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China relationship key to Canada's LNG export future


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China relationship key to Canada's LNG export future

Healthy stakeholder relationships, British Columbia's proximity to Asia and lowering construction costs were crucial to LNG Canada's success in reaching a final investment decision.

➤ Long-term off-take contracts remain relevant even as many LNG export projects have opted for an equity financing model.

➤ Petronas approached LNG Canada about becoming a partner after canceling its own British Columbia export project.

As CEO of the joint venture LNG Canada export project in British Columbia, Andy Calitz oversaw the first final investment decision in western Canada as competitors either dropped out or faced delays.

Capable of producing 14 million tonnes per annum of LNG, the Royal Dutch Shell PLC-led enterprise — whose partners also include Malaysia's Petroliam Nasional Bhd., Japan's Mitsubishi Corp., PetroChina Co. Ltd. and Korea Gas Corp. — was sanctioned in October 2018 after facing capital constraints and low LNG costs. At CERAWeek by IHS Markit, S&P Global Market Intelligence sat down with Calitz to talk about how LNG Canada cleared hurdles, the project's relationships with Asian countries and the industry's evolution. The following is an edited transcript of that conversation.

SNL Image

LNG Canada CEO Andy Calitz

Source: LNG Canada

S&P Global Market Intelligence: LNG Canada made a final investment decision without having to secure the usual long-term off-take contracts that have typically been used to underpin projects. Has the equity financing structure displaced that model?

Andy Calitz: In some ways, yes, the old model has just been completely changed. ... I think long-term contracts will remain, but the reasons for those were security of purchase and security of off-take to underpin financing, which has changed because now a significant number of players can do their own financing on their own balance sheet.

Many developers have tried and failed to build LNG export projects in western Canada, facing obstacles that include opposition from environmental groups and First Nations. What proved the winning strategy for LNG Canada?

The first thing was that in a complex basin of western Canada we ... built relationships with stakeholders over a six-year period. ... It was about understanding their interests, understanding the role they could play in the project, understanding what benefits they were looking for and understanding what support we needed from them. ... When it comes to the environmental impact assessment process, the fact that host nations' insights into the area where they've lived for thousands of years could be incorporated in the project description before it was submitted to the regulators, that made a difference.

The second thing is we managed to clearly develop the two biggest advantages of a western Canadian project against the naysayers who said it could not competitively be done, and that was the short shipping distance [to Asia] and really low-cost gas, even lower than Henry Hub. ... We had to overcome the one big disadvantage, which was high construction costs in western Canada. By going back to market and having four consortia bid for it, we got a reasonably competitive price. ...

The third part was the provincial and federal government and 23 First Nations really wanted this project, and we could fit into their agenda of resource development and economic development.

Do you think LNG Canada had an easier or more difficult time than U.S. export projects when it came to the regulatory permitting process?

Specifically when it comes to the environment we had it much harder. Canada is extremely demanding, and rightly so, in terms of its position on greenhouse gas emissions and its role in the world. ... As a result of the fact that we are in the biodiverse province of British Columbia, the Canadian regulators are also extremely sensitive to any impact on biodiversity and species. ...

In terms of process ... we got our approvals on time, and I think the overall framework has been more stable and clearer than the [Federal Energy Regulatory Commission's] framework in the U.S., and I thank Canada for that.

Petronas, which canceled its own British Columbia LNG export project, became a part of the LNG Canada venture. Can you talk a little bit about the process of bringing them on board and how the partnership materialized?

They came to the conclusion after years of work that the development on Lelu Island, but they had already acquired the upstream assets of Progress Energy Canada Ltd. ... They came to talk to us, they talked to a number of other players in the area, and in the end we found a deal that made sense for them. The fact that they also already knew PetroChina, Kogas, Mitsubishi and Shell helped in the process.

Do you think we'll see another LNG export venture in Western Canada commercially sanctioned anytime soon?

I wish [those projects] well and I hope there is another one in time so that the absolute abundance of both upstream gas supply, the support that western Canada has from Asia and [support] the provincial government of British Columbia has for LNG will all provide further impetus for more development.

Did trade tensions between the U.S. and China prove favorable to LNG Canada?

To be frank, no. It had no impact ... on the FID decision at all. There is a fundamentally good relationship between ... Canada and China, the current matter of Huawei Technologies Co. Ltd. notwithstanding ... PetroChina feels welcome in British Columbia and Canada, and I think that has probably been the most important part of this joint venture. ... They're not silent partners in this project.

What is the biggest change in the LNG market that you have seen during your tenure in the industry?

From my Sakhalin Energy days [in the early 2000s], I thought Japan would dominate world energy imports for a long time, and I'm quite surprised that even despite the arrival of pipeline gas from Central Asia and Russia into China that ... Chinese demand growth has just ramped up, and with that, China's willingness to pay international market prices for LNG. We thought for a long time that was unaffordable. The second change was the rapid reversal of the U.S. from being an LNG importing country to what is arguably going to be the biggest exporter.