Canada: Reality Bites: Status Of BC LNG

During 2014, many of the significant LNG projects proposed for the West Coast of British Columbia seemed to be making progress.

Required environmental and other regulatory approvals at the federal and provincial levels, including LNG export licenses, were granted in the ordinary course without the delays and absent the passionate opposition that proposed oil pipeline projects experienced.  Indeed, in November, provincial Environmental Assessment Certificates were issued for three LNG projects in northern BC: the Westcoast Connector Gas Transmission pipeline, the Pacific NorthWest LNG export facility in Port Edward and the Prince Rupert Gas Transmission pipeline.

There have also been several recent legislative developments:

  • The Province introduced the Liquefied Natural Gas Income Tax Act, which provides tax rates on LNG production that are substantially reduced from the rates initially proposed by the Province.
  • The Province also introduced the Greenhouse Gas Industrial Reporting and Control Act, which establishes the carbon taxes applicable to these projects.
  • The Federal Government released a proposal to allow accelerated capital cost allowance treatment for certain property acquired for use in facilities that liquefy natural gas to supply international markets, domestic markets or to store in periods of low demand and then regasify it in periods of high demand.

These developments were generally favorably received by project developers and provided them an important part of the certainty needed to determine their economics.

However, certain realities regarding fundamental elements of these projects came into sharp focus, raising serious doubts as to whether some of the proposed projects will proceed on schedule, or at all. These include:

  • The fall in the price of oil: LNG pricing has historically been effectively linked to the price of oil, and at least some project proponents expect to price their LNG on that basis if their BC LNG projects proceed.
  • The challenges of controlling costs, securing sites and entering into the necessary commercial arrangements and alliances with First Nations and other stakeholder groups.
  • The risk that LNG demand will be diverted from Canada to brownfield LNG projects on the US Gulf Coast, which have proceeded far more rapidly than expected as a result of fewer regulatory hurdles and their use of existing infrastructure.
  • Increased competition for the Chinese market that will result from the massive gas export deals entered into between Russia and China.
  • The possibility of Japan turning back on various nuclear powered generating stations, reducing the demand for LNG in the intermediate term

A number of BC LNG Project proponents have delayed or retrenched in part as a response to these developments:

  • Petronas recently announced that its Final Investment Decision would be delayed beyond 2014 citing falling oil prices, rising construction costs and pending regulatory approvals that have not yet been obtained.
  • Chevron and Shell have reduced global capital expenditures except for a few priority projects (which have not included their BC LNG investments) and Chevron has specifically reduced the pace of investment and expenditure on its BC LNG Facility.
  • BG has delayed a Final Investment Decision, indefinitely, on its Prince Rupert LNG Export Terminal. The timing for its Final Investment Decision may be further complicated as a result of the recent announcement that it will be acquired by Shell.
  • Apache sold its JV interest in Chevron's Kitimat LNG Project to Woodside Petroleum.
  • According to recent Environmental Assessment Filings, Exxon and CNOOC/Nexen do not anticipate beginning construction on their respective LNG projects until next decade.

In 2015, at least some of these BC LNG Projects will struggle with the viability of their proposed projects. These are all costly and complex Projects and they face clouded market outlooks and the development of LNG Projects in some areas, such as the US Gulf Coast, which appear to enjoy significant competitive advantages over the BC LNG Projects.

Some smaller Projects (such as Woodfibre and the Douglas Channel Project led by AltaGas) may proceed on schedule and the Petronas syndicate – which has made massive sunk investments and may have special particular commercial and non-commercial reasons to proceed with a BC LNG Project – may proceed faster than some other participants. But the bulk of BC LNG proponents appear likely to take some time to make a Final Investment Decision and to defer completion until sometime in the next decade – not the end of this one.

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.

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