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Energy Watch: Why Canada is losing the global LNG race

ANALYSIS: Once Canada is finally able to sell LNG to an increasingly energy-hungry world, the global appetite might already be spoiled.

There are currently 16 different proposals to ship liquefied natural gas [LNG] from Canada’s west coast and another 4 planning to fill LNG tankers on the east coast. All come with multibillion-dollar price tags and many pledge to be operational by the end of this decade. Yet according to a new analysis from Peters & Company Ltd. published on Wednesday, just about one in ten proposals will make it all the way to operability and they will take more than a decade – until 2025 – to get there.

In the meantime, Canada’s rivals in the global LNG race will forge ahead. It is true that global LNG demand is increasing; the Peters report says it will more than double from roughly 240 metric tonnes per annum (mtpa) in 2013 to more than 500 mtpa by 2030. Global gas liquefaction capacity, however, it expected to grow even faster; reaching 800 mtpa around the same time demand passes the 500 mtpa mark.

That means several of the 29 LNG export projects currently under construction around the world will not be able to find buyers for their product. Australia, Malaysia, Indonesia, Papua New Guinea, the United States and even Russia have their own LNG export projects at various stages of development. Despite Canada having the geographic advantage of its west coast being physically closer to LNG-hungry Asian markets than any U.S. location, the report argues Canada loses the economic argument.

“The U.S. Gulf Coast is expected to be the most efficient location to construct LNG liquefaction facilities in North America,” the report said, adding projects being planned there “have the advantage of significant regional construction capacity, a large pool of skilled labour and fewer weather disruptions.”

For Canadian projects, the report notes: “high capital costs, the required development of infrastructure, the extended regulatory approval process and potential LNG taxation all present risks.”

American projects are largely based on converting facilities originally designed to import LNG into export facilities; still a multibillion-dollar endeavor, but massively less costly than the Canadian proposals to build entirely new facilities on empty parcels of land. For example, the Cameron LNG project – a conversion of an existing import terminal on the U.S. Gulf Coast – will cost roughly US$7-billion to complete, according to the Peters report. That equates to a per-metric-tonne cost of roughly US$600.

Pacific Northwest LNG and LNG Canada are the projects being planned for Canada’s west coast that have the best chance of succeeding, the Peters report says. Malaysian state-owned Petronas leads the Pacific Northwest LNG project with other stakeholders including Sinopec, Japex, Indian Oil and Petroleum Brunei. Royal Dutch Shell is the main partner in LNG Canada along with Kogas, Mitsubishi and PetroChina.

Regulatory filings show both projects would cost up to $15-billion, which would equate to a per-metric-tonne cost of roughly $1,200 or nearly double the cost of Cameron LNG. Neither project has reached the construction stage as the entire industry waits for the British Columbia government to finalize its LNG export tax regime.

The province unveiled its initial plan for a two-tiered system in February that was widely criticized for being uncompetitive with other jurisdictions. Petronas CEO Shamsul Azhar Abbas even went as far as to warn B.C. not to “slaughter the goose before it even has a chance to hatch the golden egg” during a May visit to Vancouver. B.C.’s LNG export tax regime is expected to be finalized during the fall sitting of the provincial legislature.

Canada still has a chance to catch up, the report concludes, but only if project proponents and the relevant politicians move together and with urgency.

“Project coordination and timeline sequencing will be critical,” the report said, “we would not be surprised to see consolidation of competing projects and collaboration among projects in Canada.”

Some level of consolidation among Canada’s hopeful LNG exporters is clearly inevitable. Whether those consolidations will happen quickly enough or will cut costs enough to make Canada’s players more competitive globally, however, is not.

Jameson Berkow is BNN's western bureau chief based out of Calgary. Every weekday morning he researches the top stories affecting commodities and the oil patch, and sends his analysis to the BNN newsroom in Toronto. You can follow him on twitter @crudereporter
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