West Coast LNG advocates face tough road ahead

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Big dreams for liquid natural gas exports from Canada's West Coast may face a rude awakening as a result of the cost and difficulty of constructing mega-projects that must find customers in an increasingly saturated global market.

Industry plans to send Canadian gas to Asia have stirred optimism in British Columbia, where the seven potential export projects stand to unleash a deluge of spending and major new government revenues.

Yet for those LNG projects to succeed, they must outrun competition on numerous fronts, from giant new gas finds near Mozambique to major new projects already under way in Australia, and even pipelines to China and South Korea from Russia.

They also face intense Asian pressure to make contracts less lucrative for gas suppliers – challenging the economics of new export terminals in B.C. And they have to build multibillion-dollar mega-projects that have, around the world, seen schedule delays and cost overruns.

For those reasons, skeptics say the province – and Canada's energy industry – should prepare themselves for a winnowing of the current slate.

"Based on our model, most of these LNG projects will likely get shelved once the true costs are calculated," Peter Doig, an analyst with GMP Securities in Calgary, wrote in a recent research note to clients.

That analysis runs counter to a trend that has seen industry firmly embrace LNG. Exxon Mobil Corp., BP PLC, ConocoPhillips and TransCanada Corp. unveiled plans Wednesday for a $45-billion to $65-billion (U.S.) pipeline and export terminal from Alaska.

Apache Corp., which is leading the Kitimat LNG project that secured Canada's first LNG export licence, is pressing ahead, despite difficulties securing a lucrative contract that ties the price of gas to the price of oil.

"We have the right ingredients for success, and I truly believe this is the right opportunity at the right time," David Calvert, vice-president of Kitimat LNG, said this week.

Royal Dutch Shell PLC, which is leading Korea Gas Corp., Mitsubishi Corp., and PetroChina Co. Ltd. in a consortium to build another terminal near Kitimat, B.C., also parried concerns. The Shell project is "unique in Canada because it brings market and supply experts together, and because of the extensive experience the four co-venture partners have in the LNG industry," a spokesman said.

Yet it is becoming increasingly clear that building these facilities will not be simple. Costs are a major challenge. Shell, for example, has applied to export 24 million tonnes per year at Kitimat, although it would begin with a project half that size.

The cost of recent projects around the world, compiled by the International Energy Agency, suggest even that initial, smaller development, could run between $33-billion and $39-billion – although other analyst estimates have come in at less than half that figure. Shell has not commented on its project cost.

Foreign buyers are also increasingly less willing to buy LNG through expensive oil-linked contracts, with some Japanese buyers looking to sign solely cheaper gas-price-contracts in North America.

Then there are markets. By 2020, the Institute of Energy Economics in Japan predicts projects with contracts already in place will produce enough LNG to meet global need in a high-demand scenario. In a low-demand scenario, they will outstrip need by roughly 15 per cent. Projects currently in planning, however, would take supply above even high demand by 50 per cent in 2020, and by 75 per cent in 2025.

Far more LNG is being contemplated than the market is likely to need. That suggests some projects will not succeed. Bentek, a U.S. energy forecasting and analysis firm, believes only two Canadian LNG projects will be built by 2020.

"The question is, how long is it going to take to build the projects, to build the new pipelines they need and the necessary infrastructure?" said Javier Díaz, Bentek's lead energy analyst for LNG. "That is the big concern. Will they be able to compete?"