Canada: Eastern Promises? LNG Expands Beyond B.C.

Much media attention ( including this blog) has been devoted to following the developments of British Columbia's nascent LNG Export industry. At the same time potential LNG Export Projects on Canada's East Coast are slowly gaining momentum. The following chart sets out LNG Export Projects on Canada's East Coast that have been announced to date.

Although the number of potential projects pales in comparison to proposed projects in British Columbia, there are a number of reasons why LNG export from Eastern Canada is becoming increasingly attractive. Perhaps the most significant reason is that Eastern Canada is home to Canada's only potential "brownfield" LNG Export Project. Repsol YPF SA, the owner of the Canaport LNG Import Terminal in New Brunswick, has publicly indicated that it is considering converting the underutilized import facility to export LNG.

The capital cost advantages of brownfield projects are significant. Currently, there are nine US Gulf Coast projects that plan on converting LNG import infrastructure to export facilities, and the US has approved approximately 68 million tonnes per annum (MTPA) for export to non-FTA countries. The estimated capital expenditures to convert these brownfield projects are estimated to be in the range of $650M/MTPA. This is a considerable cost advantage when compared to new greenfield projects estimated at $2.0B/MTPA and new Australian projects with CAPEX coming in closer to $3.0B/MTPA.

This disparity in capital costs is driving divergent pricing for off-take agreements, of which brownfield projects are positioned to take advantage. For example, some Australian greenfield projects are struggling to lock-in 20-year sales contracts as buyers hold out for the prospect of lower prices from US brownfield projects. Cheniere Energy, Inc. has secured anchor buyers for each of its proposed four "trains" of 18 MTPA, collectively, of export capacity at its brownfield Sabine Pass facility under short term contracts based on Henry Hub pricing. Lower capital costs and shorter development times provide brownfield projects with greater pricing flexibility and lowers their reliance on long-term oil indexed pricing to recover CAPEX. Long-term oil indexed pricing is increasingly being opposed by Asian buyers. This growing mismatch of expectations between proponents of greenfield projects and Asian buyers is leading to considerable uncertainty as to the development of many proposed greenfield projects.

Like Western Canada, Eastern Canada is also in close proximity to abundant natural gas reserves that could feed potential projects. Nova Scotia's offshore could hold as much as 120 trillion cubic feet of natural gas and production of natural gas from the Marcellus basin in the Northeastern United States equals the current natural gas production in all of Canada. With abundant production available across the border in the Eastern United States and existing pipeline infrastructure available for use, LNG Projects on Canada's East Coast may avoid additional capital expenditures in developing production to feed their export terminals. The potential for the Canaport facility to function as a "merchant" LNG Export Facility, similar to many of the proposed U.S. brownfield projects, may provide the potential project with further cost advantages over greenfield projects.

In addition, much focus has been on the demand for LNG from Asian buyers, providing British Columbia with a perceived advantage due to its proximity to Asian markets. As a result of increasing political tensions between Western Europe and Russia and the uncertainty regarding the stability of traditional pipeline routes through Ukraine, Western Europe is increasingly looking towards LNG imports to reduce their dependence on Russian gas supplies. Eastern Canada's proximity to Western Europe may also provide the proposed Eastern projects with a strategic geographic advantage. This is important considering the uncertainty regarding the continued demand growth from Asian LNG buyers and the considerable growth in supply to the Asian region that will occur as Australian and US export facilities become operational in the near term.

The proposed LNG Export Projects on Canada's East Coast share many of the same development costs and risks as Western Canadian projects such as regulatory uncertainty, skilled labour shortages and environmental opposition. However, some projects may also possess some unique advantages which remain relatively overlooked as Western Canada races to develop export projects.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.