Canada: Small-Scale Canadian LNG Projects Quietly Growing As An Alternative Power Source

The development of Canada's liquefied natural gas (LNG) export industry has attracted much attention in recent years as large and mid-scale LNG export projects in British Columbia and Eastern Canada have shifted from a surge in initial project development to increased uncertainty in the face of depressed global LNG prices. What has attracted less attention over this time is the slow but continuous growth of Canada's domestic LNG market as LNG gains traction as an alternative power source for both remote resource projects and remote communities.


A report submitted by ICF International to the Canadian Gas Association in 2016, titled Economic and GHG Emissions Benefits of LNG for Remote Markets in Canada (ICF Report), surveyed the Canadian market potential for smaller-scale LNG projects and operations as a source for power generation in remote areas.

The ICF Report addressed the areas where LNG could be used as a substitute for other fuels like diesel for power generation and reasoned why LNG can be an attractive alternative to such traditional fuels. It found that "approximately 200,000 people live in nearly 300 remote communities spread across Canada that are disconnected from central energy supplies."

According to the ICF Report, these remote energy markets are "off-grid" regions of Canada that are not connected to the North American electrical grid or to natural gas distribution pipelines. This includes both remote communities and remote industrial energy users, such as mines. In these remote regions, reliable and cost-effective energy supply is a challenge for communities and industry, and serves as a barrier to economic development.

The ICF Report found that these remote communities and industry "typically rely on diesel, propane, or other fuel oils for heating and to generate their own electricity, all of which have to be shipped in by truck, rail, or marine vessel" and that many are increasingly considering LNG as an option to meet their energy requirements:

"Advances in the technology used to liquefy, transport, and re-vaporize natural gas, have made LNG a viable option for remote customers. . . . Although LNG has many advantages, including environmental and safety benefits, cost savings are the primary driver of its adoption. In recent years, due to low natural gas prices, LNG has emerged as an affordable alternative to diesel or fuel oil in remote communities and mining sites."

For energy lawyers, the growth of small-scale LNG in Canada therefore begs the following two questions:

  1. To what extent does the value chain in small-scale, local LNG operations differ from the value chain in large-scale LNG export projects?
  2. To what extent do such differences impact considerations relevant to the various contracts comprising the small-scale LNG value chain compared to the various contracts comprising the value chain of large-scale LNG export projects?


As discussed in our June 2016 Blakes Whitepaper: Canadian LNG from a Global Perspective,  different international jurisdictions have witnessed the development of varied formulations of LNG projects and value chains. In other words, LNG export projects can take various forms or "project structures" and involve different combinations of upstream natural gas producers, pipeline companies, liquefaction facility owners, maritime transportation companies and downstream utilities, each with their own set of objectives and potentially complementary or conflicting interests. Therefore, a point of stark contrast between large-scale LNG export projects and small-scale, local LNG operations is the degree of complexity involved.

A brief example is illustrative. One of the more common project structures for Canadian large-scale LNG export projects is that of the "integrated" project model, which is typified by multiple project proponents owning a consistent percentage of different components along the LNG value chain. For example, four energy companies may create a series of joint ventures pursuant to which each of them:

  1. Owns a 25 per cent interest in the project's upstream natural gas production
  2. Owns a 25 per cent interest in the pipelines and processing facilities linking the upstream production to the liquefaction or export terminal
  3. Owns a 25 per cent interest in the liquefaction or export terminal
  4. Is entitled to 25 per cent of the LNG offtake from the terminal, which they then either sell to downstream purchasers or use as feedstock in their own power-generation facilities.

Small-scale LNG projects and value chains are likely to be less complex on a number of levels.

First, upstream natural gas production will not factor into small-scale LNG operations in the same way as a large-scale LNG export project. Small-scale LNG projects will require natural gas production, but such natural gas will not be produced for the primary purpose of feeding LNG production. Rather, such feedstock will typically be intended to feed general regional market demand for natural gas, of which liquefaction into LNG for small-scale sales arrangements will be only one of a myriad of potential uses.

Second, while small-scale LNG projects and operations will require natural gas pipelines and processing facilities to transport the natural gas from the point of production to the point of liquefaction, it is unlikely that the great majority of such pipelines and processing facilities will be new-build infrastructure as is the case with large-scale LNG export projects. Rather, small-scale LNG operations likely to take advantage of existing natural gas transportation and processing infrastructure, with the possible exception of new-build small-scale liquefaction facilities at strategic locations along such existing infrastructure.

Third, small-scale LNG offtake arrangements are likely to be of shorter terms and involve less complex conditions than offtake arrangements from large-scale LNG export projects. Offtake agreements in large-scale LNG export projects commonly involve minimum terms of 15, 20 or 25 years, such extended terms being necessary to underwrite the large capital expenditures necessary to build the project's liquefaction facility and other infrastructure. It is also common for LNG offtake arrangements from large-scale LNG projects to involve destination restrictions that only allow buyers to transport the LNG to pre-determined regasification facilities or specified regional markets. Such restrictions also go toward project viability and project sponsors' desire to prevent downstream buyers from indirectly competing with the project. Offtake arrangements in small-scale LNG projects are unlikely to be nearly as lengthy or restrictive, given that the LNG purchase and sale arrangement will unlikely be underwriting large capital expenditures, and the purchaser will likely be seeking to supply a single "off-grid" project, development or community without interest in any forward sales or other market opportunities.


Despite these differences, there are many lessons from large-scale LNG export projects that can be applied in small-scale, local LNG operations. Indeed, much of the large-scale LNG "virtual pipeline" composed of longer-term purchase and sale arrangements and maritime transportation arrangements remains applicable to the small-scale LNG "virtual pipeline" composed of shorter-term purchase and sale arrangements and overland vehicle transportation arrangements.

First, close coordination of the terms of the LNG purchase and sale agreement (LNG PSA) and the LNG transportation agreement will be essential to the LNG buyer in both large-scale LNG export projects and small-scale, local LNG operations, including to ensure continuity of LNG supply and avoid disruptions in power generation.

Therefore, just as is the case in large-scale LNG export arrangements, buyers of LNG in small-scale transactions will want to ensure that their transportation service provider is obligated to:

  •   Meet all delivery/receipt windows and schedules established under the LNG PSA
  •   Keep its vehicle delivery fleet in good repair and maintain minimum levels of insurance coverage
  •   Comply with the LNG seller's loading protocols and other safety regulations and policies
  •   Regularly communicate with both the buyer and seller as required to ensure timely receipt and delivery of LNG, including to inform the buyer of any breach by the seller of its obligations under the LNG PSA or any other development that could adversely impact receipt and delivery schedules.

The LNG buyer will also want to include appropriate indemnities and other risk allocation provisions, including with regard to any liabilities or damages that would result from delivery interruptions that are the transporter's fault (e.g., related to interruptions in production at the LNG buyer's mine).

Second, both the LNG seller and buyer will want to ensure that the terms of the LNG PSA meet their commercial objectives without exposing them to undue risks or unreasonable costs. Furthermore, just as is the case in large-scale LNG export arrangements, this calculation — as well as the specific contractual terms and conditions by which it is achieved — will depend on the particular circumstances of both the LNG buyer and seller.

The buyer, for example, may wish to build in a certain amount of flexibility into its demand profile, whether in rm of a staged increase of its consumption at the front end of the LNG PSA's term (e.g., as the operations of the buyer's mine are progressively brought online) or in the form of lower demand over the back end of the LNG PSA's term (e.g., by which time alternate LNG suppliers are expected to have entered the local market).

The buyer may also want to build in flexibility within the quarterly delivery periods comprising a contract year within the LNG PSA's overall term (e.g., because it anticipates seasonal variability in the amount of LNG it will require due to temperature fluctuations). A potential solution in such circumstances will be the option for the buyer to schedule as little as 15 per cent or as much as 35 per cent of its annual offtake during any particular quarter, provided it commits to scheduling the entirety of its annual offtake across all four quarters.

The LNG seller, by contrast, will likely want the buyer to commit to receiving its annual offtake commitments on a "take or pay" basis, including to ensure it is not prejudiced for reserving output capacity to an LNG buyer when it could be dedicating its LNG supply to alternative market opportunities. Another key question for the seller is whether the LNG buyer will be permitted to re-schedule LNG volumes it did not take delivery of, but has paid for under the "take or pay" principle, as well as whether the buyer should be able to roll over such LNG credit volumes indefinitely over the term of the LNG PSA or for a limited amount of time (e.g., no more than two quarterly delivery periods).

Third, the LNG seller will want to consider achievable limitations on its liability for failing to make LNG available at scheduled delivery times, whether by stipulating that liability will only accrue once a minimum number of missed LNG deliveries have occurred (e.g., three or more in any quarterly delivery period) or by stipulating that responsibility for extra costs incurred by the LNG buyer stemming from missed deliveries will be shared among the buyer and seller pursuant to a predefined allocation (e.g., 70 per cent as to seller and 30 per cent as to buyer). Risk allocation can be staggered or subject to other variability (e.g., once the LNG seller has missed four deliveries in any quarterly period its share of responsibility will increase to 100 per cent until it re-establishes reliable delivery for a minimum period of time).


At the overall project level, there is much that distinguishes small-scale, local LNG operations from large-scale LNG export projects, with the latter being subject to potentially far more complicated project structures and project dynamics among the various potential project participants. Nonetheless, there is much to be learned from large-scale LNG export projects that can be applied in small-scale, local LNG operations, particularly regarding the coordination of the terms of LNG PSAs with the terms of associated LNG transportation agreements, and the different LNG PSA terms and conditions that can assist both LNG buyers and sellers in meeting their commercial objectives while minimizing exposure to undue risks or unreasonable costs.

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.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Events from this Firm
12 Sep 2017, Seminar, Toronto, Canada

Please join us as we take an in-depth look at the legislation and the impact on the industry.

14 Sep 2017, Seminar, Toronto, Canada

Change, stress and uncertainty are ever]present factors in todayfs legal environment, and specific aspects about the practice of law make it difficult to thrive in the profession long term. Luckily, there are specific research]based strategies that have been shown to help lawyers thrive and lead to more effective ways to manage stress and pressure.

5 Oct 2017, Seminar, Toronto, Canada

Blakes is proud to host our New to In-House Series, designed to bring together junior and mid-level in-house counsel for a candid exchange of insights to highlight and address some of the challenges and opportunities facing in-house lawyers in their roles today.

In association with
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.