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Costly Canadian LNG projects suffer setbacks

Hydrocarbon Engineering,


Business Monitor International (BMI) has downgraded its Canadian natural gas production forecast due to increasingly uncompetitive LNG project economics amid lower international oil prices, both of which will negatively impact the outlook for gas production. Furthermore, high operating costs, limited midstream infrastructure, and uncertain Asian demand for Canadian LNG will continue to disincentivise investment in the sector. First mover advantage and competitive costs will be crucial for new entrants in the Asian Pacific LNG market as it will grow increasingly crowded with available suppliers.

With OPEC unlikely to provide support for oil prices in the coming quarters, a global oil surplus will depress crude prices over the next five years, keeping international prices below US$80/bbl through the end of the decade. This will also have a knock on effect on oil indexed LNG prices, reducing potential returns and eroding profit margins on major LNG developments despite vast below ground resources.

BMI now forecasts Canadian natural gas production to decline over the next decade, as a result of persistent delays at proposed LNG export projects. To date, 30 LNG liquefaction facilities have been proposed to the Canadian National Energy Board (NEB), with over 100 million tpy of capacity at the nine facilities that have been approved. However, BMI believes it is increasingly unlikely that many of these projects will come online before the end of its 10 year forecast in 2023 as producers continue to reassess capex plans in the wake of declining oil prices.

Project economics hit by fall in oil price

Rising equipment and labour costs are challenging the competitiveness of new LNG projects, particularly in an increasingly bearish energy price environment. Development costs at an average LNG terminal in Canada are as much as twice that of similar facilities in the US due to limited existing infrastructure and inadequate midstream capacity. This is discouraging the advancement of proposed LNG export facilities.

In addition, long term oil indexed LNG purchase agreements will be lower priced in the future, reducing project revenue and lowering profit margin, disincentivising investment to a greater extent. This dynamic is reflected in the BMI natural production forecast, whereby average growth of -2.0%/y was estimated through 2020 as crude prices remain below US$80/bbl. This trend improves slightly to 0.3% average growth from 2021 to 2023 as oil prices move higher. BMI cautions, however, that costly LNG projects will remain broadly unprofitable at these rates, resulting in delayed final investment decisions (FID) or project cancellations.

While the municipal government of British Columbia passed a consolidated tax framework for LNG producers in October 2014, coupled with increased regional coordination through Western Regulators Forum which aims to encourage pipeline development, BMI sees little scope for improvements in this space over the next several years. Ultimately, the Canadian government’s recent attempts to improve the LNG regulatory framework will prove inadequate as increasingly unfavourable project economics will discourage producers from following through with proposed LNG projects.

LNG terminal casualties to increase

Increasing headwinds faced by Canadian LNG developers are most clearly evidence by the December 2014 decision by Malaysian state owned oil and gas company Petronas to delay its FID for a second time on the US$11 billion Pacific Northwest LNG export terminal. Chevron also remains without a partner at its Kitimat projects after Apache chose to exit the project in August.

Furthermore, BMI believes that progress at other major proposed LNG export projects will remain unlikely given persistently unfavourable project economics for Canadian LNG. The status of the LNG Canada facility proposed by Shell, Kogas, Mitsubishi, and PetroChina, has become increasingly uncertain as Kogas announced in November 2014 it is considering selling its stake in the project. The Prince Rupert LNG terminal, with a capacity of nearly 29 billion m3/y, has also been suspended as operator BG Group delayed its FID in October 2014, pushing back its decision deadline to 2017.


Adapted from a report by Emma McAleavey.

Read the article online at: https://www.hydrocarbonengineering.com/gas-processing/20012015/costly-canadian-lng-096/

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