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LNG Canada, country’s $40-billion ‘second chance’ at becoming a global LNG leader, takes shape

On a drizzly stretch of B.C. coastline at the head of the Douglas Channel, Canada’s first natural gas export terminal is taking shape.

The sprawling site on the traditional territory of the Haisla Nation teems with more than 5,000 construction and trades workers, working around the clock to bring the $40-billion Shell Plc.-led LNG Canada terminal to completion.

The latest piece of the puzzle: a colossal 3,000-ton Baker Hughes compressor that arrived in Kitimat by boat from Italy on Sep. 20, the first of four that will form the powerful jet engine of the terminal’s liquefaction process. Its arrival puts the project — and the country — one important step closer to seeing the first cargo of liquefied natural gas depart from its shores.

Already more than 70 per cent complete, LNG Canada could be operational by the middle of the decade and promises to unlock the full economic potential of Canada’s rich gas reserves for the first time.

It’s a change that will take some adjusting to in the oilpatch. Despite being the fifth-largest supplier of natural gas in the world, Canada’s energy sector has long seen its production hemmed in by pipeline constraints and market conditions in the United States.

An export terminal on the West Coast providing access to global markets would be a game-changer for Canadian producers who have been maxing out the volumes they can push into the U.S. Midwest and Eastern Canada, said Richard Frey, an analyst with S&P Global Commodity Insights. In 2021, Canada exported an average of 7.6 billion cubic feet per day (Bcf/d) of natural gas to the U.S. and imported 2.2 Bcf/d.

“There’s really not a whole lot of room to do anything more beyond what they’re sending right now,” Frey said. “So this will be an additional outlet and a large outlet at that, too. If North American prices remain high … it could easily grow production by two (billion cubic feet of natural gas) per day.”

Hundreds of kilometres inland, veteran oilpatch leaders in landlocked Alberta have watched as more than a dozen West Coast LNG ventures were shelved or cancelled over the years as regulatory delays or market conditions battered proposals and soured investors — all while nascent LNG export industries took off in Australia and the U.S.

Now, those same oilpatch veterans are urging Shell and its partners to quickly green-light a second phase of the project, effectively doubling the export capacity of the plant from 14 million tonnes of LNG per year in the first phase, to 28 million tonnes a year.

“We had an opportunity that required us getting after these projects 10 to 15 years ago. We didn’t for all kinds of reasons,” said Tourmaline Oil Corp. chief executive and founder Mike Rose. “Fortunately, we have a second crack at it. So I’d like to see more than just LNG Canada phase one — we’d like to see both phases of LNG Canada and more projects on the West Coast.”

Experts in the sector say Canada’s advantages as a West Coast LNG exporter are considerable. They include the significant low-cost supply from western gas fields such as the giant Montney formation that straddles the border between Northern B.C. and Alberta, shorter shipping distances to Asian markets, access to renewable hydroelectricity and a colder climate than U.S. Gulf Coast competitors who must expend more energy to cool gas through the liquefaction process. In combination, these factors mean LNG Canada’s facility in Kitimat will have one of the lowest carbon intensities of any LNG project in the world.

The $40-billion facility is furthest along of a small pack of proposed West Coast projects that have benefited from the fresh interest in Canadian LNG brought on by the global energy crunch following Russia’s invasion of Ukraine.

In Kitimat, work can’t progress fast enough for LNG Canada’s investors, even as massive new pieces of equipment and machinery arrive almost weekly. A 56-meter-high circular tank — the second-largest LNG tank in the world — is also nearing completion and will eventually store the super-chilled natural gas until tankers arrive to carry it away.

But despite the current enthusiasm for Canada’s LNG potential, there are disadvantages to being a late entrant in a crowded global LNG market.

The long-term nature of investments in LNG present a risk if global demand for natural gas declines faster than expected. One of Shell’s own recently published climate models suggests that it is conceivable that global gas demand could peak in the 2030s as governments around the world switch to low-carbon energy sources — a timeline that has been vociferously contested on both sides of the climate debate.

“It doesn’t really make sense to build a facility if you don’t think you’re going to get a lot of good use out of it for at least a decade, if not two decades,” Frey said. “There’s a lot of questions right now about natural gas’s role in the future energy mix. So that’s what I would be the most concerned about: It looks great right now, but what does it look like in 2045?”

Among the factors helping to bolster local enthusiasm for Canada’s prospects as an LNG exporter is the energy sector’s growing relationship with Indigenous communities.

It looks great right now, but what does it look like in 2045?
In a reversal from the industry’s old pattern in dealings with Indigenous peoples in Western Canada, the focus now is on consultations and carefully negotiated benefit agreements with communities affected by the energy sector’s activities.
In the case of LNG Canada, built on Haisla Nation territory, the project has brought revenue, employment opportunities and more than 20 joint-venture partnerships with related businesses. Haisla Chief Councillor Crystal Smith said she has urged members of her nation to take advantage of training and career opportunities to propel their careers, long after construction on the LNG Canada mega-project begins to taper off.

“That is the reason we wanted and supported this project,” Smith said. “I’m not saying that everything has been perfect,” Smith added, pointing to the area’s housing shortage and the difficulty in attracting and retaining teachers and an addictions counsellor.

“But for the most part, what we’re experiencing now is what we wanted for our people in our community and our region.”

Even better, Smith said, is the promise of the proposed $3-billion Cedar LNG project, which would neighbour LNG Canada in Kitimat and be majority-owned by Indigenous groups. The project is currently awaiting a decision under B.C.’s environmental assessment process.

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“I often describe our journey as one that started with not having a share or a say in any opportunity that occurred in our territory, to being active, at-the-table decision makers helping LNG Canada become successful. Now, we are ‘the’ decision makers in Cedar LNG, and that in itself is a huge legacy,” Smith said.

It’s unclear how many LNG projects will ultimately be approved by Canadian regulators.

Project proponents and investors will be watching closely as the governments of Canada and B.C. prepare to roll out more detailed plans to cut emissions from the oil and gas industry. Some oilpatch leaders and Indigenous groups with ambitions to invest in energy projects have warned that the introduction of a sector-specific emissions cap could thwart further investments in LNG.

Still, LNG Canada CEO Jason Klein said he remains optimistic about the economics of Shell’s project and the sector’s potential to endure as the global energy transition unfolds.

Pointing to the company’s 40-year permit to operate in Kitimat, Klein said he believes there is starting to be an acknowledgement that not all LNG projects are created equal.

“The cleanest molecule is going to be the last molecule standing,” Klein said. “That’s one of the reasons why I feel so good about LNG Canada, because we are that clean molecule. And when people start getting really picky, whether driven by carbon price or otherwise, the cleanest LNG will be the last LNG — which right now, in the world, that’s right here.”
Source: Financial Post

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