Until recently, many regarded natural gas exports to Asia as a sideshow to Canada’s prospects of selling oil across the Pacific. That notion was banished with the announcement on May 15 of a massive new liquefied natural gas (LNG) terminal planned for Kitimat, B.C. The LNG Canada project led by Royal Dutch Shell would be the third and largest B.C. terminal, capable of shipping 1.2 billion cubic feet of gas a day. It carries a price tag of at least $12 billion, according to B.C. Energy Minister Rich Coleman. That would make it the largest capital project ever undertaken in the province.
However, the development of two other LNG plants already granted export permits by the National Energy Board has been slow, especially compared with competing projects in Australia. In May, Apache Canada announced it was pushing back the in-service date for its Kitimat LNG project to 2016, from 2015. Along with partners EnCana Corp. and EOG Resources, Apache has not made a final financial commitment to the project, but one is expected this fall.
The third and smallest project, BC LNG, has likewise yet to break ground. The joint venture between the Haisla First Nation and Houston-based LNG Partners occupies a floating platform off the Haisla reserve. It has a head start since it could start shipping gas right away off the existing Pacific Northern Gas pipeline.
The LNG Canada and Kitimat LNG projects, as well as a fourth plant proposed for the northern B.C. coast by Malaysian state energy company Petronas and Calgary-based Progress Energy, will likely have to wait for new pipelines to be built directly from the shale gas fields of northeastern B.C. Kitimat LNG’s owners are separately developing the Pacific Trails pipeline to their terminal. Spectra Energy is contemplating investing up to $6 billion in new pipelines in B.C. after 2015.
New natural gas pipelines do not face the same kind of opposition as oil pipelines because the product is a gas and, in case of a leak, it escapes into the atmosphere rather than fouling waterways and soil. While there is a risk of gas exploding at the terminal, such accidents are extremely rare. LNG development also has strong political support in B.C.—all three major parties favour it in principle— because, unlike oil from Alberta, it would almost certainly result in higher royalty revenues.
There are still questions around power and whether the LNG plants could comply with B.C.’s carbon tax, however. Chilling the gas to –162°C such that it liquefies for shipment by pressurized tanker takes a lot of energy. “BC Hydro simply doesn’t have the capacity to provide even close to the amount of power required for these projects,” provincial Conservative candidate Rick Peterson argued May 28 in the Vancouver Sun. “The first three LNG proposals alone…would require about half of the electricity that’s currently consumed by the entire province.” They’d either have to generate their own gas-fired power or necessitate the construction of controversial new dams like BC Hydro’s proposed Site C on the Peace River.
These and other issues need to be worked out quickly or Canada’s opportunity will be lost, many in the industry worry. Though the market for LNG in China, South Korea and newly nuclear-free Japan is growing fast—LNG currently fetches six times the price there as the equivalent volume of gas in North America—so is the supply. Australia alone has $175 billion in LNG infrastructure planned for completion over the next five years. “Canada has a finite period of time to capitalize on this opportunity,” says Lance Mortlock, lead author of a recent report on the industry’s opportunities and challenges from advisory firm Ernst & Young.
At the same time, Canada’s American export market, worth $31 billion in 2005, is dwindling to almost nothing as a result of growing shale gas production stateside. China too has huge shale gas reserves that will satisfy much of its domestic demand as extraction techniques pioneered in North America spread there. It’s not an exaggeration to say the fate of Canada’s natural gas sector rests on rapid LNG development. Ernst & Young puts the total investment required in LNG infrastructure at $50 billion over the next five to 10 years.
That still doesn’t mean every project will get built. Andrew Potter, an analyst with CIBC World Markets, expects to see a flurry of mergers and acquisitions as long-term supply contracts firm up between customers in Asia and particular terminals, pipelines and upstream gas producers in Canada. “There is no logic at all to seeing three to five facilities built with three to five independent pipelines,” he said in a conference call.