B.C. LNG plans get a second look as market shifts
The scramble for new projects to export liquefied natural gas (LNG) is shifting to the Pacific Northwest, where longstanding proposals are getting a renewed look as rising shipping rates make the region’s easy access to Asia more appealing, with gas price shifts sweetening the deal.
In October, Royal Dutch Shell and its Asian partners approved construction of a $30 billion export terminal in British Columbia, surprising investors by saying the plant would deliver the super-cooled fuel to Asia at a more competitive price than new U.S. Gulf Coast projects.
Since then, costs have shifted further in Canada’s favour, according to Reuters. LNG shipping rates hit record highs in November, due to a tanker shortage, boosting costs for multi-week journeys from the U.S. Gulf Coast to Asia, while natural gas priced in Texas has surged as much as 51 per cent as Canadian gas prices fell.
More than 30 North American LNG export facilities are in various stages of development or construction to meet growing demand. Global LNG demand is expected to double to 550 million tonnes per annum (mtpa) by 2030, as countries like China move away from coal to cleaner fuels.
Investors have traditionally favoured Gulf Coast projects, which led to the first wave of U.S. builds. However, Shell’s cost estimates, shifting market conditions and a months-long suspension of LNG deliveries to China due to the U.S.-China trade war have made the Pacific Northwest more attractive.
“Canada is really attractive to investors right now. And it may win funding over some of these U.S. facilities that don’t quite have everything together yet,” said Charlie Cone, analyst with energy data firm Genscape.
Pacific Coast projects were expected to cost more than rival U.S. Gulf construction. But Shell said it would be able to ship LNG to Asia for about $7 per one million British Thermal Units (mmbtu), based on a $2 per mmbtu feed gas price, lower than analysts’ assumptions.
“They may be fortunate. They may have picked their time very well,” Howard Rogers, senior research fellow at the Oxford Institute for Energy Studies (OIES) told Reuters, who estimated Canadian LNG break-even costs around $10 per mmbtu, compared to roughly $7.50 per mmbtu for new U.S. Gulf terminals.
Should Shell’s estimates bear out, it could bolster the outlook for other proposed West Coast projects, including Canadian terminals backed by oil majors like Chevron and ExxonMobil, along with U.S. projects based in Oregon and Alaska.
Shell Canada president Michael Crothers said access to cheap feed gas made LNG Canada attractive, while slowing construction in Canada’s oil patch, hampered by low prices and infrastructure woes, has freed up contractors and workers.
“When you look at what’s happening in Western Canada, we’re actually in a bit of a lull, which is very helpful in terms of us getting access to the very best labor,” he told Reuters.
Canadian feed gas is selling at about $3 less than the U.S. Henry Hub spot price, up from an average $1.69 below Henry Hub in the first half of 2018.
The ongoing U.S.-China trade war may add another temporary advantage to Canadian ventures. The two nations have agreed to a 90-day pause in the dispute, though China has not yet resumed major purchases of U.S. LNG products.
An LNG tanker shortage is putting pressure on per-day shipping costs, making Gulf ventures more costly. It takes 25 to 30 days to move LNG from the U.S. Gulf to Asia via the Panama Canal, compared with just 10 days from the West Coast.
LNG shipping rates in the Atlantic basin hit $140,000 a day last month, up from around $80,000 a day this time last year, and around $40,000 a day in previous years – so one shipment that would have cost $1.2 million now costs $4.2 million.
While the current climate is making West Coast projects look promising, and one other Canadian terminal is set to start construction early next year, many proposals still face regulatory hurdles and investment decisions could be years off.
Alaska LNG, which boasts the shortest shipping distance to northeast Asia as well as cheap feed gas, is eyeing early 2020 for its go-ahead. The $40 billion project’s preliminary sales and financing deals with China are still intact, despite the trade tiff.
“The global LNG market is on a significant growth trajectory. We’re going to need a number of these large projects to satisfy the demand,” said Keith Meyer, president of project developer Alaska Gasline Development Corp.