Waiting for the Next Train? – An Assessment of the Emerging LNG Industry in Canada

Reports and presentations on the European Gas Market
European Gas Hub Analysis
Published 04/07/2015 by Cedigaz

In February 2015, Canada counted 22 LNG liquefaction plant projects – of which 17 are located in British Columbia – representing a total design capacity of 325 mmtpa. Canada has the potential to become a major LNG exporter but no project has received Final Investment Decion (FID) so far. Competition with US brownfield projects with innovative business models have limited the commercial appeal of many Canadian projects relying on oil indexation. More recently, plummeting oil prices have put into question their profitability and lead to several postponements of FID reviews. This paper discusses the potential for Canada to export LNG, looking at the initial enthusiasm and wide support by public authorities and local communities but also at the economic challenges and commercial issues that are slowing the progress of these projects.

In 2013, Canada owned 2,028 Bcm of proved natural gas reserves and in 2012, remaining marketable gas resources were estimated to exceed 30,000 Bcm, located mainly in the Western Canada Sedimentary Basin. In 2013, natural gas consumption grew due to higher demand from the tar sands industry and reached 90 Bcm, while the marketed production rebounded slightly to 145 Bcm after 10 years of continuous decline. Net exports to the United States, the only export market for Canadian gas, kept decreasing to 55 Bcm. In the future, consumption is expected to grow at a slower rate than production and net exports to the United States to keep declining. As a consequence, LNG appears to be an ideal solution to monetize gas and to unlock these large resources. However, CEDIGAZ does not expect material LNG exports to start before 2021, but they could reach 34 mmtpa by 2035.

Since the very beginning of the wave of LNG project proposals, Canadian federal and provincial authorities have appeared very supportive. At the provincial level, the government of British Columbia has multiplied initiatives to favor the emergence of a LNG industry, including by lowering its proposed LNG income tax act to enhance competitiveness and financial viability. On the federal side, applications to export LNG are granted by the National Energy Board without restrictions and the environmental assessment process was simplified in 2012. In addition, First Nations are cooperative overall and 8 of them (out of 20 impacted by LNG projects) have already signed revenue-sharing agreements with proponents.

However, the development of projects has been slowed by uncertainties regarding the economics of the projects and difficulties in signing sales agreements. For a typical BC LNG plant the break-even Asian sale price has been estimated at $11.8/mmbtu by CEDIGAZ in the base case scenario, which corresponds to a JCC price of $81/bbl for oil-indexed contracts with a 14.5% oil slope. The low case break-even price is $8.6/mmbtu while the high case price is $16.1/mmbtu. Considering oil long term price trend, Canadian projects should be profitable but will probably remain less competitive than US-produced LNG indexed on Henry Hub spot price.

Based on six objective criteria, CEDIGAZ has identified a group of four front-runner projects which, as of February 2015, stand the best chances to succeed: Pacific NorthWest LNG, Goldboro LNG, LNG Canada and Douglas Channel LNG. The second group is composed of seven projects, dubbed challengers which are less advanced, but still have some chances to succeed. The third and last group contains the projects with the least chance of success as things currently stand.

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