On the eve of Canada’s first LNG export facility starting up, future growth is anything but certain

Business has been tough for a while now if your business is selling Canadian natural gas in North America.

Producers in Western Canada this summer endured the worst price slump in five years as a combination of warm weather and high storage volumes oversupplied the market, pushing AECO prices (the Canadian benchmark price for natural gas) below $1 per gigajoule during the shoulder season and spot prices into negative territory in August and September.

Through it all, companies have resolutely maintained production, sometimes to their own detriment, setting new daily production records in October and November even as the added volumes meant prices dropped further.

The blow from dismal natural gas prices has been softened by the steady returns for the byproducts of drilling, including natural gas liquids and condensate, but a feeling is emerging that sweet relief is on the way with the upcoming startup of the LNG Canada export facility in Kitimat, B.C.

LNG Canada will boost exports of natural gas from Western Canada by 20 per cent when it begins commercial operations in mid-2025, BMO Capital Markets analyst Randy Ollenberger recently told a room full of oilfield service contractors at an industry luncheon in Calgary.

“We think the outlook for natural gas in Western Canada is probably the best since 2005,” he said. “Because gas has really sucked since then and we think it’s going to be much better over the next couple of years here. We’ve got a very bullish outlook on that.”

The thesis beginning to grip the sector is that Canadian producers won’t be able to drill fast enough or ship in large enough volumes on existing pipeline routes to meet the combined pull on resources from Shell PLC-led LNG Canada and the demand from the oilsands, where natural gas is increasingly used to power thermal production and mining operations.

For producers, the tantalizing prospect of Canadian natural gas shedding its steep discount to American prices — in a pattern similar to the effect the Trans Mountain Pipeline expansion (TMX) has had on Canadian heavy oil prices — has driven home the importance of pipelines and export infrastructure.

But on the eve of Canada’s first liquefied natural gas (LNG) export facility starting up, the outlook for future LNG development on the West Coast appears more precarious, raising questions about the limits of this country’s potential as an energy exporter.

A trio of approved projects, including the first phase of LNG Canada, are poised to deliver 2.5 billion cubic feet per day (Bcf/d) in natural gas exports by 2028, but industry players and experts say fresh political uncertainty in the form of a tight provincial election in British Columbia and ongoing infrastructure capacity constraints are overshadowing more than four Bcf/d in potential export growth.

And a stall in LNG development could be felt nationwide, according to a recent research paper by former Statistics Canada chief economic analyst Philip Cross.

He modelled the economic returns from a single large LNG project similar to LNG Canada and determined that an LNG project in B.C. that invests about $4.1 billion annually over the decade it takes to construct corresponds to an annual $4.5-billion boost to Canada’s gross domestic product and creates more than 35,000 jobs.

Election officials in B.C. last week were working to settle the outcome of a nail-bitingly close race that could have far-reaching consequences for the future of LNG development on the West Coast.

The completion of two judicial recounts confirmed the incumbent B.C. New Democratic Party (NDP) will hold the slimmest possible majority with 47 seats, while the Conservatives have 44 seats and the Greens have two.

It’s an outcome that industry members fear could escalate the political headwinds that have faced LNG projects in B.C. since the defeat of the B.C. Liberals under former premier Christy Clark in 2017.

The razor-thin majority held by the NDP means the party cannot appoint one of its own members as speaker of the house without endangering its vote count in the legislature. All the evidence so far points to Premier David Eby seeking the co-operation of the Greens in some form to ensure a stable government.

One option in play, according to political experts, could have the Greens holding the balance of power in the legislature via support for the governing NDP on a vote-by-vote basis or through a more formal supply-and-confidence agreement. Such a scenario would almost certainly cast a shadow over further LNG development should the Greens elect to capitalize on the opportunity to protest further fossil fuel development.

The NDP has not yet said how it will resolve the matter, though more clarity is expected soon as Eby has promised a short fall sitting of the B.C. legislature to elect a speaker. But a scenario where the Greens hold the balance of power would have a negative impact on energy sector investment, RBC Capital markets analyst Maurice Choy said in a note following the election.

“At first glance, we believe that any material influence that the B.C. Green Party has on energy policy in the province will likely be viewed negatively by investors in our sector, particularly affecting stocks with material natural gas-oriented infrastructure exposure,” he said.

Choy said the Greens have called for a prohibition on new LNG projects, the phase-out of fracked gas production, an end to new pipeline permits and would even direct the B.C. Environmental Assessment Office to let a 2014 environmental certificate for the Prince Rupert Gas Transmission (PRGT) pipeline expire. The PRGT is a key component of one of the more advanced LNG proposals in northern B.C.

The Greens have also called for a B.C. windfall tax on oil and gas companies, which could have an impact on the demand for pipelines, Choy said.

“Of course, there’s the possibility that if the Green Party is kingmaker and they side with the NDP, they will say, ‘Absolutely no LNG development if you want to be government.’ That’s definitely a risk,” Ian Archer, an associate director at S&P Global Commodity Insights and an expert in North American gas markets, said.

“(LNG) could be used as a political playing card in order to win the support of the Greens, but I don’t know if it will be.”

But a more pressing hurdle facing the current slate of proposed LNG projects, Archer said, is the NDP government’s CleanBC regulations.

Brought in last year, the regulations require all new LNG projects to have a plan to reach net zero by 2030 and they place a regulatory cap on greenhouse-gas emissions for the oil and gas sector.

In practice, the policy means that future LNG projects will have to electrify by purchasing electricity and securing transmission from the British Columbia Hydro and Power Authority (BC Hydro) to run the massive, energy-intensive compression and liquefaction process required to produce LNG, a process that is typically accomplished with emissions-intensive gas-fired turbines.

CleanBC doesn’t explicitly prohibit further LNG development, Archer said, but the rules present a significant hurdle for projects other than LNG Canada and the smaller, electric-powered Woodfibre LNG (backed by Enbridge Inc.) already under construction near Squamish B.C.

Even approved projects face an uphill battle, he said.

Investors in the already permitted Cedar LNG project (jointly owned by the Haisla Nation and Pembina Pipeline Corp.) have made a positive final investment decision, but the project still faces a potential eight-year wait for BC Hydro to complete the required power transmission upgrades in northern B.C.

The second phase of LNG Canada (jointly backed by Shell, Petronas Nasional Berhad, PetroChina Co. Ltd., Mitsubishi Corp. and Korea Gas Corp.) has at times appeared to have the blessing of the Eby government, with the premier telling Bloomberg News in July he was optimistic that the export facility could expand without blowing the province’s emissions reduction targets.

“We’ve made some pretty clear commitments around driving down emissions in the province, and we’re at a table with them about how we can try to achieve both of our goals,” he said in reference to the investors behind LNG Canada. “From their perspective, ensuring that reliable, low-carbon energy, and from our perspective, all the emissions not showing up on B.C.’s books as the main producer.”

But beyond the aforementioned projects, all bets are off, Archer said.

The doubling of capacity at LNG Canada’s facility alone would require a massive 400 megawatts in additional power to electrify, raising serious doubts about future LNG development under a provincial regime constrained by BC Hydro’s limited capacity and the competing demand for electrification from other industrial and residential uses.

One sizable project that appears particularly vulnerable is Ksi Lisims LNG.

Proposed for Pearse Island on the northwest coast of B.C., Ksi Lisims is backed by the Nisga’a Nation, Houston-based Western LNG LLC and Rockies LNG Partnership (which represents a consortium of natural gas producers including Canadian Natural Resources Ltd., Tourmaline Oil Corp. and the Canadian arms of Ovintiv Inc. and Murphy Oil Corp.) and is still seeking environmental approvals for its 1.58 Bcf/d liquefaction and export terminal.

The project will be fed by the 800-kilometre gas PRGT pipeline, which is still in the early phases of construction and facing political and activist opposition.

“With future projects … it becomes an open question whether BC Hydro can meet their energy load and can meet it in a timely way and that’s kind of where the rubber hits the road right now,” Archer said. “It’s going to be very challenging for BC Hydro to meet (the demand of) something like a Ksi Lisims project. It can probably do Cedar, but Ksi Lisims might be a bridge too far.”

The gloomy outlook for the Nisga’a-led project is not lost on Karen Ogen, chief executive of the First Nations LNG Alliance, who said before B.C.’s election results were finalized that the next government will determine whether these projects either go ahead or will be stopped.

“We need a government that’s going to support those projects and I think that’s probably worrisome,” she said. “I think it’s critical to the quality of life of Indigenous people in B.C. and especially for those (First) Nations that are at the helm of these LNG projects.”

Despite the uncertainty, the Canadian oilpatch seems cautiously optimistic as LNG Canada prepares to ship its first cargoes from the B.C. coast.

The thesis Ollenberger recently shared in Calgary that ignited hopes among beleaguered gas producers is the possibility that it could take up to three years for Canadian production to catch up with the demand from the first phase of LNG Canada.

He said it will take that much time since the combined demand pull from LNG Canada and the oilsands could be as much as 2.5 Bcf/d, whereas the basin might only be capable of supplying another 700 to 800 million cubic feet per day in new gas, potentially propelling AECO to trade near parity with U.S. benchmark Henry Hub gas.

“We think that AECO is going to be the best performing gas market within North America over the next three years because this increased capacity from LNG Canada is so material,” he said.

Tourmaline Oil executives are similarly optimistic about the prospects of an AECO rally, with chief executive Michael Rose telling Bloomberg recently that the discount on Alberta natural gas could be cut in half next year.

On a recent conference call with investors, Tourmaline chief executive Michael Rose said the more than 1.8 Bcf/d in natural gas production required for LNG Canada when it starts up is currently being absorbed into North American markets and that the anticipated pull on volumes next year will trigger a rise in Canadian prices.

“We’ve decided to get the pads drilled out so that we can respond,” he said. “We think the AECO strip is understating what the impact of the ultimate startup of LNG Canada will do.”

— Additional reporting by The Canadian Press and Bloomberg News.

• Email: [email protected]

Bookmark our website and support our journalism: Don’t miss the business news you need to know — add financialpost.com to your bookmarks and sign up for our newsletters here.

Source link : http://www.bing.com/news/apiclick.aspx?ref=FexRss&aid=&tid=673b382f94a444e3a3abac1ff3ce0a47&url=https%3A%2F%2Fca.finance.yahoo.com%2Fnews%2Feve-canadas-first-lng-export-110051867.html&c=17058782134522874077&mkt=en-us

Author :

Publish date : 2024-11-17 22:01:00

Copyright for syndicated content belongs to the linked Source.