Canada’s Key LNG Players Form an Alliance

Last week’s announcement of Russia’s USD400 billion deal to export its natural gas to China has global liquefied natural gas (LNG) players scrambling.

The good news, as we noted last week, is that as staggering as the numbers are, the 30-year contract between Russia’s state-controlled OAO Gazprom and the state-owned China National Petroleum Corp (CNPC) will fulfill just 9 percent of projected Chinese gas demand by the time natural gas starts flowing through East Siberian pipelines toward the end of this decade.

And the Chinese are shrewd enough to know that the Russians are only as dependable as current exigencies allow. In other words, they understand the importance of diversification when it comes to meeting the country’s critical energy demands. So while Canada’s political and regulatory process is proceeding at a glacial pace, the country’s relative stability is a welcome complement to its resource riches.

Besides China, the Asia-Pacific region includes other major consumers of natural gas, including Japan, South Korea, India and Malaysia, all of which will need Canadian LNG.

Still, this landmark deal means the LNG market just got even more competitive than it was already. And there’s a real possibility that Canada could squander some of its advantages if politics continue to get in the way.

Fortunately, the companies involved in developing Canada’s LNG export infrastructure are now even more motivated to do what it takes to expedite the approval process. To that end, the companies behind four of coastal province British Columbia’s largest LNG export projects have formed the B.C. LNG Developers Alliance to lobby the government for sensible policymaking, help each other navigate the thorny approval process, and avoid duplicate efforts when it comes to the infrastructure itself.

According to The Globe and Mail, the group’s four members are: Petronas-led Pacific NorthWest LNG, Shell Canada Energy-led LNG Canada, BG Group PLC’s Prince Rupert LNG, and the Kitimat LNG project, which is co-owned by the Canadian units of Chevron Corp and Apache Corp.

Three smaller LNG projects are also considering joining the group. The alliance might also team with the Canadian Association of Petroleum Producers on issues related to drilling for natural gas.

For now, the fledgling group is not quite yet in launch mode. According to a representative from Kitimat LNG, alliance members are still working out the details involving governance, while staff need to be hired, including a leader, who will act as spokesperson for the group, as well as outside consultants.

The companies hope that by working together they’ll be able to more easily secure the imprimatur of key constituencies, such as First Nations groups, environmentalists and labor unions, among others. Outreach efforts will include an LNG literacy program to address the sort of misconceptions that have hindered the approval process for other energy infrastructure projects, such as Enbridge’s Northern Gateway pipeline.

And once they receive the blessing of these various groups, the companies behind these LNG projects could also negotiate with the provincial government as a collective entity, instead of on a one-on-one basis. There’s a solid precedent for the collective approach, as it apparently helped facilitate the negotiations that led to the development of Alberta’s oil sands.

Additionally, as these projects are approved, the alliance will also work toward ensuring a steady supply of skilled labor is available for both construction and operation, as labor shortages have plagued past ramp-ups in the energy sector.

According to a report issued last year by the B.C. Natural Gas Workforce Strategy Committee, LNG exports will require more than 100,000 new skilled workers: about 60,000 to build gas liquefaction plants starting in 2016 and 75,000 workers to operate them after they’re built.

Finally, LNG project stakeholders may even broker the sharing of certain pipelines, which would not only save on construction costs, but also help speed the approval process.

Nevertheless, the political and regulatory process remains formidable. And this likely means that only a few of the 14 LNG projects that have filed for export licenses with the country’s National Energy Board will ever become operational.

For instance, according to Canada’s Business News Network, Calgary-based investment bank Peters & Co Ltd believes that just one LNG export plant will be operational by the end of this decade, with “maybe” two on line by 2025.

AltaCorp Capital Inc notes that Petronas’ Pacific NorthWest LNG and Shell Canada Energy’s LNG Canada are the two presumptive leaders at the moment, though this could very well change, particularly if the provincial tax and compliance regime becomes so onerous that companies decide it’s no longer economic to pursue these projects.

LNG projects must appease the provincial government, as well as the aforementioned constituencies, which enjoy considerable political clout. The B.C. government estimates the LNG industry will create at least 75,000 new jobs in the province, while it hopes taxes and royalties will help fund a CAD100 billion prosperity fund. At the same time, it hopes to allay the concerns of First Nations groups, as well as ensure that these projects are in compliance with stringent environmental regulations.

All of these demands add up. Companies investing in these massive multi-billion-dollar LNG projects must not only enjoy a rate of return that justifies their risk, but Asian buyers of LNG are becoming increasingly adamant that contracted commodities be delivered on time and within budget, as they’ve seen other developed-world energy projects hit by huge cost overruns.

The energy industry has already balked at the B.C. government’s proposed tax of 7 percent on the income from LNG facilities after the recovery of capital costs. That’s just the latest tax on top of many others already proposed or in existence. And the resulting thicket of taxes has created extraordinary complexity for which the government still needs to provide clarity. That’s not expected to happen until the B.C. legislature’s fall session, at the earliest.

That timing is crucial, as Petronas is expected to make its final investment decision by year-end. And while the CEO’s tough talk at a Vancouver energy conference last week may be just another negotiating tactic, there’s definitely a point at which it will no longer make sense for the company to commit further resources to Canadian LNG.

Canada’s federal government certainly is in favor of developing the country’s LNG export market. And British Columbia clearly sees significant benefits for the province as well. But the provincial government is going to have to shake off its bureaucratic malaise by moving faster and making more concessions, or it will risk killing the golden goose.