Yedlin: East Coast LNG projects quietly moving forward

Lost in the hyper-focus on British Columbia and its persistent obstruction of energy infrastructure development is the East Coast, where two liquefied natural gas projects are quietly moving forward in Nova Scotia.

Both Bear Head LNG to be located on the north bank of the Strait of Canso and Pieridae Energy in Goldboro are at different phases of their progress, but unlike what’s going on in B.C. there is a marked absence of opposition.

“There is tremendous support for business and industrial development in the area where the project is located,” said Paul McLean, strategic and regulatory affairs adviser for Bear Head, who said the company benefited from an integrated review process between federal and provincial authorities.

Canada, with its natural gas glut, must become part of the global LNG trade, which is growing at a faster rate than many expected, as noted by Royal Dutch Shell’s chief executive, Ben van Beurden, earlier this month.

That bodes well for the prospects of LNG Canada, the consortium led by Royal Dutch Shell in B.C., which recently shortlisted two engineering, procurement and construction contractors, as well as the other projects that are in various stages of development but nowhere close to being built: the Woodfibre LNG project in Squamish; the WCC LNG export facility being studied by Exxon and Imperial Oil; and the joint venture between Chevron and Woodside International at Kitimat that has yet to receive its final investment decision. Also on the West Coast and involving a Canadian company, Pembina’s Jordan Cove project in Oregon has applied for approval from the U.S. Federal Energy Regulatory Commission; that project would take Canadian natural gas production.

But even with all that potential development in the West, there is action for East Coast LNG projects. Think of it this way: Shell, Chevron, Exxon all have plenty of natural gas to feed their own projects; there is still plenty of room for the independent producers to supply the likes of Pieridae and Bear Head, which together would need 2.3 billion cubic feet per day.

Bear Head LNG, which was initially conceived by Anadarko Petroleum as an import facility back in 2001 and sold to Australia-based Liquefied Natural Gas Ltd. in 2014, has received all the regulatory approvals needed to start construction on its facility designed to export 8 million tonnes of LNG annually.

But it has a few things to do.

It needs to source natural gas from U.S. and western Canadian producers and find capacity on the New England gas pipeline system that connects to the Maritime and Northeast Pipeline; that system is challenged during times of peak demand, which means it likely doesn’t have the capacity to supply an LNG facility.

It also has to solve its own pipeline puzzle in Canada. Buying gas natural gas from Western Canada means using the TransCanada mainline to ship it into Ontario. From there, it needs a pipeline going the 1,600 kilometres from North Bay, Ont., to Saint John, N.B. Had TransCanada’s Energy East gone ahead, the plan was to run the pipe alongside that line, but that project has been iced, making the securing of transportation for western Canadian gas more complicated.

The third item on the list is securing buyers for the LNG, which McLean said could be shipped to Europe, Asia or South America.

Pieridae, unlike Bear Head, does not have any issues with pipeline access, with connections from Western Canada to Goldboro. While it is also seeking to source natural gas, with the collapse in natural gas prices in western Canada there could be some interesting opportunities for Pieridae. In addition, it has secured a 20-year offtake agreement with German utility Uniper.

As part of the Uniper agreement, says Todd Kepler of Laurentian Bank Securities, Pieridae qualifies for a loan guarantee to backstop a maximum of US$3.1 billion in debt financing related to the LNG terminal and $1 billion for upstream-related development. The loan guarantee means lower borrowing costs for Pieridae.

There remain a number of hurdles for both these projects, even as the regulatory approvals have been received. While each has pursued different models — Bear Head’s tolling approach versus Pieridae’s integrated model — the need for securing a natural gas supply remains critical at a price that satisfies buyer and seller.

“It comes down to finding the balance between securing a cheap feedstock from the perspective of the LNG proponent and the producers maximizing price,” said Kepler.

One would assume the bleak outlook for natural gas prices in Western Canada means it is only a matter of time before companies move to lock-in a percentage of production at a fixed price that provides a modest return on investment, much-needed certainty and the opportunity to diversify away from the AECO gas hub.

These projects need to move forward, especially given the looming expansion of LNG exports south of the border.

The Cheniere facility at Sabine Pass in Louisiana remains the only exporting facility in operation in the U.S., but there are five more LNG facilities under construction, with a total capacity of about 7.5 billion cubic feet per day that will come into operation this year and next, putting total U.S. export capacity close to 11 bcf/d. And that’s not counting an additional four projects that have been approved, capable of exporting another 7 bcf/d, but have yet to start construction.

But, as Kepler points out, LNG buyers have a preference for western Canadian natural gas because it is cheaper, cleaner and doesn’t require as much conditioning for re-gasification. It also offers buyers diversity of supply; for countries in Europe, having a source of natural gas other than Russia’s Gazprom has strong appeal.

Finally, as van Beurden said, the growth in LNG consumption over the last 12 months has exceeded expectations. The projects that were deferred or cancelled over concerns they would not be economic may well instead contribute to a global LNG shortage.

From Canada’s perspective, it comes down to this: we missed the first wave of LNG development, but there is a second window open — one that can see Canadian projects leverage clean and cheap natural gas and offer buyers shorter transit times to markets. We cannot — and should not — miss this one.

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