By R. Bruce Striegler

It was only a few years ago when many in Canada thought a huge wave of global LNG activity would soon crash over the shores of British Columbia. From an original list of more than 15 proposed multi-billion dollar projects in the Province, only one remains a possibility today. The rich Asian market has been glutted since 2015, following a massive development program across the region which began in 2000. But a policy shift to favour consumption of natural gas in China this year and strong economic growth across Asia has pushed up demand. Several export projects in North America hope for Final Investment Decision (FID) this year, including LNG Canada, a $40 billion, 13 million-tonnes-a-year venture led by Royal Dutch Shell, with PetroChina, Korea Gas Corporation and Japan’s Mitsubishi as partners. The proposed liquefaction plant and marine terminal are planned for Kitimat, B.C.

Liquefied natural gas (LNG) is natural gas that has been cooled down to liquid form for ease and safety of non-pressurized storage or transport. At minus 162 degrees C, liquefied natural gas takes up about 1/600th the volume of natural gas in the gaseous state. LNG is stored in huge storage tanks at minus 162 degrees C, from where it is usually piped into specialized LNG carriers for transport overseas (at minus 162 degrees C) to LNG receiving terminals operated by utilities or other users. At the receiving terminals, LNG is regasified and distributed as pipeline natural gas.

Port of Belledune 50 Years

North Asia has been anchoring demand for the past decade – Japan, China and South Korea being the top three LNG importers – with China accounting for most of the growth. South and Southeast Asia are now providing new demand. By 2030, Thailand and Indonesia together could import nearly 70 million tonnes of LNG a year. Global LNG production in 2017 jumped to a record high of 290 million tonnes, up by 12 per cent from 2016. The increase was mainly driven by the rapid production growth in Australia and the United States, whose combined growth contributed an additional 22 million tonnes. Conversely, Qatar, the world’s largest producer, recorded no production growth.

A report issued by the International Gas Union at this summer’s World Gas Conference in Washington D.C shows global LNG trade in 2017 reached 293.1 million tonnes, the third consecutive record-breaking year for the industry, with LNG establishing itself as the fuel of choice in markets across the world. The majority of forecasters expect gas to grow from the current 22 percent to over 24 percent of the global energy mix by 2035.

The International Energy Agency (IEA) reports in a news release “In the next five years, global gas markets are being re-shaped by three major structural shifts,” said Dr Fatih Birol, IEA’s Executive Director. “China is set to become the world’s largest gas importer within two to three years, U.S. production and exports will rise dramatically, and industry is replacing power generation as the leading growth sector. While gas has a bright future, the industry faces tough challenges. These include the need for gas prices to remain affordable relative to other fuels in emerging markets and for industry to curb methane leaks along the production and distribution chain.”

Rich with natural gas, B.C. waits and watches

According to Natural Resources Canada, Canada is the fourth largest producer and fifth largest exporter of natural gas. When it comes to LNG, however, we’re not yet at the starting line. B.C.’s LNG illusion started abruptly with the 2011 earthquake and tsunami in Japan, the globe’s largest importer of LNG. The disaster damaged a nuclear power plant and led Japan to shut down 54 reactors, bringing a spike in demand for LNG in the energy-poor country. As a consequence, global LNG prices rocketed from $8 per million BTU to as high as $18. These circumstances seemed ideal to British Columbia, which then tried to kickstart an LNG program. But critics, of whom there were many, claimed the B.C. government never had a coherent financial strategy, never did a proper cost-benefit analysis, and then got into bed with opaque, foreign-owned businesses, including one with links to tax evasion. In short, they say, the government failed to exercise adequate due diligence.

In recent years, more than twenty LNG export facilities have been proposed in Canada – 14 in British Columbia, three in Quebec and three in Nova Scotia – with a total proposed export capacity of 257 million tons per annum (mtpa), representing approximately 34 billion cubic feet per day (Bcf/d) of natural gas. Since 2011, 24 LNG projects have been issued long-term export licenses. Although Canada has no gas liquefaction terminals, it does have an operational regasification (import) terminal in Saint John, New Brunswick, built during a time when it was thought that Canada’s eastern provinces might be running out of natural gas, before shale gas was discovered.

Pacific NorthWest LNG, led by Malaysia’s state-owned Petronas announced in July, 2017 that it had cancelled its plans to build an export terminal on Lelu Island in the Port of Prince Rupert. But Petronas disclosed in May, less than a year later, that it had signed a deal to become Shell’s largest partner in LNG Canada, a consortium that hopes to become Canada’s first LNG exporter, as it seeks to develop large deposits of unconventional natural gas in British Columbia and Alberta. Expensive, high-tech extraction methods, along with a robust approach to risks taken by exploration companies, have dramatically increased the recoverable supply of natural gas in Canada and the United States.

At the end of April 2018, LNG Canada announced it had selected a joint venture between Japan’s JGC Corporation and the Fluor Corporation as their Engineering, Procurement and Construction contractor. The company’s website says, “Our project is well advanced, having received key regulatory approvals and completed key site preparation activities, to ensure the project is in the best place possible for a Final Investment Decision (FID). Originally scheduled for late 2016, the global energy market and the affordability of the project in that context prevented our joint venture participants from taking an FID at that time. However, they are committed to making an FID when these conditions improve and the project has demonstrated that it remains cost-competitive against other investment opportunities.” LNG Canada says that it has used this delay time to examine ways to both protect the value already invested in the project, as well as to bring costs down, while keeping performance targets for GHG emissions and environmental performance at world-class levels.

At a LNG conference held in Vancouver in May, LNG Canada’s CEO, Andy Calitz, said that the company was committed to starting construction on the $40 billion liquefied natural gas export project this year. At the time, he noted the delay of the investment decision in 2016, saying the delay was in response to sagging oil prices that hit cash flows, along with unfavourable supply-demand outlook. “It didn’t make sense in July 2016,” he said. “When [our stakeholders] asked the inevitable question, when will you reconsider the FID, our answer was: We will be in construction in 2018. I reaffirm that commitment today.”

In early September, TransCanada Corporation said that its Coastal GasLink pipeline project, which aims to deliver feed gas to the proposed LNG Canada facility, has signed agreements with all of the elected indigenous bands along its pipeline route in British Columbia. The pipeline will run approximately 670 km in length, delivering natural gas from the Dawson Creek area of northern B.C. to the proposed facility near Kitimat. In addition to finalizing these agreements, the Coastal GasLink project also awarded approximately $620 million in conditional contracting and employment opportunities to northern indigenous businesses this past July.

The shipbuilding industry, along with LNG, takes on greenhouse gases

By 2020, the global shipping fleet will be required to reduce greenhouse gas emissions by 50 per cent and switch to low-sulphur fuels, a move that is expected to radically improve air quality, but also have an impact on LNG supplies. Already used to fuel ferry fleets and now cruiseships, LNG is gaining traction among freight and cargo shippers, despite reluctance by the entrenched industry to make major changes. The stakes are high: the global shipping fleet now consumes about four million barrels per day of high sulfur fuel oil. LNG bunker demand from the shipping sector is expected to be between 20 and 30 million tonnes per annum by 2030, up from less than one million tonnes today, according to forecasters.

Industry insiders say it is the most significant change faced by the global shipping sector in decades, and many in the industry remain divided over what fuels ships will use and how many vessels will simply break the rules. Supply is also an issue: in 2017 there was only one bunker vessel for LNG anywhere in the world. Today, there are five, with 14 more on order. Industry experts are quoted in published reports, saying that the vast majority of bunker ports around the world are expected to have LNG capabilities in place by 2020.

The cruise industry has taken a first step towards implementing LNG power. In mid-August this year, AIDAnova, the world’s first LNG-powered cruiseship left German shipbuilder Meyer Werft’s docks in Papenburg, Germany. The 180,000-tonne vessel will berth at the builder’s outfitting pier where its mast and funnel cladding will be fitted. In addition, further testing with LNG will be performed on the ship’s engines and acceptance procedures by the shipowners will also take place. With its four dual-fuel engines, AIDAnova can be operated both in port and at sea with the currently most environmentally friendly and lowest-emission fossil fuel.

LNG World Shipping’s latest LNG carrier orderbook statistics cover the situation as of August 20 2018 and incorporates changes that occurred in the 51 days since the last book was published in June. It appears to have been a dramatic seven weeks. Eight newbuilds were commissioned and 16 new ships contracted in that seven-week window. It has been a busy summer for Liquefied Natural Gas Carrier (LNGC) shipyards. Eight deliveries so far this year bring to 38 the number of LNGC completions this year, comprising 34 conventional LNGCs, one floating storage and regasification unit (FSRU) and two small coastal carriers.

Of this year’s conventional LNGCs completed by August 20, says LNG World Shipping, Korean yards built 22, Japanese built eight, and Chinese yards built four. Nine of the completions were allocated for carrying U.S. export cargoes under long-term arrangements and another seven were destined for similar work on new Australian projects. Another twelve entered charters with major gas companies, assigned among their global LNG supply portfolios as required. The emergence of two-stroke, low-speed engines as the favoured propulsion system for new LNGCs has been strengthened with this year’s newbuild orders.

Rail looks at LNG as a fuel and a cargo

Although the technology to power railway locomotives using LNG was proven over two decades ago to switch engines in North American railyards, LNG never moved beyond the trial stage. Today there is renewed interest, due to environmental concerns and the escalating cost of diesel. In the U.S., in November 2017, Florida East Coast Railway rolled out its line-haul fleet of 24 locomotives that had all been converted to run on LNG, making it the first North American railway to operate its entire fleet on natural gas and bringing years of industry testing and debate to a successful conclusion. The EPA Tier-3 compliant locomotives look no different to their diesel counterparts but, under the skins, their diesel drive units have been retrofitted with GE’s NextFuel™ technology, allowing them to operate on a natural gas/diesel mixture that substitutes natural gas for up to 80 per cent of the fuel without compromising engine performance.

In a throwback to the days of steam, LNG-powered locomotives are fuelled from a tender hitched behind the locomotive, or in this case, between the twin locomotives. The challenge was to design and build the tender. Not only did that include the complex system for regasifying the LNG, but also to manage refuelling of the tender. The result is a fleet of units that each contains enough fuel for 900 miles of heavy haulage service at speeds up to 60 mph, which is sufficient for Florida East Coast Railway’s round-trip journeys with contingency for idling time and delays. At its core, the tender is a cryogenic tank and, in terms of its ability to safely store and transport cryogenic liquefied gases, little different from the technology that has been deployed to convey cryogenic industrial and hydrocarbon gases, incident free, on roads, railways and waterways for many years.

In June of this year, a Russian subsidiary of gas giant Gazprom signed an agreement to supply and maintain 24 liquefied natural gas-fuelled shunting locomotives. These are scheduled for delivery in 2019-24 and would be used to haul trains of up to 8,200 tonnes on Gazprom’s Obskaya – Bovanenkovo line. The gas locomotives are expected to offer a 30 to 40 per cent reduction in fuel costs compared to conventional locomotives, with reduced emissions, extended maintenance and overhaul intervals and a service life of 50 years. This August, the International Railway Journal reported that Russian Railways (RDZ) had completed a series of tests of a prototype liquefied natural gas (LNG) fuelled turbine-electric locomotive hauling trains with a gross weight of up to 9,000 tonnes. The 8.3MW double-unit locomotive hauled a 7,000-tonne train over the entire length of the 636km route without refuelling. This was followed by a test a few days later on the Surgut – Limbey section which demonstrated that the locomotive could haul a 9,000-tonne train over the 532km section without a fuel stop.

In January 2018, Spanish passenger train operator RENFE began the first trial of an LNG-powered passenger train. RENFE, in conjunction with Bureau Veritas and gas suppliers Gas Natural Fenosa and Enagás, will assess the reduction in emissions and cost savings that LNG is expected to offer as a potential alternative to electrification, and will identify technical challenges such as the need for refrigerated fuel storage facilities.

Japan Petroleum Exploration Co. Ltd. is promoting rail transport as an environmentally sound way to distribute LNG in places where there are extensive rail networks, such as North America and Europe. Known as “Japex’, the company says its methods of combining trains and trucks can cut carbon dioxide emissions by 80 per cent, compared to trucks alone. Japex is offering paid feasibility studies and consulting services to local railway operators and others in the West. Japex started transporting LNG by rail in 2000, in what the company says was a first. It uses trucks and trains to move the fuel from its 73,000 tonne plant on the country’s northern island of Hokkaido, approximately 280 km from Kushiro. A company spokesperson says the trains are more efficient and cost-effective than trucks. One freight train can hold up to 40 containers, or 10 tonnes.

Significant growth in LNG applications is a reality. How Canada grasps a share of this growing market remains to be seen. BP forecasts that the LNG trade will grow much faster than traditional gas pipeline trading, and expects it to increase from about 32 per cent of globally traded gas this year to roughly 50 per cent by 2035. Asia is already the largest destination for LNG, led by China and followed by India. Demand for gas is expected to grow faster than oil or coal in this region. Europe will grow more slowly, as demand for gas has softened. Natural gas is expected to gain modestly in the overall global fuel mix, from 22 percent in 2016 to 23 percent by 2030, driven mostly by demand in Southeast Asia and other Asian countries. India, the fourth-largest importer of LNG, has huge plans for the fuel. The country plans to add seven new LNG import terminals (in addition to its existing four) by 2025 and more than triple LNG deliveries. Much of the new LNG will be devoted to electrifying communities that currently do not have power, while also reducing reliance on coal.

Latest developments appear encouraging

It appears the federal government has agreed to waive import duties on steel needed for the terminal, saving the companies about $1 billion, The Globe and Mail recently reported. The LNG group had sought relief from the duties, arguing that the steel for the massive terminal couldn’t be sourced in Canada. The government is now confident the operators will give the project a green light this year, the Globe said.

“We are hopeful that Shell will make a positive investment decision which will lead to the creation of thousands of jobs,” said Pierre-Olivier Herbert, spokesman for Finance Minister Bill Morneau. “There is due process in place for the remission of surtaxes in the event that there is no domestic supplier, and that process must be followed.”

Prime Minister Justin Trudeau met with Royal Dutch Shell CEO Ben van Buerden in New York on September 25, leading to speculation that LNG Canada will announce a positive investment decision soon.

As of September 28, the Boards of PetroChina Co. and Korea Gas Corp. had approved their respective shares of the investments to be made. Malaysia’s Petroliam Nasional Bhd and Japan’s Mitsubishi Corp. need to make similar moves for the venture to approve a final investment decision. Shell holds 40 per cent of LNG Canada, with Petronas at 25 per cent, 15 per cent each for PetroChina and Mitsubishi, and Korea Gas holds 5 per cent.

LNG opportunities have previously eluded Canada, with too much time wasted in endless debates. This time, the opportunity seems very real. Let us hope 2018 will end for Canada with the birth of a new industry that will add measurably to its prosperity. Perhaps it will then be time to review another potential wealth generator, Kinder Morgan Canada and its proposed expansion of the Trans Mountain pipeline, in a more favourable light.

Postscript

Having received approvals from all of its partners, LNG Canada decided on October 2 to proceed with its plans to build a $40 billion LNG liquefaction terminal in Kitimat, B.C. Construction will start immediately.