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The small chance for B.C.’s big LNG hopes

The Christy Clark government has raised hopes high about liquefied natural gas in British Columbia. It might be time to start managing down expectations.

There are at least 13 proposals to build plants that would take in gas from northeastern B.C.'s vast shale deposits, supercool it and load it on to tankers bound for Asia.

Yet it's difficult to find anyone schooled in the intricacies of global LNG or major construction who predicts that more than two or three will actually proceed, even with some impressive corporate muscle involved.

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The government, which last month unveiled a tax regime for LNG, has set a target of having three facilities up and running by the end of this decade. During last year's provincial election campaign, Ms. Clark's Liberals even trumpeted a study showing how five facilities costing $98-billion would generate 100,000 jobs in B.C. by 2021. Over 30 years, the province expects $100-billion in its coffers and $1-trillion in economic activity.

Big numbers indeed from a government that's gone all-in on gas exports but has yet to tally a single go-ahead decision from a developer.

Wood Mackenzie, the global energy consultancy, doubts any of the players will green-light a project in 2014. Too many aspects are still up in the air, including the development of the gas fields, availability of labour and scarcity of contracts for LNG supplies. Assuming it takes five to six years to build a liquefaction plant in a new operating region such as the West Coast, the target looks shaky.

"We see it a tad unrealistic to expect three projects by 2020. We'll be lucky to see probably one of them," WoodMac analyst Asish Mohanty said. "But probably a few years after 2020, we should be able to see a few projects."

There have been hopeful signs in recent weeks, including the buy-in of a new international player to a partnership led by Malaysia's Petronas, and yet another proposal for a plant, from a company called Canada Stewart Energy Group Ltd. It joins such other big names as Chevron Corp., Royal Dutch Shell PLC and Exxon Mobil Corp. in plotting LNG plants in coastal locales such as Kitimat and Prince Rupert.

Before getting too giddy, there are several things to keep in mind. First, some of the companies involved are rethinking their exposure to West Coast LNG, as even the government says it takes would-be developers at least $1-billion in spending on engineering and other items to get to a final investment decision.

Apache Corp., Chevron's partner in the Kitimat LNG plan, the first entrant into the race, is looking to sell part of its interest this year to "right-size" its exposure before deciding whether to proceed.

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Chevron, meanwhile, has made it clear that it must have acceptable gas-sale contracts in the bag before moving ahead with the multibillion-dollar project, and that's proving tough. CEO John Watson said there is "tension" between LNG buyers, who want to take advantage of cheap North American gas prices, and sellers, who'd love their supply linked to richer Asian oil prices. Prevailing prices won't cut it, he said.

Development costs are escalating worldwide. The company does not want a repeat of its experience with the Gorgon project in Western Australia, where the price tag has ballooned from its initial estimate by 45 per cent to a bewildering $54-billion (U.S.).

"We think the realities of cost are such that it's going to take stronger prices," Mr. Watson told analysts on Tuesday. "If you look at some of the very low price expectations that have been cited in the media, I mean, our projects don't go ahead with those prices whether in Kitimat or Australia. So it's going to take a meeting of the minds by customers and suppliers or we'll see that gap widen over time."

Meanwhile, competition is only heating up. The first U.S. plant, Cheniere Energy Inc.'s facility on the Gulf Coast, is slated to export one billion cubic feet of gas a day with first volumes starting by the end of 2015 or early 2016. B.C. also lags developments in Australia, Nigeria and Qatar.

If she needs an example of how plans can change quickly, Ms. Clark should have a good look at what was once called Upgrader Alley. That's the region northeast of Edmonton, where as many as nine massive oil sands upgrading plants were once slated to be built by around the end of this decade, pumping out two million barrels a day of synthetic crude.

The 2008-09 financial crisis and development of surging volumes of competing cheaper Bakken shale oil in North Dakota changed the market to the point where all but two have shelved their big ideas and retreated.

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There is a lot of industry ambition directed at B.C. gas exports, especially with a growing understanding of just how big the province's resources are. However, its timelines and ability to move forward, with so many moving parts at play, don't match the government's hopes.

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About the Author
Mergers and Acquisitions Reporter

Jeffrey Jones is a veteran journalist specializing in mergers, acquisitions and private equity for The Globe and Mail’s Report on Business. Before joining The Globe and Mail in 2013, he was a senior reporter for Reuters, writing news, features and analysis on energy deals, pipelines, politics and general topics. More


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