Canadian LNG export proposals challenged by supply overhang

By REBECCA PENTY
Bloomberg

Competition hasn’t been this stiff for liquefied natural gas (LNG) developers since Alanis Morissette released her hit ‘You Oughta Know’ in the 1990s. The title of the Ottawa-born singer’s song could serve as a warning for the nascent Canadian industry.

Companies backing LNG export proposals on Canada’s Pacific Coast need to keep costs low for their projects to survive as a global surplus of the fuel emerges like two decades ago, according to developers with LNG ventures in British Columbia, including ExxonMobil, Royal Dutch Shell and Chevron.

“The situation that world LNG faces right now is quite similar to the 1990s, especially the late 1990s, where there was a supply overhang,” Andy Calitz, CEO of the Shell-led LNG Canada proposal, told reporters after speaking at a conference on Wednesday in Vancouver. “Only the most competitive, in terms of cost of supply and the projects which are best connected to markets, will survive.”

Analysts including Citigroup’s Ed Morse have cast doubt on Canada’s ability to deliver LNG export projects this decade. The market is entering a period of oversupply and demand is slowing in Asia, just as the oil slump has lowered prices for LNG along with companies’ ability to finance projects. Adding to challenging market conditions, a new pricing model from US projects is causing developers and buyers to rethink contract terms.

New Supply

More than 140 metric tons of new LNG supply is under construction globally and just a third of that is committed to long-term contracts, Steve Lidisky, president of ExxonMobil LNG Market Development, said at the conference. The glut will start to ease past 2021, and the current oil price rout offers a chance for proponents to reduce costs and keep Canada in the game like Qatar did in the 1990s, Lidisky said.

“The dramatic drop in energy prices provides the catalyst today for a cost shakeout, and only the strongest projects from financially strong developers will succeed,” Lidisky said. “This current low oil price environment provides the opportunity to get it right on the cost side.”

Canada has already missed the window to bring on LNG supplies this decade as Australia and the US have moved faster, Morse, the head of global commodity research at Citigroup, said last month in an interview.

Lost Window

“This window will come back again but for this round, it’s been lost,” Morse said.

Canada’s LNG industry benefits from cheap gas supply and a short shipping distance to Asia, while it faces higher labor costs than competing regions, Calitz said on Wednesday.

Chevron is focused on reducing the cost of its Canadian LNG proposal with Woodside Petroleum, Alan Dunlop, vice- president of Chevron’s Canadian division, said in Vancouver.

Pacific NorthWest LNG, the venture led by Malaysia’s Petronas, sees Canadian LNG exports being competitive, said Michael Culbert, CEO of the project. The Petronas-led project is ready to start construction, pending final Canadian regulatory approval.

Developers have pitched 20 LNG export projects for Canada’s Pacific Coast and none have started construction. The industry, which has spent C$12.5 billion ($9.7 billion) to date in British Columbia, is poised to succeed, Premier Christy Clark said at the conference.

“I’m an optimist,” Clark said. “Optimists make change.”

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