Do Kitimat LNG's Woes Apply Broadly to Western Canada?

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That Chevron would cut future funding to its erstwhile Kitimat LNG export project in British Columbia (BC) was no surprise -- and neither is what it implies about future LNG development in the Pacific Coast province. “It’s increasingly evident that British Columbia is not going to be the LNG juggernaut it had the potential to be,” said Ian Nathan, a director with Energy Intelligence's Research & Advisory unit. That scenario stems from a host of factors that also hamper further greenfield LNG development in the US -- mainly a dearth of customers willing to commit to long-term contracts to back megaprojects, an increasingly uncertain outlook for gas demand by midcentury, an effective green pushback, and a focused political opposition. All of those forces are frustrating Western Canadian producers eager to find new outlets for what is essentially a bottomless shale gas resource. “The bigger challenge going forward is not a lack of supply. There’s more than enough to supply another megaproject,” Mark Pinney with the Canadian Association of Petroleum Producers told Energy Intelligence. “The biggest challenge is having such a long approval process in Canada.” LNG Canada, under construction at Kitimat, made it through that gauntlet and is expected to start delivering 1.8 billion cubic feet per day to Asian markets by mid-decade. The Royal Dutch Shell-led project was something of a dark horse, running behind first Kitimat LNG and then Malaysian state Petronas-led Pacific NorthWest (PNW) LNG up the coast at Prince Rupert. But the pieces fell into place for Shell as they fell apart for Petronas for reasons that could doom future large-scale LNG development. What killed PNW LNG was the “terrible time” it had meeting environmental mitigation demands and First Nations objections in order to pass regulatory muster, Pinney said. The process was so protracted that by the time it got clearance “the project was getting really expensive.” So Petronas killed PNW and joined Shell and its Asian partners in the LNG Canada venture, assuring its success. Chevron and its Australian partner Woodside Energy were not so lucky, and Kitimat LNG languished for years before Chevron officially shelved its part in the project last month (NGW Mar.29'21). Chevron, which bought a 50% stake in the 18 million ton per year (2.4 Bcf/d) project in 2012, has actively been seeking a buyer since December 2019 The question now is whether Woodside keeps the project alive. The company could see a “long-term optionality” in doing so because Kitimat LNG is not without worth, Nathan said. “Pulling the plug on a fully permitted project might be an important consideration.” Pinney agreed. As long as Kitimat LNG has permits in hand for both the terminal and its Pacific Trail supply pipeline, it could be considered shovel-ready. And it's conceivable that someone will turn that dirt rather than start a new project from scratch. "In the next couple of years Kitimat might be attractive to underpin a project," Pinney said. And why not? BC's Pacific Coast offers the shortest sailing time to Asia from North America without the headache of passing through the Panama Canal. But any additional megaprojects will have to get past LNG Canada, whose expected success is mainly predicated on having a good mix of partners possessing both gas production in Western Canada and Asian markets to fill. This would be hard to duplicate, especially given that LNG Canada is planning a second phase that would bring liquefaction and export capacity to 3.6 Bcf/d. Theoretically, that could block any construction at a revitalized Kitimat LNG until that new capacity is maxed out, because building trains at existing facilities is far cheaper. However, Pinney said there are reasons for optimism, including rising demand in Asia for which Canada could become a preferred supplier as buyers focus on finding lower-carbon LNG options. R&A's latest long-term LNG demand forecast, published in February, sees six key Asian markets responsible for roughly 75% of LNG demand growth to 2035. Once LNG Canada begins shipping gas it could also create momentum for other projects in BC because of advantages Canadian-produced supply can offer. LNG Canada will already produce some of the lowest-carbon LNG in the world and Kitimat LNG's supply could be even cleaner, due to hydropower electrification. However, low-carbon concerns could also discourage demand for fossil fuels, Nathan said, and the longer Kitimat LNG sits on the shelf the less likely it is to be pulled off. To be financially sound, a project like Kitimat LNG needs to have an assured 20-year life span. But with energy markets in flux and climate concerns gaining traction, who can assure what LNG demand will be like beyond a 10- to 15-year horizon? Buyers and sellers have been signing shorter contracts, but projects already operating or under construction are better positioned to accommodate this requirement, Nathan said. Tom Haywood, Houston

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