Wednesday, July 30, 2014

LNG Proposals for the South Coast - why?

I think the economics for BC LNG is weak for the best projects, but there are at least several that I do not understand how they could possibly make any financial sense.   I do not see how some of proposed LNG projects on the south coast could be viable unless there was a local supply of gas (and yes, there is natural gas potential on the south coast)

Currently there are four proposed LNG projects on the south coast, two of them might make sense, two of them seem like pie in the sky:

Woodfibre LNG near Squamish - 2.1 mtpa
Steelhead LNG near Port Alberni - 24 mpta
Discovery LNG near Campbell River - 20 mtpa
Tilbury LNG in Delta - 3 mtpa (currently about 0.45 mtpa)
(mpta = million tons per annum)

I think people on the south coast are not at all aware that some of the LNG proposals are for this part of the province.

Tilbury
The Tilbury LNG plant is not lot like the first three for a number of reasons.  First, it is an existing LNG plant that is planning on expanding.   It currently produces LNG for use regionally.  FortisBC uses it to manage peak demand periods in the Lower Mainland, sell it to heavy duty customers like Vedder Transport Ltd., Arrow Transportation Systems Inc. and Denwill Enterprises and finally to provide Watson Lake with LNG to provide electrical power. The town of Inuvik in the North West Territories is also offsetting its diesel-fuel utility operations using LNG transported from Tilbury. 

Second, they have much of the infrastructure in place.  The plant is owned by FortisBC who is a producer of natural gas and owns much of the natural gas pipeline infrastructure on the coast.

The plan is  to increase the production of LNG at Tilbury by six fold and then export LNG.This project might makes sense financially and is small enough that it could operate as needed when the prices work.  Realistically this is the most likely LNG export facility we will see in BC in the next five years.

Woodfibre
The Woodfibre LNG plant is a small scale one in terms of the global LNG business.  It seems to mainly based on the idea that they have a brownfield industrial site to work from with the old Woodfibre mill site.   As LNG plant locations go, it is good one.  It is at tidewater with a deep anchorage and the community is protected from the plant.   The problem this proposal has is sourcing LNG.

The Woodfibre LNG proposal is too small to justify a new pipeline but at the same time it could be too large for the existing pipelines.   With the Tilbury LNG expansion and increased use of natural gas in the lower mainland, is there enough capacity to provide natural gas through to this plant at Woodfibre?

The final question for Woodfibre LNG is if they can acquire the natural gas cheap enough to make a profit selling LNG in Asia.

Now we come to the two Vancouver Island proposed LNG terminals which do not make sense because they are so far from the North East natural gas fields and would require a long, expensive and new pipeline.

Discovery LNG
The project is proposed for the old Elk Falls pulp mill site.   It has a deep water anchorage, it is outside of town and it an existing heavy industrial site - all factors in its favour, but I think it has more downsides.

They would need a much larger pipeline to service the plant.   The scale of the demand would realistically require a completely new pipeline from the Peace to the Island.   I fail to see how that could be done for less than a ballpark $10 billion.   At the moment no one is even proposing a new pipeline from the North East.   It would take about five or more years to plan and get approval to build a new pipeline.   Until there is a supply of natural gas this project has no hope of moving forward.  The lack of a current pipeline proposal means there is no chance of anything before 2020 at the absolute earliest.

Even if there were  supply of gas the company behind the project, Quicksilver Resources, is much too small to be able to get the financing for the project.   The company has revenues of around $400 million per year which is roughly the value of the company based on current stock prices.   A project of this size would cost between $20 billion and $40 billion to build.  Only a major global company could possibly afford to finance this project.   More or less every major player in the LNG field has some project they are already connected to.

Location of Proposed Steelhead LNG Plant
Steelhead LNG
This project is some sort of a partnership between  Steelhead and the Huu‐ay‐aht First Nations.  The proposal is to build a greenfield LNG plant on some of the Huu‐ay‐aht First Nations land on Sarita Bay, which is about 10 kilometers up the Alberni Channel from Bamfield.

In nothing I could find is it clear what the relationship between Steelhead and Huu‐ay‐aht First Nations is.   The use of Huu‐ay‐aht First Nations land is interesting because jurisdictionally it is not in the same category as other lands.  The project benefits from having the First Nation on board but can Steelhead deliver the benefits the First Nation members are looking for?

The project suffers because this is a greenfield site.   The location is 80 kilometers from Port Alberni, the nearest location with the full infrastructure to support a major industrial site.   The road to Bamfield would have to upgraded.  There would have to be a deep sea terminal built in Sarita Bay.  The powerline would have to upgraded.   etc....   All of these add to the costs of the projects

Sarita Bay
The project is not near to any large scale natural gas pipeline.  It is hard to see how this project could go ahead without someone committing to building a large new pipeline from the North East to the South Coast.  Even then this project would still require an extra 155 kilometers of pipeline once the gas is on the Island at the Comox Valley.

I do not know enough about the company behind this proposal to know if they could finance it,  but based on what this project would cost to build I seriously doubt that it could move forward without a major global partner to finance it.   Without a secure supply of gas, which means a pipeline ready to be constructed, I am not sure what would make this project interesting to any possible partner.

A South Coast Game Changer?
The Georgia Basin with an estimated 185 billion cubic meters of natural gas
These projects suddenly look much more promising if there were a source of gas in this region.   There are possible supplies for LNG plants here on the south coast.   Could the idea be that these plants are being developed to stimulate demand for local gas?

The first possible source is coal bed methane.   We have a lot of coal deposits on the east coast of Vancouver Island and all of them should have the potential for coal bed methane.  Estimates are that there is about 30 billion cubic meters of coal bed methane on Vancouver Island

The second is natural gas under the Strait of Georgia and estimated 185 billion cubic meters of it.  That is enough natural gas to allow for the export of 44 mpta from the south coast for 32 years.  It is a large enough amount to make development of the resource worthwhile and the south coast plants much more viable.

With a local resource the cost to produce the LNG would be lower and this would make the projects much more likely to be profitable.  

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