Canada’s LNG Export Dreams Go to Heck

Lower oil prices have killed off already troubled mega-projects for liquefied natural gas exports from Canada’s west coast to Asia.

By Nick Cunningham, Oilprice.com:

On December 2 the state-owned oil company of Malaysia, Petronas, decided to shelve plans to build an enormous LNG export terminal in British Columbia, citing the falling price of oil. It is common for LNG contracts to be priced using a formula linked to the price of crude oil, so declining oil prices pushes down prices for LNG.

Petronas’ Pacific NorthWest LNG, as it was known, was a proposed $32 billion export terminal that would send Canadian LNG to Asia. The decision highlights how competitive global LNG trade has become, despite growing demand. Greenfield projects, such as Pacific Northwest LNG, face steep startup costs that become prohibitive when oil prices fall.

But Canadian LNG projects were facing serious obstacles before oil prices plummeted. There is stiff competition from a slew of LNG projects already under construction in the U.S. and Australia, which will come online much earlier than anything from British Columbia.

Several LNG export facilities in the U.S. are not starting from scratch, for example. The Sabine Pass terminal on the Gulf Coast and the Cove Point facility on the Chesapeake Bay were both originally constructed to import LNG rather than export. The original facilities were put on ice when the U.S. no longer needed LNG imports. Now, companies are retrofitting them to handle exports – a much cheaper process than building a new facility.

The indefinite cancellation of Pacific NorthWest LNG is a major setback for Canada’s plans to export natural gas. The move comes after BG Group abandoned plans to build a separate LNG export terminal on Canada’s west coast. Chevron is also in limbo with its Kitimat LNG project after its partner Apache pulled out.

The inability to break ground on a series of LNG export terminals is also a major blow to the province of British Columbia, which has banked on natural gas exports to meet certain budget objectives. B.C. Premier Christy Clark was originally very bullish on the industry, telling constituents that the province could become debt-free as a result of exports.

In 2013, Clark predicted that a full-fledged LNG export industry would be up and running by 2020, which would bring in $4.3 to $8.7 billion each year for the province. But her government made major concessions on taxes after several companies wavered on final investment decisions. Petronas even threatened to cancel its project because of proposed tax rates. In October 2014, Clark’s government proposed a 3.5 percent LNG tax, half of the original proposal.

The move was intended to offer a more attractive investment climate yet it was not enough to overcome high costs and falling oil prices.

Related: LNG-Dependent Japan Tries To Gain Leverage Over Pricing

The LNG market has dramatically changed since the B.C. government made its 2013 budget projections. Along with lower oil prices, the demand for LNG in Asia – the target market for Canadian exporters – looks quite a bit softer than it once did.

Japan is inching closer to a restart of its nuclear reactors, and as the world’s largest LNG importer, that could put a dent in demand. China’s economic growth is lower than expected, slowing the rise in energy consumption. And in what may have been unimaginable in 2013, China inked two major natural gas deals with Russia this year. If the deals are completed and the pipelines constructed, Russia could end up providing China with 17 percent of its natural gas needs by 2020. All of these trends narrow the market for Canadian LNG.

CBC News described British Columbia’s Premier Christy Clark as having an “almost singular focus” on LNG, but her government will need to find another silver bullet to fix provincial debt with LNG off the table for now. By Nick Cunningham, Oilprice.com:

With $9 billion in debt and no profit in its entire history, US LNG “exporter,” Cheniere, is priced as if the future is not just rosy, but guaranteed, and that is not the case. Read…  Cheniere’s Big Gamble With Other People’s Money

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  1 comment for “Canada’s LNG Export Dreams Go to Heck

  1. mick
    Dec 7, 2014 at 9:15 pm

    I live in British Columbia and have watched this farce unfold from the beginning. You have to know a thing or two about Christy Clark first. She’s a liar among liars and will say anything to boost her ratings.
    For instance, she campaigned on the slogan ” Debt free BC ” recently, though her govt has increased the debt to ridiculous levels since coming to power, but hid half of it under “contractual obligations.”
    Her campaign claim was that LNG would bring a trillion dollars to BC, which would make us all rich and pay off the debt. To arrive at the trillion dollar figure, she forgot to mention they used Japans LNG price, the highest in the world, as the average price they expected to receive for BC’S LNG.

    When investors like Petronas and others started to see the gaping cracks in the plan, they began pulling out. Not that it mattered to Ms. Clark, as she had touted this grand scheme throughout the province by then, to desperate residents of the north and central province, all wanting to believe the dream.

    They did, as did enough city folk to get Ms. Clark re-elected, which is all that mattered in the first place. Once that was accomplished, her govt couldn’t even put together a tax scheme in time to meet key project dates.

    Every potential investor like Petronas, was just a dupe in her grand plan. And now they know it.

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