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Competing in the global LNG market: Part Two

Hydrocarbon Engineering,

First Nations

According to EY, the Canadian LNG industry is comprised of global players who take all their obligations to work cooperatively with Canadian First Nations communities very seriously. These developers bring positive global experiences to the table in doing just that in many other jurisdictions, and in many cases they have long standing operations in Canada and mutually beneficial relationships in place with many of the impacted First Nation communities.

Nevertheless, the issue of gaining First Nation support is still the most complex for energy companies to address. Technical and cost challenges such as LNG facility design can certainly impact project economics, but those issues are in many ways more manageable than gaining acceptance and support from communities that are determined to preserve their heritage and traditional territories and where there is not a shared consensus across all the various First Nations communities.

Project proponents must continue to engage in extensive consultation efforts, and new models of cooperation and sharing will have to emerge. Training and education programs, real and last job opportunities, support for social programs, community investment and finding a way to share the other economic benefits are all critical tasks. To the extent that First Nations take up equity positions or participate in other creative gain-sharing structures as part of projects, attention will have to be given to make those structures transparent, well understood and viable.

Furthermore, though getting the deal terms agreed to will require significant effort, additional challenges lie in implementation. Aboriginal content provisions, funding models, effective training programs, and the reconciliation of competing interests will require the development of specialized skills and a culture of collaboration and patience.

EY accentuates that both the BC and Federal governments have a role to play. But simply granting regulatory approval will not be enough to move projects forward. Many anticipate the potential of ongoing legal challenges. That’s why all levels of government are proactively identifying creative solutions to address these issues.

However, it must also be noted that many First Nations communities recognize and want a part of the opportunity in BC’s LNG development plans. EY holds that respect, trust and cooperation can be achieved by maintaining a collaborative mindset.

Capital allocation

Portfolio optimization has been the primary focus for global players as they seek to improve margins and generate adequate returns in a period of flat commodity prices and rising costs, according to EY. That focus on cost and capital availability will continue to rule business decisions going forward.

Canadian LNG projects will have to compete globally for capital against projects in many jurisdictions. For example, the significant capital requirements for pipelines, infrastructure, liquefaction facilities and development of the required natural gas reserves for Canadian projects will have to compete with brownfield projects in the US where a far more developed infrastructure capable of supporting LNG exports already exists.

Another dynamic affecting Canadian LNG projects is the structuring required to accommodate the multi-faceted nature of the projects. Upstream spending decisions, the need for significant investments in pipeline and midstream facilities, the multi-billion dollar investment in liquefaction facilities, ports, logistics, and the need for sophisticated marketing operations to manage complex processes leads to complex business structures. Add to the mix the need for project structuring to achieve desired risk management and mitigation objectives. All projects will also require very sophisticated financing structures to support the required project returns. The good news for Canadian projects, according to EY, is that the financiers will see relatively little geopolitical risk. The more challenging news is that many perceive relatively higher project cost risks, given the Australian LNG experience and Canada’s cost history in the oilsands.

Adapted from a report by Emma McAleavey.

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