Commercial success of the much-delayed Shell-led C$40 billion LNG Canada venture is becoming more and more certain after Japan’s JERA Co Inc. signed a Heads of Agreement (HoA) to offtake up to 1.2 mtpa of liquefied natural gas for 15 years starting from April 2024. Other firm offtakers from LNG Canada include the utility-buyers Tokyo Gas, Toho Gas and Korea Gas, as well as the global trading house Vitol.
JERA’s latest HoA is for the purchase of up to 16 cargoes of LNG a year from the LNG Canada venture, and the Japanese buyer said this deal will “contribute to stable and economical LNG procurement in the future.” The destination clause in this offtake agreement with Royal Dutch Shell is in line with the survey on LNG trades report released by the Japan Fair Trade Commission in June, 2017, and JERA said that it believed this will help it respond appropriately to LNG supply and demand uncertainty and optimize its global gas portfolio.
Striving to boost its medium-term LNG purchase activities, JERA recently announced an overhaul of its business structure. In the short run, the company said it wanted to expand its LNG carrier fleet to achieve 3.6 trillion yen ($33 billion) of sales in fiscal 2019. By boosting its shipment capabilities, JERA is preparing to cater for an anticipated rise in gas-burn in the Japanese power sector through 2030. The scale of that rise hinges on the speed of nuclear restarts and renewable penetration.
Shell adamantly advances the project
Determined to get the project off the ground, Shell has been pressing ahead on LNG Canada while recognizing that it was likely not possible to get unanimous support for a major infrastructure venture. Situated in the Port of Kitimat, BC, the LNG Canada project is the largest private sector investment in Canada's history with spending of C$40 billion (US$30.2 billion).
Together with its four partners, Mitsubishi Corp. of Japan, the Malaysian energy company Petronas, PetroChina and Korea Gas Corp., Shell decided in October 2018 to start immediate construction at the brownfield site near Kitimat. The site had had been an energy products terminal before Shell bought it in 2011.
In April, the project partners of LNG Canada handed over construction management to their prime contractor, JGC Flour.
Dispute over feeder pipeline
Project partners, motivated by Shell, keep moving ahead with the LNG Canada venture - in the full know that there would be still obstacles to overcome before Canada’s largest LNG export project will commence full operation. One such issue is the quarrel with environmentalists over the Coastal GasLink feed-gas pipeline.
The LNG Canada project keeps advancing despite a dispute over the Coastal GasLink feed-gas pipeline. The US$5-billion pipeline, stretching over a length of 670 kilometres, is being developed by TransCanada Corp. to bring the feed-gas from the Montney shale basin in northeast BC to the Pacific Coast.
“I do not see a single scenario that would cause the construction of this pipeline to be stopped,” said Andy Calitz, LNG Canada’s CEO. Opponents mounted a legal challenge, claiming the pipeline was a federal undertaking and should have sought approval from the National Energy Board, rather than the province of British Columbia. The federal regulator agreed in December to consider the jurisdictional challenge and has requested evidence from all the parties.
“It’s a complex world, the paths are not clear,” said Calitz, pointing out that any decision by the federal regulator could later be appealed in the courts. “But what I am clear about is that this pipeline, by the time that happens, will be in advanced construction.”
TransCanada is also seeking to sell a stake in the pipeline project. Calitz said that the pipeline company’s stake sale was expected and did not reflect concerns about greater risk. “It has always been a part of the financing strategy for the project,” Calitz said, suggesting “the sale plan has no impact on either the construction or the capacity or any other aspect of the project.”
Room for expansion
Momentum is growing in the BC gas market, and the consultancy Wood Mackenzie stated it now believes the LNG Canada project partners will move ahead with the second phase of the giant project later this year.
“There is a light at the end of the tunnel,” Dulles Wang, director of Wood Mackenzie North America, said with reference to the low prices and limited market western Canadian gas producers have been coping with at home. “Our view,” he said, “is that all four trains will be [underway or sanctioned] before the end of 2020.”
Train-1 and 2, now under construction, will export 1.8 Bcf/d of gas and the addition of Train-3 and 4 would bring that total volume to about 4 Bcf/d. Mr. Wang reckons the next two trains could be built for much less than $40 billion, since key infrastructure will be in place.
There is little doubt among LNG experts that the demand will be there for these gas supplies by 2023 or so, when all four trains of LNG Canada will go into operation. Currently, western Canadian gas production stands at about 16 Bcf/d, so the start-up of 4 Bcf/d of export capacity is likely to alter the balance in the domestic market.