Dispute over costs could further delay LNG Canada feedgas pipeline: Operator

A dispute over increased costs to build a 2.1 Bcf/d natural gas pipeline that will feed the Shell-backed LNG Canada export project in British Columbia could further delay completion of the pipeline, operator TC Energy said July 29.

Delays in delivering Coastal GasLink, which is less than 50% complete with a current in-service target of 2023, could impact the timing of startup of the liquefaction terminal's two-train 14 million mt/year first phase. The LNG terminal was already expected to cost substantially more and take longer to build than comparable US LNG terminals that are under construction or being developed.

The expectation that global LNG supplies will tighten over the next few years makes it important that LNG Canada hit its current target to export its first cargo by 2025. The facility is being built at a strategic location near Kitimat, with the ability to deliver cargoes to the key East Asia import market in less than half the time that terminals on the US Gulf Coast can.

"While commercial discussions are ongoing and we remain committed to successfully completing the project, we are nearing a critical stage that requires resolution of the issues," TC Energy CEO Francois Poirier said about Coastal GasLink during his company's second-quarter earnings call.

The terminal and the affiliated feedgas pipeline are expected to cost up to $33.3 billion (C$41.4 billion). That is based on four liquefaction trains ultimately being built, at $1,000/mt, and TC Energy's latest cost estimate (at the July 29 exchange rate) for the pipeline.

Changes in scope, permit delays and impacts on construction from the coronavirus pandemic are being blamed for the pipeline's cost overruns.

According to TC Energy, from December 2020 until April 13, in response to the pandemic, British Columbia health officials restricted the number of workers on industrial sites across the northern portion of the province, including Coastal GasLink. Major erosion and sediment control work was required in the absence of continued pipeline construction during the winter period.

As a result, TC Energy expects project costs to increase significantly along with a delay to project completion compared with the original project cost and schedule. Coastal GasLink expects incremental costs will be included in the final pipeline tolls, subject to certain conditions.

The dispute with LNG Canada involves the recognition of certain costs and the impacts on schedule. If a resolution is not reached in the near term, Coastal GasLink may be required to suspend certain key construction activities, TC Energy said. That would almost certainly further delay the pipeline project.

Terminal schedule

In an email responding to questions, LNG Canada said it is committed to exporting its first cargo "by the middle of the decade." When the terminal was sanctioned in October 2018, the backers said they expected first exports "before" the middle of the decade.

"We remain concerned with TC Energy's proposed cost increases and schedule performance on the Coastal GasLink pipeline, which are well beyond what was agreed to," LNG Canada said. "We have been working hard with TC Energy to understand the reasons for the increase in cost and schedule, and we have provided recommendations on improved execution efficiency. Together with our joint venture participants, we are working towards a commercial solution with respect to how increased costs are addressed moving forward."

LNG Canada cited commitments TC Energy made at the time of the final investment decision to build and operate the pipeline.

"Our priorities are on a pipeline that is constructed safely and on schedule, under competitive terms, in order to deliver this critical infrastructure that will connect Canadian natural gas to growing global markets," LNG Canada said.

Other partners

In late 2019, TC Energy entered into an agreement to sell a 65% equity stake in Coastal GasLink to private equity firm KKR and Alberta Investment Management Corporation on behalf of certain AIMCo clients. TC Energy is also giving indigenous First Nations groups an option to acquire a 10% equity stake in the pipeline.

The pipeline's equity partners are said to be involved in the talks with LNG Canada about how to divvy up the additional construction costs.

Shell holds a 40% stake in LNG Canada, followed by Malaysia's Petronas with 25%, PetroChina and Japan's Mitsubishi with 15% each, and South Korea's Kogas with 5%. Each joint-venture participant is responsible for providing its own supply of gas and marketing its share of LNG that will be produced at the facility.

Mitsubishi has agreements to sell volumes from LNG Canada to Tokyo Gas and Toho Gas, while Kogas has said it would import 700,000 mt/year of LNG from LNG Canada for 40 years. Commodity trader Vitol has a 15-year deal that begins in 2024 to buy up to 800,000 mt/year of LNG from Petronas, partly through its stake in LNG Canada.