Additional government incentives and cost reductions will be required to make more Canadian LNG export projects globally competitive and attractive to investors, a Canadian Energy Research Institute study concluded. Otherwise, more announced projects could join the 16 that have been canceled since 2014, CERI warned in a Sept. 19 report recently released in Calgary.
“Investors, particularly global energy companies, have choices. The fact that Canada does not have LNG project experience puts it at a comparative disadvantage to existing producing countries which may have options for lucrative liquefaction capacity expansion or new projects leveraging infrastructure and experience,” the report’s executive summary observed.
Canada needs compelling arguments for investors to choose it over other options, the report said. “For the Canadian projects on the east and west coasts to move forward, the projects should be cost-competitive with international options. LNG landed costs also should be consistently lower than the expected prices at the destination markets to earn a return for investors. And finally, Canada’s jurisdictions need to be attractive and stable to do long-term business, such as LNG liquefaction and exports,” it said.
Changes in the global pricing environment for oil and gas also need to be considered, CERI said. “The price volatility of the oil market is a major uncertainty for long-term oil-linked contracts on which most financing and economics of LNG projects depend,” it indicated.
“The situation is challenging for investors as the percentage of the Brent price LNG sellers are realizing where contracts tied to oil prices have been declining from 14.5% to 11.5% as of late. Thus, for investors to take a final investment decision, the projects need to have solid and profitable economics under current and prudent pricing forecasts,” CERI explained.
Scope of comparisons
The study compared announced LNG projects in British Columbia and Nova Scotia with counterparts in Texas and Louisiana as well as Australia. It found that supply costs for LNG shipped from eastern or western Canada, excluding transportation, would be $8.09-8.35 (Can.)/MMbtu for integrated operations, which use gas produced by facility owners, and $9.85-11.17 (Can.)/MMbtu for the merchant business model, where natural gas is bought on the market.
“For Eastern Canada, the integrated model implies the development of onshore local shale gas in NS, which is currently under a provincial hydraulic fracturing ban. New Brunswick’s shale gas could also be a source, but it is not considered in the study,” it said.
CERI said its study found projects in eastern Canada would hold a 36¢ (Can.) advantage over those farther west, primarily due to lower transportation cost since the gas resource would be nearby. Projects in BC, on the other hand, would edge those in NS by 93¢ (Can.) based on total costs.
The study also found that as of May, combined shipping and supply costs from LNG export terminals in eastern and western Canada would be higher than the spot cost in Japan by 80¢ (Can.), but below the historic price of $9.20 (Can.). Combined LNG transportation and supply costs from Canada’s east and west coasts also would be higher that UK spot prices at the time, it added.
CERI also found that BC appears to be more competitive globally than NS because it has more incentives and lower corporate taxes (36% vs. 31%). “Also, the Asian LNG market is better priced than European gas markets (10-year historical average is $9.20 (Can.)/MMbtu vs. $6.30 (Can.)/MMbtu),” it said. The cost of Montney gas and transportation to a BC facility is half compared to the case when an Eastern Canada project sources gas from AECO-C in Alberta or the Marcellus shale, it added.
US corporate tax cut impact
The US also appeared to be a more cost-effective jurisdiction than either of Canada’s provinces, if gas costs were not considered, according to CERI. Total liquefaction costs were lower by 70-80¢ (Can.) for the Gulf of Mexico compared with Western Canada, and by a substantial $2.80-3.00 (Can.) compared with Eastern Canada.
“Thus, the costs of doing LNG business is 13-41% lower per million British thermal unit in the Gulf of Mexico than in Western or Eastern Canada, inducing further work of business and governments to reduce the deficiency in cost-competitiveness,” CERI said.
The recent change in US corporate taxes also gave a boost to the LNG export industry there, it said. The corporate tax share/MMbtu of LNG has decreased by almost 60% (or 44-52¢ (Can.)/MMbtu). “Canadian incentives to the LNG industry are estimated to equal around 51¢/MMbtu (includes increased capital cost allowances, the BC government Natural Gas Development Framework, and the Natural Gas Tax Credit),” CERI said.
“Still, even with these measures, US greenfield projects have 27.5% lower taxes/MMbtu than for a large 26 million-tonne/year project in Canada after all modeled Canadian incentives are applied. This leaves room for further improvement of the tax regime competitiveness in Canada,” it said.
