How many of the proposed pipelines in BC will actually be built?

Right now in BC we have a huge number of proposed new pipelines.   At the moment there are two oil pipelines and five natural gas pipelines proposed.

Oil
Northern Gateway
Kinder Morgan twining  

Natural Gas (and the associated LNG projects)
Coastal GasLink Pipeline (LNG Canada)
Pacific Northern Gas Transmission Pipeline Expansion
Pacific Trail Pipeline (Kitimat LNG)
Prince Rupert Gas Transmission (Pacific Northwest LNG)
Westcoast Connector Gas Transmission (Prince Rupert LNG)

These pipelines represent about $30 to $40 billion in capital investment but I do not think the economics of oil and gas will not be favourable enough to warrant them being constructed.   An average capital spending in BC of around $3 to $4 billion a year for the next ten years.

The price of oil was relatively high from the middle of 2005 through to the middle of 2014 but has seen a significant fall in price in the last year.  The ten year long high price has lead to a lot of new oil supply coming onto the market while at the same time the high price has pushed people to move away from using oil.   The combination of the two has created a fall in the price, one that I do not think is going to change because other forms of renewable energy are getting more and more competitive.

At the same time natural gas has seen a dramatic fall over the last eight years because global supply has risen much faster than demand.   Couple this with the expansion of LNG in the world and the price for natural gas is falling everywhere.  The current price ($7 USD/MMBtu) for LNG is the lowest we have seen for some time.   The cost to make LNG in will be about $10 CDN/MMBtu.   Right now if LNG were being exported from BC the exporter would be losing a lot of money on each Btu they exported.

Pipelines are a long term investment.  Before construction starts the company building the pipeline needs to know there will be a decades long demand for the pipeline.    Right now there is not quite enough pipeline capacity for the tar sands oil production.  When it comes to natural gas pipelines, none of them make any sense unless there is a certainty that someone is going to go ahead with an LNG plant on the north coast.   At this point I do not expect to see any LNG producer to make a firm decision on building a north coast plant in the next 18 months.

Current Stage of LNG Projects in BC

The timelines for LNG in BC have been slipping and the government is going out of their way to try and show a huge interest in BC by listing every flight of fancy project out there.   Somehow by giving equal weight to serious projects and total pie in the sky projects the government thinks the public will be more sold on the LNG idea.

Here is my take on the 17 LNG projects in BC

Projects in operation 

• FortisBC Tilbury LNG Plant - The plant has been in operation since 1971 and was built to supply demand for LNG in BC

Projects Under Construction - this means any approved project with an investment decision made
None

Probable Projects - These projects are far enough along that they likely will go ahead

• WesPac - This is a small project next to an existing LNG plant owned by FortisBC.  3 mmtpa
• Woodfibre LNG - a small project located in Woodfibre near Squamish.   The final investment decision was supposed to be before July 1st this year but we are now just over three months after that date with no decision.  Opposition is rising to this project.  2.1 mmtpa

Not only do I think there are only two probable projects, they also happen to be among the smallest ones proposed,   These two projects total 5.1 mmtpa, less than one feed train for a large LNG project.

Possible projects - the projects seem to be actively being worked on but by no means close to a final investment decision

• Aurora LNG - It is still some years before a final investment is made but this projects has some Asian partners with markets and with deep pockets.  24 mmpta
• LNG Canada - The project has four large companies are partners so the capital is not an issue.   Originally 2015 was stated as the date for a final investment decision, but the dates for everything to do with the project beyond the end of the environmental assessment process have been dropped   24 mmpta 
• Pacific Northwest LNG - A final investment decision is supposed to come before the end of 2014 but with the noises from Petronas I have to wonder if the decision date will be significantly delayer - 19.2 mmpta
• Prince Rupert LNG - British Gas is the propoent of this project but I suspect that without a partner they will not move forward.   21 mmtpa

These four possible projects are all large ones.  They are big enough that the partners could spend $200,000,000 on their project and easily walk away because this is only 1% of the project cost. These projects will be entirely tied to long term prices for LNG in Asia.   Everything depends on the price differential between BC and Asia being large enough in 2025.   If one of these four is built this is 20 mmtpa of LNG.

 

Speculative Projects - they have at least something done but not much

• Kitimat LNG - A project partnership between Chevron and Apache.   The project has gone rather quiet.   I suspect that the partners need more partners with a lot of capital
• WCC LNG Ltd - this project is very early days with the most optimistic final investment decision date still four years away.  They do have an export permit.  20 mmtpa 

Very Speculative Projects - I do not believe these projects will happen

• Discovery LNG - The project is proposed by Quicksilver Resources.  As a project it makes no sense to me because it is not near any natural gas.   The cost of going to the island makes this unrealistic.
• Grassy Point LNG - this is a project by Woodside Energy of Australia.    There are no dates for when they might make an investment decision or when it might be built.  Without some partners with deep pockets I can not see how this goes forward given the large cost overruns and delays of the Pluto LNG project.
• Kitsault Energy - The owners of Kitsault are looking for another use for their town site and I think are trying to interest one of the LNG projects to locate there.   This in my opinion is not a serious LNG proposal
• Steelhead LNG Corp - A partnership with one of the local First Nations.   It is very early stage for this project and there is no money to build anything.  No timelines exist for this project.  The capital costs of a pipeline to Vancouver Island makes it an uncompetitive location.
• Canada Stewart Energy Project - This is one of the newer projects and seems to be primarily connected to Chinese State enterprises.   The project timelines are fantasies.  They are suggesting building the pipeline and facility starting in 2015

Unknown - I can not find out enough about these projects to understand where they are at

• Douglas Channel Energy - This project is one of the smallest ones and one of the few that I thought was realistically going to be in operation.   It ran into major financial problems October 2013.  AltaGas was supposed to be stepping in but as of August this had not happened.  I do not know the current state of the project
• Triton LNG - This is a project between AltaGas and Idemitsu to build a floating LNG facility.   It would be a small plant but no site has been chosen
• Watson Island LNG - this is a small proposed to redevelop Watson Island as a LNG export terminal in Prince Rupert, but beyond that I know nothing about it

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.  

The Complication of Multiple Partners for LNG Plants

Most new proposed LNG plants in the world have multiple partners as part of the project.   This clearly is necessary because of the large capital costs involved with construction of an LNG plant but it brings with it a lot more risk as well.

When a project has a single large corporation behind it there is a single clear decision making point for the the project, but as soon as there are more partners each partner becomes a decision making point for the project.  Unless all the partners agree to go ahead the project can not be green lighted.

In theory any set of partners that hold a combined majority ownership of the project can make the decision to go ahead.  The problem with this is that if one of the partners can not go ahead because they can not come up with the capital for the project the decision by the majority is moot because the money is not there to proceed.  If a minority partner says no the majority partners really have no realistic option other than to buy them out.   This increases the capital exposure of the remaining partners and may then call into question the green light decision.

Once the partnership has been created the project will effectively need unanimous support of all the partners.   This means that for a project to go ahead all the partners need to be at the same point in their decision making.   Finding "the right time" between four LNG project partners, that likely have very interests in the project, will be hard to accomplish.   The more partners there are the longer it will take for a project to get the green light to start.

Completion of the project also becomes a problem when there are multiple partners because with each additional partner there is one more chance one of them will want to pull out or delay.    Globally there is not nearly the long term experience of LNG plant developments needed to know how likely delays or abandoned projects will be.    The closest equivalent are large scale mines.  

From various large scale mine projects around the world it is clear abandonment or delay in development is the norm.  I do not know of anyone who has quantified the delays in development of mines, it is clear that in the North American context that a decade or two delay is not uncommon for the ones that do eventually get built.    In most cases new large scale mines have a lower capital development cost than LNG plants are tend to have fewer partners which means new mines should typically see shorter delays in development than LNG projects.

One of the projects proposed for BC is LNG Canada in Kitimat, a partnership of Shell, PetroChina, KOGAS and Mitsubishi.  The current capital costs of the project and pipeline is in the range of $17 billion.  For Shell the investment represents $4.25 billion in capital, which is a significant amount for them.   Given the increase in costs of similar projects elsewhere in the last few years a total cost of $25 billion is more likely raising the capital each partner would have to come up with is over $6 billion.   These are not trivial amounts for a company like Shell.

For Shell to commit to the LNG Canada it has to make more economic sense to them than other projects they are considering for development around the world.  Shell does not have access to unlimited capital for projects.   The LNG Canada team will have to compete with a dozen or more major capital projects Shell has interests in.

Shell is in many ways the easiest of the four partners in LNG Canada to read and understand how committed they are to the project.   The other three partners are not nearly as transparent.  In the case of PetroChina we have no idea at all how solvent the company is.  The long term track record for companies in countries without a free and fair legal system or a transparent and open banking system is not good, China has neither.   Trusting in Chinese state enterprises is not a long term smart idea and expecting them to be viable partners in five or ten years is unwise.

The fact that all the serious LNG proposals for BC have multiple partners means we should reduce our expectations of how many LNG plants may be constructed here and assume that the timelines will be significantly further into the future.

My work on LNG in BC

Over the last two weeks I have tried to use the data I can find to analyse the LNG business in BC.   I had assumed that in the run up to the 2013 election the Liberal focus on LNG was an election hype hail Mary and the prudent thing for them to do in 2014 was to reduce public expectations but this has not been the case.

So where will LNG in BC be by 2024?  I think it is not unreasonable to expect BC to be home to some LNG export terminals but not nearly as many as the government used in their analysis of of the benefits of the industry.  I really have been less than impressed with the reports done for the government in early 2013 measuring the impacts of LNG on jobs and government revenues.   I wanted better data to work look at.

A problem I was having was getting good information on what LNG is likely to mean for BC and it is because of this I thought I would see what I could out together   I looked for data on the global industry and the LNG situation in BC and tried analyse that data.

Here is a list with links to that work I did:

• Quick overview of LNG in BC.
• The list of the current LNG proposals in BC and how likely or not they are.
• Factors that need to be considered to make an LNG plant economically feasible.
• How many jobs is LNG likely to create in in BC in the next ten years?
• Galore Creek Mine as a potential model for possible timelines and delays for LNG plants.
• Working out the cost of making LNG and what price differential is needed to make BC LNG financially viable.

The Quick Summary:

• Overall I think we are only likely to see two LNG plants by 2024.  Of the 12 listed proposals I only think six are reasonably serious at this time.
• Using various equivalent examples, it is unlikely that any LNG plant will be operational before late 2020.
• BC LNG needs a price differential of around $7.50/MMbtu between the spot price in North America and what the customers are willing to pay in Asia to be profitable.  That is available at the moment but that price differential has not historically been available.  The global price of LNG is very much influx with few people having any long term confidence what the market will do.
• BC LNG has advantages from being closer to Japan and South Korea than the major competitors and from a cooler ambient temperature which slightly reduces the cost to make LNG.
• BC LNG has disadvantages because of the increased capital cost from needing new pipelines to supply the plants and an uncertainty of where long term natural gas prices will be in North America.
• It seems the long term jobs will be lower than most estimates based on two larger scale LNG plants.  This is because all the analysis I have seen indicate most of the jobs related to LNG plants come from the natural gas extraction end of the equation and it is not clear that BC LNG will significantly increase the natural gas production in BC.

I have some more analysis to do.  The first is the probable tax revenues from LNG in BC to 2024.   Ballpark I think the direct taxation from the production of LNG is likely to be in the range of $150,000,000 to $180,000,000 per year in 2024.   This is only a very small overall increase in BC government revenues and not at all enough to make the prosperity fund idea work.    Could the LNG plants cause a lot more government revenues from natural gas extraction?  That is something I trying to work out but my early analysis is not indicating this is likely.

The second is what is the impact on natural gas extraction volumes in BC is from LNG plants.  With the huge boom in natural gas in North America it is very possible that all BC LNG plants would do is offer a new market for existing production.  Even if all the LNG was supplied from new natural gas sources the scale of LNG that seems to be likely in BC is not enough to dramatically increase natural gas production levels in the province.

One thing I have not been able to do is work out in the construction phase how much of the plant infrastructure will be constructed in BC and how much of it in Asia.   I have seen unconfirmed figures that around 30% of the capital costs for a large LNG plant is likely to be spent in Asia but without more data to back this up I can not do more analysis on that.

The scale of capital spending in Asia does have a very significant impact on indirect jobs created by LNG plant construction and therefore the jobs benefit to people in BC.

Some LNG Economics

Making LNG from natural gas costs money and makes the natural gas that is delivered to the end client significantly more expensive than what is coming out of the ground.  One reason countries like Qatar and Australia hopped onto LNG was that their own national markets could not make use of the natural gas and exporting LNG was their only option.   Here in BC we are part of a the large North American market for natural gas.  

For natural gas to make sense to be made into LNG in BC it has to be cheap enough locally that the price after making the LNG does not make the product too expensive.   How much is too expensive and what does it cost to make LNG?

What I am looking at is what the cost would be to bring LNG from BC to Asia fob (free of burden) based on a 6 mpta (million tonnes per annum) train LNG plant on the north weat coast (a train in LNG terms is a single plant entity, some LNG plants have up to three or four trains, each train can be operated separately)

Capital Costs
Capital costs for the LNG plant and the pipeline - $15,000,000,000
Amortized over 25 years of 90% production levels is 6,561,000,000 MMbtu of natural gas, which is a capital cost of $2.29 per MMbtu over 25 years assuming zero percent return on capital

When you add the financing cost to the $15,000,000,000 capital cost and use a rate of 6% over 25 years this will add something like $14,00,000,000 to the project costs.  This adds another $2.13 per MMbtu to the price.  The 6% number is based on the average combined cost of debt and equity used in a number of large scale commercial projects in recent years, cheaper financing would reduce the costs.

Liquefying Costs
Based on the best information I can find it will be in the range of $0.90 to $1.35 per MMbtu
Assuming the cost of energy in BC is lower elsewhere and that the lower ambient temperature is a benefit, I am going with $1.10 per MMbtu

Shipping Costs
$1.40 per MMbut based on shipping costs from Australia and Qatar to Asia.  Since a lot of LNG producers own their own LNG tanker fleet there are fewer good data points for this than I had hoped for.  These costs rise much higher if one off charters are used so I have discounted those as comparable numbers

Regasification Costs
$0.30 per MMbtu based on US markets - this assumes none capital costs of the regasification plant are part of this equation

BC tax on the LNG
Assuming we end up with a 1.5% tax, this is $0.21/MMbtu based on selling the product for $14.00 per MMbtu.  This price and tax rate would be just a bit more than $55,000,000 a year in taxes to BC from a 6 mpta capacity LNG plant.

Total Cost of Producing and Delivering BC LNG Before the Input Natural Gas Cost
$7.43 per MMbtu

Current Henry Hub spot price for natural gas is $4.60/MMbtu which, when added to the other costs, brings the price to $12.03 per MMbtu.

On a price of $14.00/MMbtu this is a  reasonable profit but it would not take much to erase that profit margin.  LNG from BC is dependent on a continued price differential between North America and Asia of around $7.50/MMbtu.  

Ernst and Young did a paper on LNG pricing around the world and assumed a Henry Hub price of $4/MMbtu had the break even price for two of the BC projects at $11/MMbtu which is broadly in line with the numbers I have worked out and means a $7.00/MMbtu price differential as a minimum.  Ernst and Young found that the break even point for many of the new proposed LNG plants around the world were as high or higher than the BC projects

If LNG plants in BC did not need the pipelines to be built the cost drops by around $1.40/MMbtu.  It is the need to build the pipelines that is really pushing the BC LNG projects to the edge of economically feasible.

BC LNG makes some economic sense based on the current capital costs, but if the capital costs rise the projects become economically very marginal.   A 25% rise in capital costs would add $1.10/MMbtu to the cost of BC LNG.   The tendency of large scale capital projects is for pre-construction estimates to be low,   Bent Flyvbjerg at Oxford has studied this tendency in detail.

Be it $7.00/MMbtu or a $7.50/MMbtu price differential needed to make BC LNG economic, this is higher than the price differential has historically been.   BC LNG will only make sense as long as there is a glut of natural gas in North America and there is enough demand in Asia.  I do not have enough data to know what the state of the natural gas market in North American will be in five years or ten years time.  Without having some degree of certainty of the cost of natural gas in 2024 it would be hard to make a decision to go ahead with any LNG plant.

Some of my sources:
A paper on LNG plant costs and financing
Various reports and forecasts from the US Energy Administration
Timera Energy data various aspects of LNG
Ernest and Young paper on Global LNG pricing
IGU 2013 World LNG Report

Galore Creek as a cautionary tale for LNG

When I wrote up the factors that go into deciding if an LNG project will go ahead or not, I based it on close to 20 years of my analytical work in BC related to development on Crown Lands most specifically large scale mining projects.  There are many similarities between capital intensive mineral projects and LNG projects.   There are number of good mine projects to look at in BC, the two that come to mind are Mount Milligan that recently opened after close to 25 years of almost being developed and Galore Creek.

Galore Creek is one of the richest known undeveloped gold deposits in the world.  Galore Creek is located in North West BC about 150 kilometres northwest of Stewart BC as the crow flies or about 100 km west of Bob Quinn on Highway #37.

The fact it has not been developed when it came so very close a few years ago is a good reminder that even a very rich looking natural resource project does not work to tight timelines.   Galore Creek is an important cautionary tale when considering LNG in BC.

The Galore Creek Mine project was granted an environmental assessment certificate in 2007.  At that time the plans were for the mine to operational by 2010, which now four years in 2014 later it is not.  They  started construction in 2007 but shut down in 2008.

Galore Creek is not a small marginal project, it is a large project.

• It has a life of about 25 years
• It would have direct operational employment of 400 people and indirect employment several thousand, roughly on par with a large LNG plant
• It will mine about $600,000,000 worth of copper, gold and silver per year - in comparison the two most likely LNG projects in BC would require the extraction of about $4,000,000,000 in BC natural gas
• It will pay about $110,000,000 a year in BC Mining Tax
• It will offer the port of Stewart a major new client

Galore Creek is proven to have

• 5,450,000 ounces of gold - $7 billion
• 102,000,000 ounces of silver $2.2 billion
• 6,800,000,000 pounds of copper $22 billion
• For a total prove value of $31,200,000,000 in resources

Galore Creek is estimated to have a further

• 8,000,000 ounces of gold - $10 billion
• 136,000,000 ounces of silver $3 billion
• 8,900,000,000 pounds of copper - $28.5 billion
• For indicated estimate of $41,500,000,000 

This project has the potential to extract a value of around $72 billion in current day values.  So why has it not gone ahead?   Three major factors have stopped the project, escalating capital costs, the 2008 economic downturn, and the concern about long term mineral prices.

The 2008 economic downturn is over and the long term mineral prices are holding better than anyone had expected, but still there is no serious plans to develop the mine in the near future.  The pay back period for the capital is too long to make it a very attractive investment.

The latest plans for Galore Creek are not the first go around for the deposit.    The deposit has been on the radar for decades now having been extensively explored since 1955.  The first major attempt to move forward with a mine in 1974 and then again in the early 1990s.   The current plans are the third serious attempt.    With each iteration of the project the exploration has shown the deposit is bigger and richer than had been expected.

The reality is that many mineral deposits in BC take decades to go from initial discover to development.   There are no end of examples of significant deposits discovered more than 50 years ago that have not yet been developed.    Bringing a new mine online after all the approvals are in place takes three to five years of construction and is capital intensive upfront.   For a mine to make sense the capital costs have to repaid quickly and the mine has to have a reasonable chance to be profitable over the full 15 to 40 year lifespan.  It means when the construction starts you are looking out 20 to almost 50 years and trying decide on the economics.   For LNG the situation has a lot of similarities.

One of the biggest differences between Galore Creek and LNG is that the Galore Creek is a much smaller capital project with a better and faster pay back period.   Investing $2.5 billion in Galore Creek is a better bet than investing the same amount of money in LNG because I think almost everyone has a degree of certainty that gold and silver will retain a reasonable value in 25 years.

Another big difference between Galore Creek and the LNG projects is that the companies behind the LNG projects have a lot of their own capital and do not need to go to the market to get investment dollars.

Galore Creek has an estimated capital cost of $2.5 billion to bring in a primary economic value of $600,000,000 a year.  The two most likely LNG projects in BC have an estimated combined capital cost of  $30 billion in capital, 12 times the mine cost, for an total annual economic activity in BC of between $5 billion and $6 billion, or only eight to ten times the value of the mine.

LNG in BC is certainly not the best financial home-run for an investor.   I think given the borderline values and uncertainty into the future it is more than likely there will be delays in all the projects.   Companies can easily spend $100,000,000 playing around with the idea of BC LNG and then shelf the project indefinitely because the total spent is only in the range of 1% of the capital cost of the project.

The companies involved in the BC LNG projects are major global players and have a whole portfolio of projects they could consider.   BC is only only more 'card up their sleeves' if they need it.

If various major mineral deposits in BC can take decades to develop there is no reason to think LNG projects will not also take much longer to come online than people think.

An attempted projection of LNG jobs through to 2024

I have been trying to quantify what is likely to happen with LNG in BC, here is my attempt on the jobs side.

I believe only 2 major projects are probable in the next ten years, Pacific Northwest LNG, majority owned by the Malaysian government through Petronas, and LNG Canada, a partnership of Shell, Mitsubishi, KOGAS and Petro China    Between them and their related pipelines we should see a peak direct construction employment of 13,500 and ongoing direct LNG plant jobs of 550 - that number comes from the companies themselves.  With indirect employment the construction phase should peak at 38,800.  For total direct and indirect ongoing employment there too many unknowns to make a good estimate but it is much smaller than the Grant and Thornton numbers of up to 64,100 direct and indirect jobs.

I think of the other ten current LNG "proposals", four may happen but I would not put money on them, and the six others are nothing more than ideas at this time, some of them not very serious.

The current timelines for all the LNG projects are very optimistic.   The track record of getting large natural resource projects from the drawing board to operation tends to almost always be longer than than originally envisaged.   In this case both projects need pipelines to be completed as well.  Pacific Northwest LNG is scheduled to be operational in late 2018 and LNG Canada in 2019.  I think a three year delay is realistic for the two projects based on timelines for LNG plants, pipelines, mines and other capital intensive natural resource sector projects in first world countries.   This means operational dates of 2021 and 2022 and construction starting in a 2016 to 2017 timeframe.

Both projects are currently designed to be constructed in phases and at least in the case of Canada LNG no certainty on the second phase at all.  I expect there to be a capacity of 18 mtpa in BC by 2021.  I think there is a moderate probability of Pacific Northwest LNG expanding to 12 or 18 mtpa by 2025/26.  18 mtpa is 24.5 billion cubic meters of natural gas.  BC will produce around 45 billion cubic meters of natural gas in 2014/14 which means this projects represent a bit more than 50% of the natural gas currently produced in BC.

Both companies list how many jobs their project is projected to create based on their first phases:

• Pacific Northwest LNG projects 250 +-50 operations jobs and a peak of 3,500 construction jobs
• LNG Canada projects 300 +-100 operations jobs and a peak of 5,500 construction jobs in Kitimat
• The two pipelines should have about 3,800 to 4,900 construction jobs based on their own estimates.  

Here is my estimate of direct and indirect jobs from LNG - job means one full time position in a given year
Year    2016   2017   2018   2019   2020   2021 2022 2023 2024 
dir.   1,000  4,000  8,000 13,500 13,500  7,000 550* 550*  550*
indir. 1,900  7,500 15,000 25,300 25,300 13,000   x    x    x
total  2,900 11,500 23,000 38,800 38,800 20,000   x    x    x
* these are the direct jobs the companies estimate, I think there could more primary suppliers that should count as direct employment
x indirect employment is hard to estimate, see discussion below
For simplicity I assumed both projects come online January 1st 2022

Indirect employment in a large construction project is much easier to estimate than indirect employment at the operational stage.  I am using the same factor for indirect jobs that Grant and Thornton used because it broadly fits with BC Stats numbers.   That said, much of the indirect employment in the construction phase will not be in BC.  As an example, most of the parts will come from Asia.  It is hard to estimate how many of the indirect jobs will be in BC because we are not privy to the internal plans of the companies.  I think it is safe to assume that between 20% to 40% of the indirect construction work will be offshore.  It could be higher if fully finished sections of the plant are shipped from Asia.

On the operational end what should we count as indirect employment?  The natural gas production in BC or only an increase in natural gas production after the plants open?  All the people that supply natural gas production in BC, which is what Grant and Thornton seems to be doing to some extent? Are the direct jobs all the direct jobs or should some of the wholly dependent primary supplies be counted as direct jobs and how are they counted at the moment?

I could put numbers in for the indirect jobs for the operational era of the plants but they would be guesses.  Grant and Thornton had 25.7 times more indirect jobs than direct jobs for operations.   This factor seems suspicious to me.   If I were to apply it to the 550 operational jobs it would give us a number of 14,135 indirect jobs and this seems to be too many for the volume of natural gas involved.   Grant and Thornton do not provide anywhere close to enough data for me to be able to replicate their numbers.   Pacific Northwest LNG says there will be 200 to 300 indirect spin off jobs from their facility which sounds much too small to me though they could be talking about wholly dependent primary suppliers that should be counted as direct employment.  I think most of the indirect jobs in the Grant and Thornton report relate to jobs in natural gas production.  

I am not convinced that the existence of LNG plants in BC will mean an dramatic increase in natural gas production in this province.   In Canada we are likely to see the loss of our main market for natural gas in the next few years as the US ends up producing a lot more natural gas than they can consume.  The LNG plants may simply be an outlet for natural gas that becomes unmarketable in the rest of North America.

The normal number used via BC Stats to work out the impact of indirect employment in oil and gas is a factor of about 2.8, it varies based on where in the province you are.   The problem is that this factor is for the existing oil and gas extraction industry and not LNG.  If I were to use the 2.8 factor it could be completely off of the mark.

If I were generous and assume a total of 1,000 direct operational jobs from the companies and their wholly dependent primary suppliers and used a factor of 3 for indirect employment, I get to total of 4,000 ongoing permanent jobs.  I have no idea if I am in the ballpark, but I expect I am in the same city with the ballpark.   I am confident I am within astronomical accuracy 

I debated adding more construction jobs in the last two years to reflect a potential third LNG plant but I do not have data to justify making the leap of a third one being constructed, yet.  This could all change as we find out how serious or not the various companies are.  Projecting anything like this out ten years is always going to be highly speculative.   

It should be noted that the BC Stats population projections as of April 2013 out to 2036 do not show any significant growth in population in the Northwest

I do not work with induced employment numbers because I have yet to see any good quality academic grounding for the concept.  Induced jobs are ones that are claimed because the economy is larger due to the projects.  It is a logically false concept because the reasoning is circular.  One could make the argument that Starbucks causes induced demand in the natural resource sector.  Induced employment was created to make industries look more important than they are, it is a PR shell game and nothing more.

Current LNG projects listed by the BC government

Right now the BC Government lists a total of 12 different potential LNG projects in BC.   Here is my quick run down of them and how well they meet the board criteria to make the projects viable. I am looking at 2025 has the date they could be complete by given that the BC Government uses the early 20s as the time when we will see the bonanza from LNG.

Of the 12 projects the government list I see two as serious, four more with some potential and six that are nothing more than ideas.

The projects that seem serious at the moment - an investment decision should be made in the next 24 months

• Pacific NorthWest LNG has access to natural gas via the Prince Rupert Gas Transmission project owned by TransCanada Pipelines.  It also has a gas supply via ownership of Progress energy and since they own it the price of the gas is not an issue.  The project has deep pockets because of majority owner Petronas.  It has started the environmental assessment process.   Because it is owned by Petronas it would seem there is a market for the LNG though Petronas.  Given that Petronas is a government owned company, it may not be concerned about the medium or long term markets for LNG. 
• LNG Canada owned by Shell, KOGAS, Misubishi and Petro China and to be supplied by the proposed Coastal GasLink pipeline owned by TransCanada Pipelines   The Asian partners of the project have strong motivations to bring more LNG online especially Mitsubishi and KOGAS. 

Projects that clearly have some barriers to succeeding and until they are dealt with there is no path to an investment decision.

• Douglas Channel Energy Project This is small project compared to many others.   It was slated to start construction a year ago but nothing is happening.  I have to wonder if there is an issue with raising capital or in justifying the investment cost.
• Kitimat LNG is owned by Apache and Cheveron and will be supplied by the proposed Pacific Trail pipeline.  This project got an EA certificate in June of 2008 but still no the ground has not been broken.  I wonder if Chevron bought into this project to allow themselves some options in the future.  Chevron is currently involved the construction of projects totaling 30 mtpa and LNG is a new product line for them.
• Prince Rupert LNG owned by the British Gas group.   Through the proposed Westcoast Connector pipeline owned by Spectra Energy and BG Group they have a supply of gas.   At the moment the regulatory and planning work for the project does not seem to have started and all the timelines are very vague.
• Woodfibre LNG this is a small project near Squamish Fortis is proposing a 52 km pipeline link.  It is small enough and on an existing industrial site to effectively deal with a number of the issues that are barriers for the large projects.   The one major issue I can see is access to capital.

Projects that are really nothing more than ideas

• Aurora LNG Very early stages, all they have is rights to one of the two Grassy Point locations.  No supply of gas.
• WCC LNG Ltd Imperial Oil/ExxonMobil Canada  They have applied for a 25 year export permit.  They have no location yet and not pipeline.  
• Woodside LNG - Woodside has been granted the rights to use Grassy Point for an LNG plant.  Woodside has to get an export licence within a year.  No supply of gas
• Triton LNG A small project jointly owned by AltaGas and Idemitsu without a location or a natural gas source
• Discovery LNG Proposed for Campbell River of all places which would require a pipeline connection to the mainland.
• Kitsault Energy Project Not a project at all (though the BC government lists them) but a plea from the owner of the town of Kitsault offering his location for an LNG terminal.

Just because a project is not completed by 2025 does not meant it is dead.  A company could shelve a project for a couple of decades, the further we look into the future, the more likely we are going to be wrong to some extent as to what is going to happen.

If I were to guess what we will have in BC by 2025, I think it will be one large and two large LNG facilities with a total production of between 20 mtpa to 30 mtpa of LNG.

Factors to consider in LNG plant development viability

For an LNG facility to make an sense there are a number of factors to be considered and each one of them spells the end of the project if they can not be dealt with.  I am writing out this list of issues so that in future posts you can see how I decide if a project is likely or not.

The list of issues:

• Access to natural gas
• Access to a safe deep water port
• An export licence
• Environmental regulatory approval
• Secure land tenure
• Capital
• The price of natural gas in BC
• Buyers for the LNG
• The medium and long term market for LNG

Access to natural gas
This is an issue in BC as opposed to many other LNG locations around the world especially the United States.   It is not that BC does not have natural gas, what it lacks is the pipeline infrastructure to bring the natural gas to the north coast.

From the 2013 IGU World LNG Report:

7.4.3 CANADA COMMERCIAL RISKS: PROJECT COST (CAPEX). The commercial position of liquefaction proposals in Western Canada is weakened by the need for greenfield facilities, as well as the early stage of development of the shale gas resource play in Western Canada. Based on announced costs, projects in Western Canada face inexpensive liquefaction costs (~$1,000 /ton) relative to greenfield projects in Australia. However, a major factor affecting Western Canadian projects is the need for a long, expensive pipeline to bring gas from eastern British Columbia to the Coast. Currently, pipeline infrastructure in British Columbia is limited, with one major north-south trunkline and a smaller pipeline running west to the coast. As of may 2013, four projects have proposed building ~500 mile pipelines with costs of between $1,000/mmcf/d - $3,000/mmcf/d, which will significantly increase total project costs.

This means that any project that can not point to their source of natural gas is unlikely to be a serious project at this time.  

It is important to understand that the five proposed pipelines are not enough to supply all the LNG projects currently listed by the BC government.   If someone were to propose a new pipeline now, it is going to be eight to ten years before it is built.   This means that any project without a clear source of natural gas is nothing much more than a drawing board idea and is on the order of a decade away.

The total capital investment in the proposed pipelines is large and may make some of the proposed pipelines financially nonviable.  The loss of any one pipeline project will make some LNG plant proposals nonviable.

Access to a safe deep water port
This does not seem to be a problem in BC with numerous locations available.

An export licence
This does not seem to be an issue in Canada

Environmental regulatory approval
The process takes time and add costs to any project but is likely to be a barrier.  The various environmental regulatory requirements are a two to five year process to get through.

Until a company has started down this process, it is hard to consider their project as a serious one.

Secure land tenure
This is an issue in BC much more so than most locations around the world because of the lack of a settlement with First Nations.   As long as BC does not settle treaties with the First Nations, all tenures for the plants and pipelines are not 100% secure.

All I can say about the First Nations issues is that they are not as bad as they could be.

Capital
This is an issue on two levels, the first is finding the money to build and the second is how to fund cost overruns

Can the companies get the capital needed to build the plant?   For the large international oil and gas firms this should not be an issue, but some of the projects are being proposed by companies not on that scale and the money they need to raise is in the billions.   Without everything looking just right, these projects are unlikely to go forward.

For the global oil and gas companies with the deep pockets the BC projects have to offer a good enough return that it is better than other projects they could invest in.  Companies like Chevron and Shell have a whole planet to choose from.

The second issue is cost over runs.  The track record for LNG projects over the last several years has been to have significant cost over runs.  Cost over runs elsewhere are going to make companies wary of committing to BC projects given their need to ensure the capital is available to complete the projects already under construction.  All the major players in BC currently have LNG projects under construction somewhere else in the world.

Price of Natural Gas in BC
BC natural gas is not the cheapest to produce and this will matter if the end buyers want a price tied to the Henry Hub price.   As more and more shale gas close to infrastructure comes online around the world, the remote gas in places like BC's Horn Basin may have trouble competing in the market.

Buyers for the LNG
Normally in the LNG market there is a contract between the LNG supplier and an end client.   To date none of the BC based projects have contracts for their LNG.  This is where the American projects have a significant advantage over the BC projects.  Many of the American projects have buyers contractually committed already to their LNG.

There is an ever increasing spot market for LNG but this is risky for any project because the spot price can go well below the cost of production.  If spot prices start to offer LNG buyers on going cheaper prices, companies may become unwilling to sign long term contracts to buy LNG.

Medium and Long Term Demand for LNG
The capital investment to build an LNG plant and a pipeline is huge and requires a pay back period long enough to justify the initial capital.

At the moment there are 100 mtpa of LNG plant capacity.   This is a 27% increase in global LNG production capacity over the next four years.   That is a much faster rise in LNG capacity than demand for LNG.   By 2017 there should be about 366 mtpa of LNG capacity but likely only a demand of 280 to 290 mtpa.   There is going to be an issue with more capacity being available than demand by 2018.  Does it make sense to build 30 to 60 mtpa of LNG capacity in BC when there will be so much more capacity than demand?

LNG demand is also impacted by a host of other energy decisions.   As an example, if Japan were to ramp up nuclear power again that would remove the most significant increase in LNG demand seen in recent years.

To finish, there are many different barriers to LNG development and an executive with any of the companies proposing LNG plants in BC has to justify that the investment of billions of dollars   Much of what the companies could be doing in BC is keeping their options open.   The large cost of the projects means spending 1% of the value exploring an idea is a drop in the bucket.   For a $15,000,000,000 project that would be $150,000,000 which is a lot of money but still so small in the overall project that they can walk away from it without it financially impacting them.

LNG in BC and Jobs

I have been unhappy with the February 2013 Grant Thornton Employment Impact Review since it first saw last year before the election.   The report projects an average of 39,400 jobs per year directly, indirectly or induced from the construction phase and further 75,200 ongoing direct, indirect and induced jobs from the operation of the plants.   It bases this all on BC have five LNG plants operational by 2021 producing 82 mtpa (mtpa=million tonnes per annum) of LNG costing $98,400,000,000 to build.

These numbers are huge and need some way to test them for validity but the report does not give us the data to be able to figure out how they calculated the numbers.  The numbers have looked overly opotomistic to me from the start and I think Grant and Thornton felt the same, the final paragraph from their report reads:

We are not guarantors of the information upon which we have relied in preparing our report, and except as stated, we have not audited or otherwise attempted to verify any of the underlying information or data contained in this report.

They are saying they just used the numbers provided to them and have no idea if they are accurate.

What I would like to try and do over a number of posts is to figure out what the reality of the situation is.

Here are the questions I want to try and answer:

• Is 82 mtpa of LNG realistic from BC?
• What LNG plants are more likely to be built and when?
• What is the capital cost of the projects?
• What are the timelines of the projects?
• How many direct jobs will each plant produced?
• How many of the in direct construction related jobs will be offshore?

I am sure more will come up as I work through this, but this is a start.  If you have questions that I should try and figure out with respect to this, drop me a line or leave a comment.

Grassy Point proposed LNG terminal location

One the proposed locations for LNG terminals in BC is at the north western most part of the Tsimpsean peninsula.  Four companies have responded to the provincial governments request for proposals for the site - Nexen, Woodside Petroleum of Australia, SK E&S of Korea and Imperial Oil.  I honestly have not understood why the interest in a site so far from the existing infrastructure.

The location for the proposed Grassy Point LNG terminals is only about 10-12 kilometers from Port Simpson but 40 to 45 kilometers from the end of the road in Prince Rupert.   To access the location at Grassy point about 30 kilometers of new road will have to built and 12 to 15 kilometers of the existing road to Port Simpson from the ferry terminal at the head of Tuck Inlet would have to be upgraded.  As well there will have to be a 500 to 600 metre long bridge over Fern Passage.

I do not know what it would cost to build this road but I am assuming the province will absorb that cost and not the LNG plants themselves.   Whatever the cost to the province, the road would have benefits beyond the LNG plants

The construction of the road will be of huge benefit to Lax Kw'alaams.  With close to 800 people in Port Simpson, they are amoderate sized community with no connection to the highway system of the province.  At the moment you need to take MV Nicola from Prince Rupert to get to Port Simpson.   The trip is too long for people to live at Port Simpson and work in Prince Rupert and consequently the on reserve population is not nearly as high as it could be.

One problem many remote First Nation communities have in BC is the difficulty in getting the membership that gets an education to move back.   There are simply not enough opportunities for people to be able to move home and make a living.   Connecting Port Simpson by road to Prince Rupert will have solve this problem for Lax Kw'alaams.

The construction of LNG terminals at Grassy Point would also lead to a demand for local services for the site and those services would most easily come from Port Simpson.   This would be an important source of jobs and economic activity for the community.   If Law Kw'alaams is willing to consider it, development of reserve lands could allow them to raise revenue from property taxes and get them some independence from Indian Affairs.

How far down the road to committing to building an LNG plant will a company have to go for the province to step in start the construction of the road?   I assume ideally the road would be complete before the construction of the LNG plant would begin.

Another cost is the construction of the powerline to Grassy Point.  Once again I assume the costs will be borne by the government of constructing a large enough transmission line.   The current power line running to Port Simpson is nowhere close to what would be needed for an LNG plant.

One major objection that will be raised against the use of Grassy Point is that the northwest tip of the Tsimpsean peninsula is unroaded wilderness.   Are there not better locations closer to Port Edward or have all the good spots been taken already?   In the environmental assessment process this issue will be the major hurdle the government and companies will have to overcome.   If there had been existing logging roads it would be a lot easier within the process.

I am still not convinced of the economics of LNG for the long term.  So far companies have not had to put much money down.  I am still afraid the provincial government is going to be on the hook for a lot of costs up front with no guarantees of success.  My skepticism will lessen when actual construction work begins on at least on LNG plant.