LNG prices skyrocket, but fresh delays mean Canadian projects will mostly miss the boom
The only LNG export facility even under construction in Canada is years away from completion

Financial Post Geoffrey Morgan January 14, 2021

CALGARY — Canadian natural gas producers are watching with envy as liquefied natural gas prices in Europe and Asia hit new records this month while Canada’s only under-construction export facility is years away from completion and the COVID-19 pandemic has dealt fresh delays to other proponents.

“I won’t hide the fact that COVID has had an impact on the overall development timeline,” GNL Quebec acting president Tony Le Verger said in an interview of his company’s proposed $9-billion Energie Saguenay LNG export project in northern Quebec.

LNG prices skyrocket, but fresh delays mean Canadian projects will miss the boom
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Less than a year ago, at the beginning of March 2020, GNL Quebec confirmed it had lost a major potential investor in the LNG export facility when Warren Buffett’s Berkshire Hathaway Inc. pulled out of the proposed terminal amid concerns about political risk following rail blockades.

Then, two weeks later, at the beginning of March 2020, the spread of the coronavirus sent natural gas and LNG prices crashing as economies around the world closed down for months. This led Quebec regulators to question whether GNL Quebec’s plans remained viable and the pandemic also delayed regulatory hearings for Energie Saguenay.

Le Verger said the delays might cause a slight increase in development costs but “it’s at the margins” and the company has contingencies built into its cost estimates. Still, the company is hoping to make a final decision to build the project by the end of 2022, with first cargoes leaving the facility four years later.

The delay has been an annoyance for the company but, Le Verger said, with global LNG prices now jumping, the company is getting a needed boost in its efforts to finalize off-take agreements with LNG buyers.

“The bottom line is that yes, it helps from a recency bias standpoint,” Le Verger said, referring to the cognitive bias that favours recent events over historic ones. “It’s helping because it’s showing there is demand for natural gas.”

While the commodity price has skyrocketed globally, the Canadian export project closest to completion, LNG Canada, isn’t expected to be in service until 2023 at the earliest, which means Canadian producers will largely miss out on the current boom.

Fluor Corp., which is building the Royal Dutch Shell Plc-led $40-billion LNG Canada project on the West Coast, disclosed in a Sept. 25 earnings call that the project was about 25 per cent complete but had suffered delays prior to and as a result of the coronavirus pandemic.

“Up in Kitimat, our LNG Canada project is moving forward, albeit impacted by COVID-19,” Fluor CEO Carlos Hernandez said.

Bitterly cold winters in Europe — where warmer countries like Spain recorded its lowest recorded temperature in history at -34 degrees Celsius last week — and Asia have caused demand for LNG around the world to skyrocket and prices have jumped accordingly.

The Japan-Korea Marker, Asia’s benchmark for the fuel, rallied 15 per cent to US$32.49 per billion British thermal units (Btu) on Tuesday, the highest since S&P Global Platts began assessments in 2009, Bloomberg reported. The surge represents an 18-fold increase from the all-time low for the commodity less than nine months ago amid COVID-19 pandemic lockdowns.

Calgary-based Seven Generations Energy Ltd. is one of the few domestic natural gas producers currently benefiting from the rapid appreciation of LNG prices in Europe and Asia as the company signed deals in 2017 to supply gas to Cheniere Energy Inc.’s Sabine Pass LNG export terminal in Louisiana.

“The recent rally in global LNG prices is constructive and further highlights the interconnective nature of the global market, and how North American LNG can help balance evolving supply and demand dynamics,” Seven Generations president and CEO Marty Proctor said in an emailed statement.

“Moving our gas directly to the U.S. Gulf Coast provides access to the premium North American export market,” Proctor said. Seven Generations stock had rebounded to $7 per share on the TSX on Thursday, after falling to below $1.31 last March.

Still, the company has looked for ways to advance LNG export projects closer to home, including taking a stake in Steelhead LNG, a private firm with ambitions of building LNG projects on Vancouver Island. It is also a partner in Rockies LNG, an early stage initiative that has yet to announce a project, alongside nine other Canadian natural gas producers.

The Rockies LNG office sits inside the headquarters of Calgary-based Birchcliff Energy Ltd, which is one of the key backers of the project.

Birchcliff president and CEO Jeff Tonken said the partnership is making progress in its goal to build its own export project in Canada but is not discussing the project publicly as it advances partnerships with various First Nations.

“I don’t think there’s anybody in this city that’s got more confidentiality agreements signed than Rockies,” Tonken said.

“These are multi-billion-dollar projects so nothing is ever quick but we believe the best economics is to create our own opportunity and not buy existing projects,” he said. “Suffice it to say that we’re working with partners to make sure that everyone who is involved is effective.”

While the Canadian industry will miss out on this winter’s bumper prices for LNG in Asia and Europe, Tonken said he still believes there’s upside for natural gas prices in domestic markets as evidenced by the forward curve, which allows producers to hedge their gas for the entire year at US$2.80 compared to current NYMEX gas prices of US$2.57 per gigajoule.

Tonken said that between U.S. domestic natural gas demand, U.S. LNG exports and U.S. natural gas exports to Mexico, natural gas demand south of the Canadian border adds up to about 97 billion cubic feet of demand per day.

“Supply is currently between 88 bcfd and 90 bcfd. So we’re short gas,” he said.

Even if North American natural gas prices are looking up, producers are still missing out on global prices that are as much as 15 times higher than the full strip for NYMEX gas this year.

Alfred Sorensen, president and CEO of Calgary-based Pieridae Energy Ltd., has been trying to secure financing for an LNG terminal called Goldboro in Nova Scotia and described 2020 as “a perfect storm,” that has frustrated his company’s capital-raising efforts.

“We had a scenario where gas built up coming into winter, there was no winter in Europe, then COVID-19 came and gas got destroyed,” Sorensen said, adding that he hasn’t been able to travel to meet potential investors in the project through 2020 but is still hopeful he’ll be able to engage investors this year.

“To do the kind of deals we’re going to do, we’re going to have to see how we can go to places. I don’t think that’s going to occur for the next three or four months,” Sorensen said, adding he’s looking to raise $1 billion in the first half of this year.

Sorensen said the company’s new engineering and construction contractor, Virginia-based Bechtel Corp., is due to send the company a preliminary all-in cost estimate for the project by the end of March. The company hopes to make a decision on pre-construction work by the end of June.

“If we get to the finish line, there’ll be a very big bottle of champagne,” Sorensen said.

 

Canada looks to strengthen LNG credentials in 2021 with additional FIDs

Daily Oil Bulletin Paul Harris Tuesday, January 19, 2021, 7:16 AM MST

Global demand for cleaner-burning natural gas has created a once-in-a-generation opportunity for Canada to develop an LNG industry. While that narrative was largely displaced during 2020 by the immediate impacts of COVID-19 on energy demand and pricing, it remains strong.

During 2021, two more Canadian LNG projects are expected to reach final investment decisions (FIDs).

Canada is the world’s fifth largest producer of natural gas, with an estimated 1,225 trillion cubic feet (tcf) of remaining natural gas resources. The western provinces of Alberta and British Columbia, in particular, have vast reserves of natural gas. As of year-end 2018, Alberta had 27.72 tcf of remaining established reserves of marketable natural gas, while B.C. had 41.03 tcf. At current rates of consumption, Canada has sufficient natural gas in the Western Canadian Sedimentary Basin (WCSB) to meet the country’s needs for 300 years, with enough remaining for export.

LNG Canada announced a positive FID in October 2018 for a C$40-billion export project in Kitimat, B.C., and construction continues in advance of an expected mid-decade startup of operations. The joint venture backing the project is comprised of five global energy companies with substantial experience in LNG: Royal Dutch Shell, PETRONAS, PetroChina, Mitsubishi Corporation and KOGAS.

Importantly, both LNG Canada and Pacific Oil & Gas Limited’s smaller Woodfibre LNG project in Squamish, B.C., have secured long-term buyers. Both are well-placed to serve growing Asian demand for cleaner natural gas to replace coal.

In late 2020, Pacific Oil & Gas said it now expects to formally approve the project by 2021’s third quarter, with construction to start shortly thereafter (it had earlier expected construction to start in 2020). The project, which is expected to be producing LNG for export by late 2025, is estimated to cost between C$1.6 billion and $1.8 billion.

Compared with LNG Canada, Woodfibre is small. But it has set the bar high for other proposals in two respects.

For one, it entered an unprecedented agreement with the Squamish First Nation, which became, in essence, a regulator. The First Nation produced its own environmental impact study, and Woodfibre agreed to abide by all 25 of its recommendations.

Woodfibre also agreed to use electricity instead of natural gas for the liquefaction process. By using e-drive, the carbon emissions intensity of Woodfibre’s LNG will be amongst the lowest in the world, it says.

Another project, Kitimat LNG, is located just down the road from the LNG Canada project. Its operator, Chevron Canada Limited, announced in December 2019 that it plans to exit its entire 50% working interest as part of the global portfolio optimization effort of parent Chevron Corporation. Woodside Energy International (Canada) Limited is the other current partner.

At the other end of the country, Pieridae Energy has proposed an LNG plant at Goldboro, Nova Scotia. The Goldboro project also has a committed buyer. Pieridae would source its natural gas from the WCSB via the TC Energy Corporation (formerly TransCanada) mainline pipeline. Two other projects in Eastern Canada are the Bear Head LNG project, also in N.S., as well as Quebec’s Énergie Saguenay project.

In the third quarter of 2020, Pieridae signed a services agreement with engineering firm Bechtel Corporation in relation to two-train Goldboro LNG facility.

As part of that agreement, Bechtel will develop a comprehensive engineering, procurement, construction and commissioning (EPCC) execution plan by March 31, 2021. Bechtel has significant experience building and delivering global LNG projects, helping their customers deliver about 30% of the world’s LNG capacity over the past two decades, notes Pieridae.

By May 31, 2021, Bechtel is expected to deliver a final, lump-sum turnkey contract price proposal for the project’s EPCC execution plan. Pieridae says an FID date is expected in June.

While COVID-19 undoubtedly alters the political and policy narrative around energy demand and usage — and related impacts cannot be discounted that could be longer lasting — three key factors remain supportive of Canadian LNG development:

  • Asian and European importers increased imports from exporting nations closer to them between 2013 and 2018. Canada’s West Coast is ideally located for the Asian market, while Canada’s East Coast represents a new nearby market for Europe to continue its diversification.
  • Asian imports increased from nations where domestic-headquartered companies held a stake in exporting overseas facilities. Mitsubishi, a member of the LNG Canada joint venture, already has agreements in place with Japanese buyers. Other members of the consortium include companies based in Malaysia (PETRONAS), China (PetroChina) and South Korea (KOGAS).
  • United States LNG exports have grown quickly since 2016 via the spot market by selling gas to global traders. Canadian projects include Shell and PETRONAS among the owners (LNG Canada project) and BP as a potential customer (Woodfibre project), all global traders of LNG.

The big question with many in the oil and gas supply chain is what impact LNG development will have on exploration and development spending in Western Canada.

Most of LNG Canada’s partners already have gas production up and running and are expected to use their own production to supply the export facility. Shell Canada, with 40% ownership in LNG Canada, has over 500 wells in production at Groundbirch in the Montney (a liquids-rich resource play straddling the border of Alberta and B.C.). Shell expects it will need to drill about 20 to 30 new wells each year over two years to meet additional demand from LNG Canada and to replace production from some of the wells whose production will have declined leading up to exports from LNG Canada, which is slated to come onstream in 2025. From then on, the LNG Canada partners will need to drill about 200 new wells per year for the life of the LNG plant.

However, if a second large LNG terminal and small terminal proceeds to an FID, the facilities would require significantly more investment and drilling, according to the Conference Board of Canada. To provide five bcf/d of gas supply, annual investment would be around $5 billion for the first decade as the facilities came onstream. These investments would put in place the wells, gathering systems and field processing facilities, as well as the pipeline fuel required for the transmission lines. In addition, because tight gas wells show high initial production rates but very steep initial decline rates, significant long-term drilling activity will be required to maintain the targeted production level.

Expected drilling levels to support five bcf/d of liquefaction capacity are 600 wells per year for the initial phase building up to exports, followed by 510 wells per year in the longer term. The positive impact on the supply chain from this increased drilling would be significant.

East Coast projects will also have a major impact on activity. The Pieridae project is expected to source around 800 million cubic feet per day (mmcf/d) from Alberta’s conventional gas fields to supply its Nova Scotia facility. GNL Quebec’s Énergie Saguenay project will ultimately require around 1.8 bcf/d of Alberta gas. Bear Head LNG would require 1.75 bcf/d of Alberta gas.

Canada’s petrochemical sector also stands to win big from LNG exports off the West Coast. It could double Alberta’s petrochemical output and create tens of thousands of jobs, according to an energy diversification report presented to the provincial government in 2018. Driving the growth in petrochemicals will be increased production of natural gas liquids (NGLs) such as ethane, propane and butane from the liquids-rich Montney as companies drill to fill the LNG export pipeline.

Canada’s oil and gas sector has faced huge challenges and competitive pressures since the oil price downturn. A robust LNG export business would generate substantial economic activity that would flow throughout the regional supply chain, and provide long-lasting benefit to the natural gas sector as a whole.