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Western LNG export projects fizzle as demand shrinks, opposition mounts


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Western LNG export projects fizzle as demand shrinks, opposition mounts

Once poised to help satisfy Asian natural gas demand by theend of the decade, West Coast LNG export facilities now face gloomy prospectswith steep economic and regulatory hurdles.

Withexport authorizations in hand by mid-2014, LNG projects along British Columbiaand Oregon's coast faced the task of signing commercial agreements and gainingenvironmental approvals to enter what appeared to be a conducive economicenvironment. World landed LNG prices in Asia wereonly 18 months away from spikingto $20/MMBtu and still hovered about $10/MMBtu.

Butthe global commodity price collapse continued through 2014 and beyond,accompanied by shrinking demand forecasts for LNG and a looming supply glut.The collapse dashed hopes and expectations that the West Coast would assume acrucial role in the global natural gas trade by 2020. Of the 20-plus projectsproposed for British Columbiaand Oregon, none have made it to a final investment decision.

"Fiveyears ago, the number-one provincial priority in the B.C. was to get five LNGterminals up and running," Rick Smead, RBN Energy's managing director ofadvisory services, said in an interview. "It was basically the centerpieceof their energy policy; they just ran into bureaucratic problems andenvironmental resistance in the face of a weakening market."

Giventhe current oversupply of LNG depressing prices, West Coast projects must nowlook beyond the end of the decade, if they plan to move forward.

"Youtypically see a four-year lead time in terms of construction, so we're alreadyin a post-2020 period for Canadian LNG to start up," Wood Mackenzieanalyst Alex Munton said. "We really think it's going to be another coupleof years before you see the next North American FID."

OregonLNG is just the latest West Coast project to . Before its backers gave in to the market , in early February thatit was postponing a final investment decision for the project, which waspreviously expected by mid-2016. And at the end of February, that the Douglas Channel LNGproject's consortium "has been unable to secure meaningful offtakeagreements" as the international supply-demand imbalance continued.

"Thereare certainly more delays coming," Citigroup energy strategist AnthonyYuen said in a recent interview. "This is similar to almost 10 years agowhen you had the U.S. looking to build a lot of import facilities. As we sawthen, announcing these terminals doesn't mean construction will actuallyhappen."

WoodfibreLNG Ltd., whose LNG export project received environmental approval in March,may be the next one to bow out since it has no firm offtake agreements.

"Do I think they're in a good position to raisecapital? I would say no," Raymond James & Associates Inc. analystPavel Molchanov said in a March interview. "If this was [] or something like that,that would be different. But capital for a small private company for this kindof project can be a very vast sum."

Theonly potential exception in Canada may be the C$36 billion -ledPacific NorthWest LNGproject in British Columbia, which reached a conditional FID in 2015.

PacificNorthWest continues to face opposition from First Nations and environmentalgroups, and it still struggling through its permitting process. In March,Canadian Minister of Environment and Climate Change Catherine McKenna addedthree months to "the legislated timeline for the project," after theCanadian Environmental Assessment Agency concluded in its draft environmentalassessment that the 12-mtpa project is "likely to cause significantadverse environmental effects."

"WithPacific NorthWest, it was a kind of willful ignorance on the part of Petronasand some of the other off-takers," said Katie Bays, an energy analyst atHeight Securities LLC. "I think they really see a long-term economicjustification for the project, and continue to sort of hammer away at thisend-of-decade target. But I'm sure they're aware of the reality that Canada isstill figuring out how to permit a lot of these [projects]. Plus you've got [a]new and less supportive leadershipat the national level."

Thereis no doubt that Petronas is feeling the crunch, however. , the company'sCanadian unit, plans to cut its CapEx for Pacific NorthWest LNG to C$500 overtwo years, from C$5 billion over three years, Canada's Financial Post reportedApril 13.

Asianofficials have also warned Canada that Pacific NorthWest LNG faces moredemand-side delays. Kenjiro Monji, Japan's ambassador to Canada, in a recent letter to theCanadian Environmental Assessment Agency that the country must act promptly todevelop the project or have to wait as long as a decade for the same access toAsian buyers.

Oregon in limbo

South of the Canadian border, the future for 's LNG exportproject in the port of Coos Bay, Ore., is murky but not as bleak as othercompetitors.

Although FERC, in March, rejected the Jordan Cove LNG project and the proposedPacific Connector Gas Pipeline LPthat would provide supply, recent agreements signal market for the development.

"There is a very keen interest amongst Japanese buyersto have a West Coast LNG export facility in the U.S.," Munton said.

The developers, JordanCove Energy Project LP and Pacific Connector, recently a request for rehearing ofFERC's order that denied their application to build and operate the facilities.

"The issue really is of course the timing, and [Asianbuyers] certainly don't want to be signing up for six or seven million tonnesof additional LNG coming online around the 2020 mark when it's not going to beneeded," Munton said. "It is a project that we think Japanese buyerswill want to see happen, but at a later stage, so it's a difficult balancingact in terms of how long Veresen will be willing to support sales team andadministrative overheads, and all the other costs associated with keeping thatproject alive if it's going to be several years down the road before they getany other meaningful commitments from buyers."

The type of preliminary agreements that Veresen hasconcluded may also indicate whether the project has enough capital to survive.

"There are two kinds of LNG projects: the ones that arewell-capitalized which are offering buyers an LNG product, and then there areother projects that are not as well-capitalized and therefore can't reallyafford to enter into the gas supply agreements they need in order to offer anactual LNG product to buyers. Instead they offer buyers the right to liquefygas at this facility, which is a tolling contract," Bays said. "That'swhat Jordan Cove is offering. If Jordan Cove is only able to sell people ontolling, to me that suggests above and beyond everything else that it's notparticularly well-capitalized, and that they simply don't have enough capitalto keep this around."

FERC's March 11 order found that the "generalizedallegations of need proffered by Pacific Connector do not outweigh thepotential for adverse impact on landowners and communities." Thecommission then concluded that authorization for Jordan Cove LNG would beinconsistent with the public interest because "without a source of naturalgas … it will be impossible for Jordan Cove's liquefaction facility tofunction." The preliminary tolling agreements Veresen has nailed downsince the order's issuance bring Jordan Cove's potentially contracted capacityto 3 million tonnes per annum — or roughly 0.4 Bcf/d — of the terminal'sapproximately 0.9-Bcf/d capacity.

If FERC denies Jordan Cove's request for rehearing, theproject can appeal that decision in the U.S. Court of Appeals within 60 days ofthe commission's order. Veresen hadplanned to reach a final investment decision in 2016 after receiving notice toproceed with construction from FERC, and Bays added it still has the bestchance out of all proposed West Coast LNG export projects.

"We have been negative really on all of them," shesaid. "Jordan Cove was the one we felt had the best chance of success, andFERC delays notwithstanding, Jordan Cove still probably has the best chance ofsuccess."