Expectations and hurdles high for B.C.'s LNG industry

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It will be years before Canadian natural gas heats Asian homes. But as the industry considers billions of dollars of investment to export liquefied natural gas, it faces a difficult path to shipping its energy overseas.

History has shown that LNG projects frequently fail, foundering on cost escalations and a tough market. LNG buyers are raising competitive threats, too, as they seek to push down the price they're willing to pay for Canadian product. And a looming new LNG tax in British Columbia has raised new fiscal uncertainty that is unlikely to be resolved for a year.

Those hurdles stands in sharp contrast to the huge expectations for LNG in B.C., serving as a reality check to the vision that exporting gas will become Canada's next major natural resources business. And the uncertainty surrounding LNG projects comes as key resource industries in Canada, such as the oil sands and mining, have seen spending and development pulled back amid a slowdown in demand and prices for certain commodities.

"We have a multitude of LNG export projects here in B.C. Only a small subset are expected to prevail," Anders Ekvall, a vice-president with Royal Dutch Shell PLC in Canada with responsibility for LNG, said on Monday.

He spoke at "Fuelling the Future," a B.C. government-organized LNG conference in Vancouver, where a more realistic industry outlook clashed with the outsized ambitions that have poured from provincial leaders. On Monday, for example, Premier Christy Clark underlined how LNG stands to economically transform the West Coast.

"There is a new day of opportunity here in B.C. today," she said.

Ms. Clark, who faces re-election in May, said she looks forward to "making progress every single day and bringing home what I consider to be a once-in-a-lifetime opportunity for the people of B.C. and Canada."

For the energy industry, that opportunity – compelling as it may be – lies behind a series of roadblocks that casts a shadow on the most optimistic of expectations.

Part of the concern is that as Canada seeks sales to a hungry Chinese market, it faces competition not just from other LNG exporters in Australia, the United States, Qatar and Mozambique.

Others are working hard to sell to the Chinese market, including former Soviet Union states such as Turkmenistan and Russia, which are using pipelines to deliver their energy, warned Luo Weizhong, president of CNOOC Gas & Power Trading & Marketing Ltd.

China currently has terminals capable of importing 22 million tonnes of LNG per year, with another 19 under construction. But it has import pipelines that can move the equivalent of 50 million tonnes, with the potential to double that.

"China has a strong gas-on-gas competition," Mr. Luo said. He added: "So if LNG is not able to compete against pipeline gas, its role will be marginal."

As a consumer of natural gas, China, like Japan, has an incentive to talk down prices.

But even those driving to build Canada into a major LNG exporter are flagging potential obstacles.

Regulatory uncertainty is one of them. B.C.'s talk of new taxes has generated substantial unease in the industry, with executives calling for rapid resolution of that issue.

A fiscal regime needs to be "in place well in advance" to allow companies to proceed with investment decisions, said Michael Culbert, chief executive officer of Petronas-owned Progress Energy Resource Corp. He added: "That clarity is utmost."

Still, there is little doubt that B.C. has drawn major attention for its gas export potential.

LNG tankers sailing from B.C. can reach Asian ports in nine to 10 days, a huge advantage over the 20-plus days for ships leaving the Gulf of Mexico.

Canada's cold weather plays a role, too: Prince Rupert, B.C. is so much colder than Gulf locations that companies can liquefy 30 per cent more energy through the same equipment, which must chill gas to minus 160 C.

The Prince Rupert chilling advantage is "what pays for the pipeline" to carry B.C. gas to the coast, said Betsy Spomer, senior vice-president of global business development with BG Group PLC.

In addition, gas from fields like B.C.'s Montney is so packed with liquids like ethane and butane that it is particularly valuable to buyers in places like Japan, who are forced to mix expensive liquid propane with "leaner" natural gas from the United States to make it sufficiently energy dense. B.C.'s "richer" gas is "a differentiator," Ms. Spomer said in an interview.

And the potential market is huge: Between now and 2025, Asia will need an additional 168 million tonnes a year of LNG, BG has calculated. That's a doubling in LNG demand.

Those factors, however, will mean little if Canada cannot fetch a high price for its gas.

Contracts signed for LNG sold from the Gulf of Mexico value gas today at under $10 (U.S.) per million BTUs. For Canadian LNG terminals to be built, companies will have to negotiate contracts of $14 to $15, Ms. Spomer said.