The man who first dreamed of transforming British Columbia into a global force in gas exports to Asia now wonders if a major liquefied natural gas export facility is even possible in the province.
Alfred Sorensen, a onetime gas trader who started planning an LNG project at Kitimat, B.C., before selling his interest seven years ago, says rising regulatory costs and delays caused by endless debate among politicians and First Nations were factors in Petronas's decision to kill Pacific NorthWest LNG.
That is after the Malaysian state oil company said on Tuesday that low LNG prices prompted it and its partners to cancel the $36-billion project it had been planning for Prince Rupert for five years, unnerving the Calgary oil patch, which has had its share of knocks amid a steep downturn.
"These are 20- to 30-year projects. Most companies can see through the current economic environment, but I don't think the cost structure was going anywhere but up and that was the real problem," explained Mr. Sorensen, who is now developing a multibillion-dollar LNG plant in Nova Scotia, a province he said is far more welcoming to such a proposal. "If you're the government of British Columbia, you can't expect to continue to layer on costs and not price yourself out of the marketplace."
Now, B.C. and Canada face a crucial question: Can any developer build such a project on the fragile coast, along with a pipeline across the Rockies? The answer is anything but certain, as Premier John Horgan's new B.C. government begins looking for ways to attract investment while ensuring environmental protection. Now that they are in power, Mr. Horgan's New Democrats are grappling with the challenge of explaining the nuance of their past positions on LNG, which have seemed, to some, skeptical about the prospects of the resource.
All eyes are on Royal Dutch Shell PLC and its Asian partners in the LNG Canada proposal. Shell's chief executive, Ben van Beurden, said this week that the major oil player still plans to decide in 2019 whether to go ahead. The project, which would cost an estimated $40-billion, will have to compete for capital against other opportunities around the world that may offer fatter returns.
British Columbia is in a markedly different energy world than it was just a few years ago, when Christy Clark was premier and promised that B.C. would reap rewards operating plants by 2020, creating 100,000 jobs.
The NDP gave decidedly less support to LNG in the spring provincial campaign, and now investors must gauge what the party will do. Mr. Horgan said this week that his new ministers must make sure the environment is protected, that First Nations are "dialed in" and that the province gets a fair return from LNG – when the market improves.
"Any reasonable read of the market would tell you the conditions aren't there for a market of this kind, and I am hoping those conditions turn around as quickly as possible," he said. "But that's not in the hands of provincial politicians. That's in the hands of consumers and in the hands of others."
There is no question the market has worked against LNG in B.C., where 18 major proposals have been floated and none built. (Construction is set to start on a small project called Woodfibre LNG this year.) A world-scale Canadian plant would require a break-even price of $10 (U.S.) per million British thermal units, and prices for cargoes landed in Japan have been less than that since mid-2015.
Meanwhile, global competitors have flooded in. There are five plants and one expansion currently being built in the United States, which had once been at least a year and a half behind Mr. Sorensen's first proposal. The one Mr. Sorensen led is now owned by Chevron Corp. and is on the backburner. Indeed, a severe drop in cash flow owing to the crude-price collapse has restricted investments in new projects by oil companies around the world.
In the case of state-owned enterprises, politics at home can also alter plans, said Dirk Lever, analyst at AltaCorp Capital Inc. in Calgary. He points out that a scandal involving political graft at state fund 1Malaysia Development Berhad, which took a toll on the Malaysian economy, may have played into Petronas's calculus for LNG.
Many in Canada's energy sector had already become skeptical of LNG, but after three years of industry downturn, the announcement was still a blow. A glimmer of hope remains that gas markets could some day be lifted by the prospect of overseas exports. There's no question that Canada has gas to support such ventures; B.C.'s reserves alone are estimated at 2.9 trillion cubic feet.
Petronas has spent an average of $2-billion a year drilling on its B.C. acreage since acquiring it in a $5.5-billion takeover of Progress Energy in 2012. Numerous other producers have employed new technology to tap massive reserves in the region's Montney and Duvernay formations, even as domestic gas prices have languished.
Pacific NorthWest's cancellation disappointed Premier Rachel Notley's Alberta government, whose non-renewable resource revenues have dwindled amid the energy-industry downturn. LNG exports had been expected to boost demand for the fuel and lift prices throughout Canada's gas market, including in Alberta.
However, Alberta had not factored LNG into its financial forecasts.
Even so, the province's government plans to meet with B.C. cabinet ministers on finding ways to advance projects, Alberta's Economic Development and Trade Minister Deron Bilous said. Mr. Bilous and Alberta's Energy Minister are also talking with other would-be LNG developers, such as Shell and Imperial Oil Ltd. The province is already forceful in its support of Kinder Morgan's Trans Mountain oil pipeline expansion, a project the new government in B.C. campaigned against.
"We need to get our products to the market, so one of the things that both the Minister of Energy and I will be doing in the near future is reaching out to our new counterparts in British Columbia to see how we can work together to move projects along," Mr. Bilous said.
Jackie Forrest, vice-president at ARC Financial, said she believes Canada can compete, but only if the industry finds ways to reduce the costs of the plants that super-cool the gas, while increasing the capacity of supply pipelines. The country has two major advantages – large and inexpensive supplies of gas and the shortest shipping distance to Asia.
"It's disappointing, because we're foregoing billions of dollars of spending in our economy – not only the upfront capital spending, but the ongoing operations and jobs. So Canada is losing a lot of economic benefit," Ms. Forrest said.
Mr. Sorensen is not yet ready to close the curtain on LNG in B.C., saying much still depends on whether Shell and its Asian partners proceed with their proposal and whether the provincial government decides it is supportive even if some in its political base are not. That decision may well be influenced by whether the Trans Mountain expansion can proceed as planned.
"If Kinder goes by the wayside, then I think probably the LNG business is dead," he said.
With a report from Ian Bailey in Vancouver