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Canadian LNG plans held back by uncertain costs

05.13.2014  | 

British Columbia is trying to erase its debt with royalties and fees it plans to charge the LNG industry. It introduced details of its tax in February and is scheduled to seek approval from the legislature in the fall.

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By REBECCA PENTY and GERRIT DE VYNCK
Bloomberg

Companies considering liquefied natural gas exports from Canada to Asia need more assurances about costs before they can proceed, said Greg Kist, who heads a proposal led by Petroliam Nasional Bhd.

“We’re trying to get to a point of some level of high degree of certainty,” Kist, president of the Pacific Northwest LNG consortium, said Tuesday at the Bloomberg Canada Economic Summit. “Foreign capital’s concerned about wage inflation, the tax environment and about our ability to actually deliver in a timely fashion on environmental assessments.”

Energy companies are competing to build gas shipping terminals on coasts around the world to meet rising demand for the fuel. Global LNG demand by 2030 is expected to almost double 2012 consumption of about 250 million metric tons, as Asian economies expand and shift from coal and nuclear generation, according to an assessment last year by Ernst & Young.

There are 17 coastal LNG proposals to process a total of at least 28 billion cubic feet/day of gas, consultants Bentek Energy estimated last month. Among Canadian proposals by companies including Royal Dutch Shell, Chevron and Petroliam Nasional Bhd, no final decisions have been made. LNG exports from British Columbia will reach 1.8 billion cubic feet/day by 2020, according to Bentek.

Tax Certainty

An agreement with the British Columbia government signed this month by Petroliam Nasional, the Malaysian state company known as Petronas, will guarantee certainty around taxes and other fees for the company and its partners required for them to make a decision on whether to move ahead this year, Kist said.

British Columbia is trying to erase its debt with royalties and fees it plans to charge the LNG industry. The province introduced details of its tax in February and is scheduled to seek approval from the legislature in the fall.

At stake is the development of vast stores of gas trapped in shale formations across Western Canada. The Montney, which straddles British Columbia and Alberta, is estimated to have 449 trillion cubic feet of marketable gas alone, enough to supply Canada for 145 years at 2012 consumption levels, according to a January study by regulators in the two provinces and the National Energy Board.

Energy producers are seeking new buyers for their Canadian gas after modern drilling technologies let companies unlock previously inaccessible supplies from tight rock buried deep underground across North America, flooding the continent’s market with the fuel and depressing prices.

US Imports

US imports of Canadian gas by pipeline fell 22% in 2013 from five years earlier, according to data from the US Energy Information Administration, as the largest consumer of Canadian gas meets more of its own demand.

As competition intensifies with proposals in Australia and Mozambique, Canada is poised to bring online at most two projects by the end of the decade, Jeff Lyons, a partner at Deloitte who runs the company’s mergers and acquisitions advisory business from Calgary, said at the conference.

The LNG industry’s long-term potential depends on taking lessons from the oil sands and keeping project cost escalation at bay, said Dave Collyer, president of the Canadian Association of Petroleum Producers, who also predicted there may be two built over the same period.

“It’s about getting an industry off the ground,” Collyer said.



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