

Website: www.stewarte nergy.ca/en/ 

Proponent: Canada Stewart Energy Group Ltd.

Triton LNG Limited Partnership Location: No site chosen, 

Website: www.altagas.ca/ or www.idemitsu.com/

Proponents: AltaGas Ltd. and Idemitsu Canada Corporation

WCC LNG Ltd. Location: Tuck Inlet, Prince Rupert

Website: www.exxonmobil.com/ or www.imperialoil.ca/ 

Proponents: ExxonMobil Canada Ltd. and Imperial Oil Resources Limited

Watson Island LNGLocation: Watson Island near Prince Rupert

Website: http://princerupert.ca 

Proponent: Watson Island LNG Corporation

WesPac LNG Location: Delta

Website: http://wespac.com/ 

Proponent: WesPac Midstream – Vancouver LLC

Woodfibre LNG Project Location: Squamish

Website: http://www.woodfibrelngproject.ca/ 

Proponent: Woodfibre LNG Limited

AltaGasLocation: small LNG facilities throughout northern B.C.

Website: www.altagas.ca/ 

Proponent: AltaGas Ltd.Location: Ladysmith

Mt. Hayes Natural Gas Storage Facility

Website: www.fortisbc.com/

Operator: FortisBC

Tilbury LNG facility Location: Tilbury Island in Delta

Website: www.fortisbc.com/

Operator: FortisBC