LNG Canada: Big is back! Or is it?

Caroline Gentry's picture
Caroline Gentry, Energy Analyst, dmg events
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The North American gas industry is eagerly awaiting a trickle-down effect from LNG Canada’s positive final investment decision (FID) last week.

The massive C$40 billion gas liquefaction and pipeline project is the “single largest private sector investment project in Canadian history,” Canadian Prime Minister Justin Trudeau said.

The joint venture between Royal Dutch Shell, Petronas, PetroChina, Korea Gas Corporation and Mitsubishi Corporation presents the fastest route from North America to Asia, which is the likely destination for most of the LNG. According to Shell the project would produce 13% IRR assuming $8.50/mmBtu when delivered to Tokyo, and Asian LNG prices are around $11/mmBtu now.

Construction of the 670km Coastal GasLink pipeline and the facility will employ 10,000 people and create 950 permanent jobs. Pipeline construction company TransCanada has awarded $620 million in contract work to northern British Columbia indigenous businesses.

But opportunities for gas producers and shipping companies coming directly from the project will be limited. Project partners Shell, Petronas and Mitsubishi already have access to their own gas reserves in western Canada. PetroChina and Korea Gas Corporation (KOGAS) could be the only two looking for third party gas for some of their feedgas requirements, according to a Wood Mackenzie report ‘LNG Canada reaches FID: Canada steps onto the global stage’ released this month.

Canadian gas prices are already heavily discounted to the US, at about $1.70/mmBtu, compared with just under $3/mmBtu in the US Gulf Coast, but LNG Canada is unlikely to boost domestic prices in the short term. Shell and Petronas have a break-even of about $1/mmBtu for drilling new wells.

Shipping-wise, Shell, KOGAS and Petronas already have large fleets of LNG carriers, so it is not clear whether they will need to charter or build new vessels, whereas Mitsubishi and PetroChina – both with a 15% share of the project -  probably will. To transport the full capacity to northeast Asia would require around twelve 160,000 m³ LNG vessels, according to Wood Mackenzie.

While in general, last week’s announcement is a shot in the arm for an industry under siege from the US shale revolution, predictions that the floodgates are open for a wave of mega-projects may be premature. LNG Canada is a brownfield project with a cost of around $1,000/tonne, higher than the typical $700-800/tonne in the US Gulf Coast but lower than for Canadian greenfield projects.

Eyes now turn to the list of other Canadian LNG projects which have been cancelled or are waiting on the shelf for more favourable economics. Seven projects on the East Coast have received LNG export licences: Goldboro LNG, Bear Head LNG, H-Energy; Saguenay LNG, Stolt LNGaz Inc. and TUGLIQ Gaz Naturel Québec Inc.; and Canaport LNG. Five projects are active in British Columbia: Woodfibre LNG, LNG Canada, Kitimat LNG, Grassy Point LNG and Kwispaa LNG, according to an August Canadian Energy Research Institute (CERI) report.

These other project developers will need to keep costs down to bring their projects to life. The next project to watch for will be Chevron and Woodside’s Kitimat LNG, situated very close to LNG Canada. The 2.1mtpa Woodfibre LNG project in British Columbia has taken a final investment decision already but as of yet no details have been released about its engineering, procurement and construction (EPC) contract or whether it has secured firm takeaway capacity.  

Globally, other projects that may take FID soon include four mega trains in Qatar, Arctic LNG-2 in Russia, at least one development in Mozambique and several US projects.

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