Canada: Continental Divide: Comparing Canadian And American LNG

Over the last five years, as the shale gas revolution has massively increased the estimated gas reserves in North America, various proposals have been made to construct LNG export facilities, both in Canada and the US.  There have been over 20 proposals advanced in Canada and over 30 in the United States.

We are now at the point where final investment decisions (or FID) are being made and construction is starting, at least in the United States, with certain Canadian projects possibly not far behind.

Speaking recently at an energy conference in Houston, the US Secretary of Energy, Ernest Moniz, summarized the state of LNG export construction in the United States by noting there are five major liquefaction plants already under construction. Secretary Moniz then went on to say:

"[W]e anticipate becoming big players...we're going to influence the whole global LNG market...certainly in this decade there's a good chance that we will be LNG exporters on the scale of Qatar...which is today's largest LNG exporter."

The situation is different in Canada, at least for now. No LNG export facility in Canada has made an unconditional final investment decision to proceed, nor are any under construction. The following table shows the status of the leading Canadian LNG projects: 

Source:  Government of British Columbia's "LNG in BC" website and Company Announcements.

Woodfibre is currently undergoing an environmental assessment under the BC Environmental Assessment Act and it will likely not make a final investment decision or commence construction until sometime in or after Q3 or Q4 of 2015.

Douglas Channel either has all significant environmental and construction-related approvals or it is not required to obtain them due to its small size. It also has all off-take arrangements in place that are needed to make a final investment decision and to commence construction by the end of 2015. Douglas Channel is only waiting for the National Energy Board to issue another export licence (the first one was revoked as a result of proceedings under the Companies' Creditors Arrangement Act affecting its predecessor), as well as a commercial determination to proceed.

The Petronas-led Pacific NorthWest LNG has made a final investment decision, albeit a "conditional" one tied to the approval of a Project Development Agreement by the BC Legislature in the fall of 2015 and the receipt of an environmental assessment certificate under the Canadian Environmental Assessment Act. The environmental assessment is still underway, but it has been delayed as a result of concerns regarding the project's impact on fish habitat. There are also still issues that have to be resolved with affected First Nations.  Pacific NorthWest LNG remains hopeful that these issues can be resolved by the end of this year so that construction can commence.

The following table shows the status of the leading projects in the US, all of which have made final investment decisions.

All of these US projects, except for Corpus Christi, are brownfield conversions of existing LNG import and re-gasification facilities. And all, except for Dominion's Cove Point project, are located on the US Gulf Coast, in the middle of the largest, most sophisticated petrochemical infrastructure on earth.

These US LNG projects have several advantages compared to their BC counterparts, which at least partly explains why they are under construction while the BC LNG projects are not – at least not yet.

First, brownfield conversions of existing LNG import facilities can re-use or modify much of that pre-existing LNG infrastructure. As a result, costs for a brownfield conversion can run as low as $500 million to $750 million per million tons per annum (MTPA) of LNG produced and appear to have a median cost of no more than $800 million per MTPA.  By contrast, costs for a greenfield liquefaction facility are generally in the range of $900 million to $1.4 billion per MTPA.

Second, in contrast to all of the significant BC projects that have been proposed (including the projects led by Petronas, Shell and Chevron), the early stage US projects are not integrated – i.e. the project proponents generally do not own the gas reserves to be fed through the liquefaction facility or the export terminal, nor do they own or have to finance the construction of new pipelines to connect gas reserves with their projects.  Instead, the early stage US projects are usually merchant facilities providing only liquefaction and processing services on a fee for service or tolling basis, and their customers usually own the gas to be processed and are responsible for any transportation of the gas that is required.

The structure and pricing of these types of merchant LNG processing contracts has allowed project proponents to tie prices to the cost of gas rather than index the LNG to the price of oil, as is the case in BC. These arrangements have proven to be attractive to many of the world's major gas buyers. Each of the early stage US projects has been able to secure off-take arrangements with a number of highly creditworthy and experienced buyers. All of this has made the US projects bankable far sooner and with greater ease than the various BC projects.

Moreover, the US projects have been able to focus on building a liquefaction facility or converting a regasification facility along with some relatively minor ancillary infrastructure. By contrast, the major integrated projects on the BC coast require the acquisition of massive gas reserves, the exploration and development of those reserves and the construction or financing of new pipelines covering the better part of 1,000 km from gas reserves in northeast BC – often over several mountain ranges, in hostile climates and with access to only a relatively constrained and expensive labor force.

This is reflected to some extent in the capital costs for the different kinds of projects.  The early stage US projects generally have capital costs of between $5 to $10 billion, which is approximately $550 million to $1 billion per MTPA.  In contrast, the Globe and Mail recently pegged the likely capital costs for the first phase of the Pacific NorthWest LNG project at approximately $36 billion, broken down as follows:

• $5.2 billion to acquire Progress Energy, and its northeastern BC gas reserves, in 2012
• at least $12 billion to drill for gas in northeastern BC
• $11.4 billion for the first two trains of a liquefaction facility on Lelu Island, BC, with an initial estimated capacity of approximately 12 MTPA of LNG
• $6.7 billion in related pipeline projects.

Whether calculated just for these initial phases, or at full build-out, this would imply capital costs for the Pacific NorthWest LNG project somewhere between $2 billion and $3 billion per MTPA.

Of course, the integrated LNG projects proposed for Canada, once fully developed, have the potential for a significantly greater return compared to the merchant LNG projects in the US, but there is also more risk involved. We do not know which of these models will be superior over the long term; however, what we do know now is that, over the short term, the US merchant model has proven to be cheaper, more attractive to off-takers and demonstrably easier to execute.

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