It's a tough time to be starting from scratch to build a natural-gas export industry that requires massive, long-term capital investment.
The federal government announced late Tuesday its approval, with 190 conditions, of Pacific NorthWest LNG's proposal to build a plant on the coast of northern British Columbia. The facility would liquefy natural gas and ship it by specialized tanker.
PNW's lead shareholder, Malaysia's state-owned Petronas, will now have to review the conditions and consult with its consortium partners to make a final decision whether to proceed with the project, into which it has already poured billions of dollars.
Construction of the liquefaction and export terminal alone will cost an estimated $11.4-billion and take five years to complete. Add the cost of developing shale gas fields in northeastern B.C. that will supply the export terminal, and the pipelines required to move the gas from a remote corner of the province over several mountain ranges to the coast, and the required investment soars to roughly $36-billion.
The consortium will also have to factor in climate change concerns, which lead to higher costs as governments look to limit greenhouse gas emissions, and which raise questions regarding long-term growth in global demand GHG-emitting natural gas.
Here is snapshot of the PNW project and the challenges ahead:
At the site: Pacific NorthWest LNG wants to build an $11.4-billion export terminal on Lelu Island near Prince Rupert in northwestern British Columbia. The site, administered by the Port of Prince Rupert, is within the District of Port Edward. It would comprise two adjacent plants – with an option for a third – that would chill the gas to minus-162 C in order to liquefy it. With two berths on Agnew Bank, the terminal would supply two LNG carriers every three days.
Consortium: Petronas holds a 62-per-cent interest in Pacific NorthWest LNG. As with many LNG projects, the leading shareholder sought partners that will help it build a multinational customer network. The PNW partners are China's state-owned Sinopec, whose formal name is China Petroleum & Chemical Corp. (10 per cent), India's state-run Indian Oil Corp. Ltd. (10 per cent), Japan Petroleum Exploration Co. Ltd. (10 per cent), China Huadian Corp. (5 per cent) and Brunei National Petroleum Co. (3 per cent).
Economics: With LNG prices in Asia at low levels, the vast majority of 20 LNG proposals in British Columbia have been rendered uneconomic. Pacific NorthWest LNG, however, is seeking to be up and running in 2021 in hopes that the glut of global supplies will have begun to ease. Security and diversity of supply is an important issue. B.C. is seen as a reliable jurisdiction, and it would provide Asian customers with shipments of the fuel under a tax and fiscal regime that is considered stable. While the global economics of LNG are looking poor for Pacific NorthWest LNG, the venture's co-owners are financial backers and also "off-take partners" – long-term buyers of LNG in Asia.
Estimated total cost: Pacific NorthWest LNG estimates that $36-billion will need to have been to spent to make its planned exports a reality in 2021. The budget includes $11.4-billion for the LNG export terminal on Lelu Island, $5-billion for the Prince Rupert Gas Transmission , $1.7-billion for the North Montney Mainline, Petronas's $5.2-billion acquisition of Progress Energy Canada in 2012 and at least $12-billion related to drilling and natural gas production in northeast British Columbia. The two pipelines are to be built by TransCanada Corp.
Greenhouse gas impacts: The expansion of the LNG industry in B.C. will drive up the province's emissions and make it more difficult for Canada to meet its international targets. PNW alone would represent one of the single largest sources of greenhouse gas emissions in the oil and gas sector. As a result, federal and provincial governments are responding with a ream of emission-reduction policies that will drive up project costs. One of the 190 conditions Ottawa is imposing is a cap on the facility's emissions that will reduce them by 20 per cent below what Pacific NorthWest originally forecast. Premier Clark argues B.C. gas will displace the use of coal for electricity in Asia, and thus drive down global emissions. Environmentalists worry that a global abundance of low-cost LNG will deter investments in renewable sources of energy. Critics also worry about the release of methane – a powerful greenhouse gas – from the shale formations in northeastern B.C. that will supply the LNG project. Ottawa and B.C. are promising regulations to reduce those emissions.
First Nations: Pacific NorthWest LNG can expect legal challenges from First Nations leaders who are unhappy with the approval. The company says that it has consulted with five Tsimshian First Nations – the Metlakatla, Kitselas, Gitxaala, Kitsumkalum and Lax Kw'alaams. The first four of those groups have signed term sheets that are intended to lead to impact benefit agreements; the Lax Kw'alaams First Nation is the holdout. Aboriginal leaders from other communities – Wet'suwet'en, Gitanyow, Lake Babine and Gitxsan – say Pacific NorthWest LNG's proposed site is the wrong place to locate an LNG export terminal because of the risks to salmon habitat in the estuary of the Skeena River, near Lelu Island. They say their views have been largely ignored because their land is farther away from Lelu Island than other First Nations. The Gitga'at First Nation remains upset at the B.C. government's previous consultation process, which excluded the aboriginal group from being fully recognized in a provincial environmental assessment of Pacific NorthWest LNG.
Concerns over salmon: Environmentalists, some First Nations and a group of scientists say environmental mitigation programs envisaged by the Petronas-led group won't be enough to protect Flora Bank, a sandbar located next to Lelu Island. Critics disagree with the Canadian Environmental Assessment Agency's analysis that there would be a low risk of damage to Flora Bank's eelgrass beds that nurture juvenile salmon in the Skeena River estuary. Those opposed to the project argue that there have been ample scientific studies dating back to the 1970s that conclude Flora Bank should be left undeveloped due to the environmental risks. Pacific NorthWest LNG believes a proposed suspension bridge and trestle-supported pier would avoid harming the sensitive eelgrass beds. The federal conditions require Pacific NorthWest LNG work with local First Nations to monitor salmon habitat in Flora Bank and implement an array of programs aimed at reducing adverse effects.