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LNG Canada signals the return of mega-projects, says Wood Mackenzie

Published by , Editorial Assistant
Tanks and Terminals,

Speaking after Shell, Petronas and their partners announced FID for LNG Canada last week, Dulles Wang, Director, North America gas, Wood Mackenzie, said: “This is the first LNG export project to reach FID in Canada and the first greenfield LNG export project globally in five years.

“We estimate initial project costs at US$18 billion for the LNG plant investment and US$3.5 billion for the pipeline. Upstream costs will be incurred by each of the project partners.

“This would make LNG Canada the biggest project sanction globally since the Tengiz expansion (FGP-WPMP) was approved in 2016, and the biggest greenfield project to be sanctioned since Yamal LNG in 2013. It seems that mega-projects are back.”

He added: “Shell’s motivations for the project are clear: without this project, the company’s upstream, LNG contract portfolio and LNG production was set to go into decline early next decade.

“Instead, this allows the company to extend LNG leadership and provides a platform for growth. It also meets wider company goals of adding reserves and building North American unconventional exposure where Shell is underweight compared to ExxonMobil and Chevron.

“For all the partners, it is also a signal of growing confidence in the LNG market. Western Canada is strategically well located for supplying North Asia and will add supply and price diversity to each of the partners’ LNG portfolios. The partners also seem confident about the prospects for expansion, which should come at a substantially lower cost.

“The project will be viewed as a confidence booster for the broader investment sentiments for Canada, particularly given recent challenges with oil-related infrastructure projects. Fiscal and regulatory supports from provincial and federal government have played crucial roles in the evaluation process.

“The momentum behind LNG Canada reflects the drastic improvement in the LNG market over the past 12 months, driven by buoyant demand in China. A clutch of projects are vying for FID, including four mega trains in Qatar, Arctic LNG-2 in Russia, at least one development in Mozambique and several US projects.

“We believe 2019 could be the busiest year of LNG FIDs ever.”

Wang added: “The sanction of LNG Canada marks an abrupt turnaround from 2017, when Petronas cancelled its Pacific NorthWest Project and Shell postponed an FID on LNG Canada in 2016.

“Since then, market fundamentals have moved in the project’s favour: LNG fundamentals have improved, upstream wells have outperformed, LNG construction costs have come down and tax breaks and import duty exemptions have been secured from provincial and federal governments, allowing the project partners to gain confidence, ultimately culminating in the announcement.”

LNG Canada is an equity project, as the partners will source gas from western Canada – principally the Montney play in British Columbia – and  transport it via the proposed Coastal GasLink pipeline (100% owned and operated by TransCanada) to the liquefaction facility in Kitimat.

Each partner will be responsible for marketing its equity LNG. Phase one will see the construction of two trains with a combined capacity of 14 million tpy. A second phase could double that, longer-term.”

He added: “Canadian upstream operators have improved productivity and efficiency tremendously over the last few years as the core areas of the British Columbia Montney witnessing EUR improvements as much as 60% and breakeven reduction of US$0.40 – $0.80 per million Btu over the last 12 months.

“The majority stakeholders of LNG Canada, such as Shell and Petronas, own some of the lowest-cost acreage in the region but monetisation for the gas domestically has not be very profitable given the supply glut in western Canada and intensified competition against plays such as Marcellus and Utica within North America.”

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