One Step Forward, One Step Back - Final Investment Decisions For BC LNG

A number of BC LNG projects are approaching – or at least appear to be approaching – a Final Investment Decision to proceed with construction.

Usually, there are two important factors that determine whether and when a Final Investment Decision is made: the economics of the project and the status of its required regulatory approvals.

In the past, the economics for BC LNG projects appeared promising, while obtaining regulatory approvals was the main obstacle in the way of development. However, over the last 12-18 months, it seems the opposite has become true.  

The economic prospects for BC LNG have dimmed, at least in the medium term. Expected demand for LNG has fallen with the slowing growth of the world's leading LNG consuming nations, which are principally in Asia. Worldwide supply of LNG is also increasing. Over 100 MTPA of new capacity is in the process of coming into service, principally from Australia and the US Gulf Coast. This is expected to result in a global over–supply of LNG capacity through to 2022.

Prices for LNG, which are traditionally linked to the price of oil, have also fallen recently. The price of oil has fallen to less than half of what it was 18 months ago and there are no signs of a quick recovery. Spot prices of Asian LNG have fallen to around US $6.60 per mmBtu, about one-third of their peak prices in February 2014, when they were US $20.50 per mmBtu.

While the economics for BC LNG have become more challenging, progress is being made, albeit slowly, on the regulatory front. Some of the leading BC LNG projects now hold all of the material regulatory approvals needed to make a Final Investment Decision. Even the projects still facing the most significant regulatory challenges have at least managed to narrow the outstanding issues requiring resolution.

Regulatory approvals for BC LNG projects include the issuance of a gas export licence from the National Energy Board (NEB) and environmental assessment certificates under the Canada Environmental Assessment Act (CEAA) and/or the British Columbia Environmental Assessment Act (BCEA). Project sponsors also usually want to be satisfied that sufficient consents have been obtained from affected First Nations, or at least that sufficient consultation has been undertaken and accommodations have been made. This mitigates the risk of regulatory approvals being overturned by the courts.

In this post, we update the status of the regulatory approvals generally needed to make a Final Investment Decision. Below is an update for those BC LNG projects that are, or are at least expected to be, in a position to make a Final Investment Decision now or over the next 12-18 months.

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

Kitimat LNG and LNG Canada currently hold all regulatory approvals usually required to make a Final Investment Decision; however, they appear to be moving on different paths and timetables. When it first announced the formation of its LNG Canada syndicate in April 2014, Shell indicated that a Final Investment Decision was likely sometime in the following 18-24 months. Having obtained its remaining key regulatory approvals in the last few months, Shell is now positioned to make a Final Investment Decision during 2016, if economic circumstances warrant.

Chevron was the first to obtain the necessary regulatory approvals to construct its Kitimat LNG project, but it has delayed making a Final Investment Decision for several years.  Chevron has made it clear that its project is not one of its core priorities and it was accordingly not exempted from a round of capital reductions made earlier this year. Also, Chevron does not yet have LNG sales agreements for its project, so a material recovery in global energy markets is probably needed to proceed.

The first phase of Douglas Channel is small enough (0.55 MTPA) that it is not required to obtain an environmental assessment certificate under the CEAA or the BCEA. The only remaining regulatory approval required before a Final Investment Decision could be made is the issuance of an export licence by the NEB – a process which, in recent years, has become relatively routine, though still prolonged. AltaGas believes that the NEB export license will be issued, and a Final Investment Decision can still be made, in Q4 2015. 

Pacific Northwest LNG and Woodfibre LNG face more serious regulatory obstacles. Woodfibre LNG is still being reviewed under the BCEA and key elements of that project – e.g. the use of seawater cooling systems – remain under discussion with regulators and the affected First Nations. While Pacific Northwest LNG has recently obtained a number of required regulatory approvals, it is still being reviewed under the CEAA and its impact on Flora Bank, an important area for the salmon populations of the Skeena River, is still a major concern for First Nations.

Despite the ongoing environmental assessments, both Pacific Northwest LNG and Woodfibre LNG remain publicly confident that they will obtain the required regulatory approvals in time to make Final Investment Decisions in Q4 2015. However, it will not be entirely surprising if one or both of those Final Investment Decisions slip into 2016. 

Other experienced industry participants, such as Exxon and CNOOC/Nexen, are also sponsoring proposed LNG projects in BC. However, those projects are further away from making Final Investment Decisions. The projects led by Exxon and CNOOC/Nexen are still in the relatively early stages of the regulatory process and a Final Investment Decision will likely not be made in either case until 2017, at the earliest. 

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.