Latest News and HighlightsOpportunities for LNG from Canada Increase

2019/11/05

Opportunities for LNG from Canada Increase
Christian Schaudwet Der Tagesspiegel November 5, 2019
Tagesspiegel Background Energie & Klima

The Goldboro LNG project in Canada is to become a new source for Germany's gas supply. The German federal government has promised billions of dollars in loan guarantees, although liquefied natural gas is particularly controversial in terms of climate policy.

The European Investment Bank (EIB) actually wanted to decide by mid-October to cease financing natural gas projects out of concern for climate protection. But Germany, an influential EIB member, insisted that the bank continue to invest money in natural gas infrastructure. Natural gas is, after all, more climate-friendly than coal and indispensable as a "bridge" to a CO2-free energy world, argues the German federal government. Correspondingly, Germany's own national development policy is natural gas-friendly.

The Goldboro LNG project in Canada plays a special role in this. The Canadian developer, Pieridae Energy, is proposing to build a massive liquefaction and export terminal for natural gas in the coastal community of Goldboro in the province of Nova Scotia. The German federal government has offered untied financial credit guarantees (UFK Guarantees) for loans of USD 4.5 billion – 3 billion for the terminal construction (2013) and 1.5 billion for the development of upstream natural gas reserves (2018). KfW Ipex, the project financier of the state promotional bank, KfW, accepted a consulting mandate from Pieridae Energy in August 2018.

The most important customer of the liquefied natural gas (LNG) produced from Goldboro would be Uniper, the German energy supplier and energy trader. A framework agreement already exists which contemplates the sale of five million tons of LNG per year for more than 20 years. From the point of view of the German federal government, Goldboro should help to diversify Germany's supply of natural gas. As a precondition for the UFK guarantees, Uniper is required to deliver at least 1.5 million tons of LNG to Northwestern Europe annually where it can reach the German market.

The UFK guarantees for upstream development is expected to allow the start of construction of the Goldboro project notwithstanding opposition from the Green Party caucus in the German federal parliament. Its energy policy spokeswoman Julia Verlinden warned that the LNG terminal would exacerbate the climate crisis in contravention of "all international agreements on climate protection". Moreover, the cooling and liquefaction processes of the natural gas in its conversion to LNG would consume a great deal of energy constituting another source of CO2 emissions. Nevertheless, KfW Ipex wants to assist Pieridae Energy in the financing of the project, which costs a total of USD 10 billion. However, "the mandate is currently suspended at the request of Pieridae", says a spokesman for the Frankfurt-based financial services company.

as soon as the Canadians give the signal, KfW Ipex will get started. Pieridae Energy is behind schedule. The Calgary-based company, which was founded in 2012, is still looking for investors, and its stock price is currently priced at less than one Canadian dollar. Now, however, the Canadians’ need for advice is becoming acute. Pieridae Energy acquired a gas field in the province of Alberta from energy giant Shell in mid-October for a total of USD 145 million. This fulfils an important milestone for the start of construction of the terminal, according to Pieridae Energy, because the field constitutes the largest source of natural gas needed to fulfill the 20-year supply. Thanks to the acquisition, Pieridae Energy now sees itself "in a good position" to access the UFK guarantees from Germany. This financial cover is intended to make participation in the project more attractive for commercial investors.

PIERIDAE ENERGY GUARANTEES: NO FRACTIONATED NATURAL GAS.

The natural gas reserves of the former Shell properties in the Alberta Foothills are earmarked for Uniper. An important detail: Pieridae Energy promises not to supply the Germans with fractionated shale gas, so no unconventionally extracted natural gas. "It's all conventional gas," Pieridae Energy manager James Millar said in an email sent to Tagesspiegel. The method of hydraulic fracturing (fracking), which is particularly common in the USA, is considered to be harmful to the environment, especially to groundwater. In Germany, it is prohibited – with the exception of four proposed test wells for scientific purposes, none of which have yet begun. The Green Party’s energy expert Verlinden warned in 2018 that unconventional fracking gas could be liquefied in Goldboro. If Pieridae Energy does permit the processing of fracked shale gas at the terminal co-financed by Germany, KfW Ipex, whose guidelines exclude shale gas fracking, should resile from advising the Canadians.

Although Pieridae Energy's final investment decision is still pending, Uniper is expecting the first deliveries by tanker in 2024. The Düsseldorf-based group would then receive the LNG for Europe, for example, in the regasification terminal in Rotterdam (Gate Terminal) or the regasification terminal at the Thames estuary (Grain Terminal), where Uniper has booked capacity. If Uniper's plans for its own terminal in Wilhelmshaven become a reality, liquefied natural gas from Canada would probably land there.

KFW IPEX IS IN AN UNUSUAL ROLE

The delay by Pieridae Energy is not inopportune for Uniper: currently the LNG market is characterized by an over-supply resulting in low prices. Uniper expects prices to climb in the medium term – at the latest, if more and more coal-fired power plants in Europe exit the market resulting in higher demand for natural gas, according to Uniper’s Düsseldorf headquarters. Then the LNG price level will rise again. For Uniper as an operator of gas-fired power plants, a gas supplier, a gas trader and an operator of LNG filling stations, the importation of liquefied natural gas is part of Uniper’s normal business activities. What is unusual, however, is the role of KfW Ipex. As an export financier, it does not normally concern itself with resource security, but instead ensures that, for example, Siemens gas and wind power plants can be sold abroad. KfW Ipex is currently spending hundreds of millions of euros in three gas plants in Brazil, the United Arab Emirates and Malta.

Up to now, the Frankfurt project financiers have been in familiar company for international gas projects: the EIB is also active in this sector. Whether this remains so, could soon be decided on November 14th. The EIB's board of directors will then revisit the thorny gas issue. If the gas opponents on the board gain the upper hand, the development of foreign gas projects, for the purposes of the German federal government, will most likely remain with KfW and KfW Ipex.

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