By R. Bruce Striegler
As reported by Canadian Press in January this year, a joint venture company, LNG Canada, led by Shell, has obtained the first permit to build a liquefied natural gas export facility in northern British Columbia, but the consortium has yet to make a final commitment to go ahead with the project. The joint venture, whose partners include Shell Canada Energy and affiliates of PetroChina, Korea Gas Corp. and Mitsubishi Corp, is the first in the province to receive a facility permit from the B.C. Oil and Gas Commission. The document outlines the requirements for design, construction and operation of the proposed facility in Kitimat, B.C. The project could cost up to US$40 billion and would initially consist of two processing units called trains, each able to produce 6.5 million tonnes of LNG annually. The facility could be expanded to four trains in the future.
LNG Canada’s proposal is one of about 20 currently on the books in B.C. In a press release announcing the BC Oil and Gas Commission’s facility permit, Andy Calitz, CEO of LNG Canada says, “We have made excellent progress in the past two years, achieving a number of critical milestones. Receiving our LNG facility permit could not have been achieved without the important input we received from the Haisla Nation and the local community of Kitimat.” Since 2012, LNG Canada has distributed more than $1 million to community initiatives, such as emergency services, trades scholarships and community services. LNG Canada has also contributed more than $1.5 million in programs to build awareness and help provide training for trades’ careers in all industries, and particularly the emerging LNG industry. Of the 20 projects, four have received environmental approval from the province, while two have been granted permission to proceed by the Canadian Environmental Assessment Agency.
One of the largest proposals, Pacific NorthWest LNG is awaiting a decision from the Canadian Environmental Assessment Agency. The regulator, which began its Pacific NorthWest review in April 2013, is expected to rule by the end of March on the consortium’s plans to build an $11.4-billion terminal in northwestern British Columbia. If the agency approves the project led by Malaysia’s state-owned Petronas, it will then be up to the federal Liberal cabinet to issue a final decision that factors in a wide range of implications such as climate change. Ottawa recently outlined measures for greater environmental scrutiny over the Energy East and Trans Mountain oil pipeline proposals. But uncertainty lingers over how the new hurdles will affect Pacific NorthWest LNG, especially taking into account carbon-dioxide emissions related to natural gas production and pipelines.
For Calgary-based AltaGas, the waiting game ended February 25, when the company cited “adverse economic conditions and worsening global energy price levels,” and announced it had halted development on the small liquefied natural gas export project at Kitimat. AltaGas took over in 2015 as lead partner of the project, which would have involved building a liquefaction plant on a floating platform to use the excess capacity on the existing Pacific Northern Gas pipeline to Kitimat and export up to 550,000 tonnes of LNG per year. Partners in the AltaGas limited joint venture included Idemitsu, EDF Trading Ltd. and the shipping company EXMAR NV.
In mid-February, the B.C. Government presented its 2016/17 budget, a $47.5 billion spending plan that remains balanced despite major downturns in nearly every natural resource sector. Energy, metal and minerals are expected to account for $1.03 billion in provincial revenues this year. The government expects income from the sale of natural gas drilling rights, its largest source of energy revenue, to decline 65 percent over the next three years. The province is forecasting natural gas royalty revenues of $128 million for the 2016/2017 fiscal year, down from an estimated $151 million for 2015/2016. Both those figures are well off from the $493 million collected in 2014/2015. Overall, income from energy, metals and minerals is expected to shrink from $1.2 billion last fiscal year to $825 million in 2018/19. Despite the negative outlook, the government remains confident, expecting to see the first Asian LNG shipments to Asia cargos by 2020.
Opposition remains with environmental and First Nations concerns
Many from the environmental movement and First Nations remain firmly opposed to any of the LNG proposals, protesting GHG emissions and possible loss of a variety of marine habitat. However, in news stories, Matt Horne, B.C. Associate Director of the Pembina Institute, a clean-energy think tank, says he expects data will be produced by federal government staff in order to provide information on greenhouse gas emissions for the federal cabinet to consider. Anticipating increased energy demand while reducing the carbon footprint of gas exploration companies, BC Hydro has installed new transmission lines to allow natural gas drilling operations to switch to electricity as their main power source in the Dawson Creek region in northeast B.C.
According to Pacific NorthWest LNG’s environmental assessment for the Canadian Environmental Assessment Agency’s review, during construction, the main sources of air emissions from the project are the operation of diesel powered vehicles, heavy construction equipment, and marine vessels. Fugitive dust emissions from vehicle travel and site preparation are expected to be negligible due to the high year-round precipitation and moist soil composition (muskeg). Pacific NorthWest LNG concluded that overall emissions resulting from construction activities would have a short-term and temporary effect, and would result in a minor effect to air quality compared to operations emissions. During operations, most air emissions would be land-based and continuous, and generated by three thermal oxidizers, six mixed-refrigerant compressor turbine drivers, six natural gas turbine generators, and three flares. The operation of LNG carrier vessels and assist tugboats would also generate air emissions.
As of January 1, 2016, the B.C. government’s new Greenhouse Gas Industrial Reporting and Control Act came into effect. Combining several pieces of existing legislation into a single Act, the new regulation replaces existing industrial reporting regulation, and adds compliance reporting requirements, including specific requirements for LNG operations. Industrial operations will continue to report GHG emissions as they have since 2010. The new laws include the ability to set an intensity benchmark for regulated industries, including LNG facilities. This benchmark can be met using flexible options that act as incentives to invest in emission reduction projects for natural gas and other sectors around the province. Options can include purchasing offsets or paying a set price per tonne of greenhouse gas emissions that would be dedicated to a technology fund.
LNG growth expected to grow dramatically in next ten years
Canada is attempting to break into an already crowded LNG market. According to the global consulting firm EY (formerly Ernst & Young), total global natural gas demand is estimated to have grown by about 2.7 per cent per year since 2000; however, global LNG demand has risen by an estimated 7.6 per cent per year over the same period, almost three times faster. EY reports that global gas demand is expected to continue to grow strongly. This parallels views expressed by the International Energy Agency, who in its most recent annual World Energy Outlook, forecast a growing role for natural gas in the world’s energy mix, with the natural gas share growing from 21 per cent in 2010 to 25 per cent in 2035, with natural gas as the only fossil fuel whose share was growing.
LNG demand is expected to be even stronger, particularly through 2020. After 2020, demand is expected to continue, albeit at a slightly slower pace as markets mature, demand shifts to more price-sensitive buyers, and some price subsidies are removed in non-OECD markets. Global LNG demand by 2030 could, however, be almost double that of the estimated 2012 level of about 250 million metric tonnes. Japan, South Korea and Taiwan (collectively JKT) have been and are expected to remain the backbone of the global LNG market, while China and India are expected to be the biggest sources of additional LNG demand.
Between 2000 and 2012 liquefaction capacity more than doubled, driven primarily by the series of massive LNG developments in Qatar and the early Australian developments. The first wave was dominated by Algeria, Malaysia and Indonesia, which collectively accounted for more than 60 per cent of total LNG capacity as recently as ten years ago, but now are expected to drop to about 20 per cent of total capacity by 2020. The second wave has been dominated by Qatar and Australia, which have been rising rapidly from about 20 per cent of global LNG capacity in 2000, but are expected to account for about 50 per cent of total global capacity by 2020. According to EY’s review, by 2025, the global LNG market should have room for all of the projects that are currently seen as “possible.” However, unless there is substantially higher growth in LNG demand, building a significant number of the “speculative” projects implies increasing supply-side competition.
Qatar has emerged as the world’s leading LNG producer and exporter. Qatargas, established in 1984, pioneered the LNG Industry in Qatar. Today, Qatargas is the largest LNG-producing company in the world, with an annual LNG production capacity of 42 million tonnes per annum or 5.6 billion cubic feet per day. Qatargas has seven LNG trains, of which four are the largest in the world, each with a production capacity of 7.8 MTA. A second company, RasGas, oversees and manages the operations associated with seven LNG trains in Qatar, for which it has a total production capacity of approximately 37 million tonnes per annum.
The U.S. enters the export market
Current American law requires an export license from the US Department of Energy (DOE) in order to export LNG, and as of February 2016, nineteen companies have submitted applications. In general, export of LNG to a nation that has a free trade agreement with the U.S. is considered in the public interest and is typically approved without modification or delay. On February 25 the first U.S. export shipment of LNG left Cheniere Energy Inc.’s Sabine Pass export terminal on the U.S. Gulf Coast in Louisiana; destination Brazil. Houston-based Cheniere recently completed the Louisiana facility which has six LNG production trains, each of which is expected to have a nominal production capacity of approximately 4.5 million tonnes per annum.
Through its wholly-owned subsidiary Cheniere Creole Trail Pipeline, L.P., Cheniere Partners also owns a 94-mile pipeline that interconnects the Sabine Pass LNG terminal with a number of large interstate pipelines. The Sabine Pass LNG terminal has a send-out capacity of 4.0 billion cubic feet (Bcf) per day and includes five LNG storage tanks with capacity of approximately 16.9 Bcf, and two docks that can accommodate vessels with nominal capacity of up to 266,000 cubic meters.
Offshore East Africa, the recent discoveries of natural gas are, in the words of the analysts at Macquarie, simply too big to overlook. The discovered resource base could theoretically support exports of up to 70 million tonnes per annum (mtpa), but since the exploration phase is far from over, that estimate could easily rise to 100 (mtpa). Generally at the high end of the cost curve, with development bottlenecks and spiraling construction costs, Australian projects are typically suffering the most problems. Sanctioned projects are generally less significantly impacted (unless contracts are reopened or renegotiated), but projects still seeking contracted off-take are at substantial risk.
The conclusions of the 2014 Canadian Association of Petroleum Producers (CAPP) “Overview of the world LNG market and Canada’s potential for exports of LNG” reports that as competition for the North American market intensifies, it is likely that producers other than those already announced, will seek to develop joint ventures with overseas companies, creating a driving force for producers to explore these opportunities. “Access to new markets will be required for Canada to realize its production potential.” The CAPP report goes on to say that as the worldwide use of natural gas increases, the size of the LNG market will grow as well. In fact, the U.S. Energy Information Administration is anticipating the LNG market will account for a growing share of world natural gas trade as worldwide liquefaction capacity increases substantially. According to CAPP, if this market grows as projected, Canada would still be a relatively small player overall, given the size of the LNG projects that have been announced to date. Based on this relatively small projected market share, Canada’s entry into the world LNG market should not have any major market impacts in terms of price.