Future of Pacific NorthWest LNG uncertain amid high costs and depressed market

CALGARY – The Pacific NorthWest LNG project may have secured the federal government’s blessing, but it could not have come at a more inopportune time.

The world market is awash in liquefied natural gas, a glut that has some wondering whether Malaysian energy giant Petronas and other backers are able to move ahead with the development.

“We’re just at the start of one of the largest buildups of LNG capacity in history, and we won’t see the peak of that until some point in the early 2020s,” said Alex Munton, an analyst with global energy consultancy firm Wood Mackenzie.

The project, which would include the construction of an $11-billion export terminal in northern B.C., is expected to produce about 19.2 million tonnes of LNG per year at full capacity — production the world won’t need for some time, Munton said.

“Petronas has to be confident it can find a home for that LNG and a good price for that LNG,” he said. “Right now it’s difficult to be able to say conclusively that it can do that.”

Shortly after the federal government announced its approval late Tuesday, the president of Pacific NorthWest LNG issued a statement saying it will announce its next steps after a project review over the coming months.

Since the project was proposed in 2012, LNG prices have deteriorated in the years as a wave of production came online. LNG spot prices in Japan, a key market for the commodity, were under US$6 per million British thermal units this August compared with over US$18 per mmBtu in March 2014.

Both the Canadian Energy Research Institute and CEDIGAZ Insights, an international natural gas research group, estimated last year that Canadian LNG projects need a price of over US$11 mmBtu in Japan to be profitable.

Munton said Pacific Northwest LNG is already towards the top end of development costs compared with other projects globally. He said Petronas and its partners will have to figure out if they can reduce those costs, while also adhering to the 190 conditions that come with the federal sanctioning.

Andrew Bradford, an analyst with investment firm Raymond James, said in a research note that most of the conditions have to do with standard safety, monitoring and best construction practices.

But he said some conditions requiring additional data collection and modelling on the sensitive salmon habitat around Flora Bank could provide proponents reason to abandon the project.

“While the probability of the project proceeding is definitely higher than it was prior to fed approval, if Petronas wanted an ‘out’ … this would be it,” said Bradford.

One of the conditions sets a cap on emissions to the equivalent of 0.22 tonnes of carbon dioxide (CO2e) per tonne of LNG for the first phase of the project, but that’s in line with what Pacific NorthWest LNG expects to achieve after finding additional performance improvements and efficiencies.

The second phase — adding the final third of production — would require the company to reduce emissions to 0.21 tonnes of CO2e per tonne of LNG produced, with a hard cap of 4.3 million tonnes of CO2e per year compared with the company’s latest estimate of 4.5 million tonnes of CO2e per year.

The federal environmental assessment says that reduction could come about by adding grid power to the project, something Petronas concluded was too unreliable to base the entire operation on.

Despite the LNG market challenges, Bradford said he still expects Pacific NorthWest LNG to proceed because of agreements in place to sell some of the gas.

Munton said he also doesn’t see the project disappearing, given the amount of money Petronas and others have already invested in it, though he could see it further delayed.

He said if Petronas wants to expand in world markets, they will likely need Pacific Northwest LNG.

“This is their flagship international project,” he said. “Globally, this is the biggest opportunity they have.”

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