British Columbia is finalising tax rules for companies seeking to export Canadian natural gas to Asia. But energy experts question how many of the dozen export terminals planned for the Pacific coast will actually get built.
Other countries, including the United States, are ahead of Canada in the race to export liquefied natural gas (LNG), a fuel that fetches far more in energy hungry Asia than in North America.
The province says it is days from presenting details on the taxes to industry, with a final deal expected by year-end. It is looking at a tax on income, not a levy on export volumes, and says British Columbia will remain competitive.
With strict timelines on how quickly authorities must move ahead on permits for terminals, and support from aboriginal groups, the tax plan should put LNG exports on a faster track than the stuttering bids to export crude oil from the province.
But the danger is that the market gets saturated before much of the development occurs, given that terminals are under construction in Australia, the United States and elsewhere.
“There’s a huge amount of uncertainty about where all this is headed,” said Rodney Northey, a partner at Gowlings law firm in Toronto with more than 20 years experience in resource and infrastructure regulation. “I think even the proponents would concede there are far more projects out there than can feasibly feed the market.” Canada is the world’s No. 3 producer of natural gas, all of which currently stays in North America. Regulators have okayed export licences for three LNG projects, and are reviewing six more. No final investment decisions have been made, despite hundreds of millions of dollars in development costs.
The United States has approved five export licences since May and has more than 20 in the queue.
Most analysts say less than five terminals will ultimately be built in Canada, with issues such as competition, high capital costs in the remote north and a shortage of skilled labour as potential barriers to development. It is even possible that none go ahead at all.
Energy companies from Asia and North America are waiting for decisions on permits and sales contracts, along with details on the export tax, to finalise investment, although the tax is not seen as a deal-breaker.
Rich Coleman, British Columbia’s Minister of Natural Gas Development, gave no clues on the likely tax rate, but insisted that, even with existing production royalties and taxes, the rate would be globally competitive.
British Columbia has made natural gas exports to Asia its top economic priority, seeing it as a path to billions of dollars in annual tax revenue and the transformation of its economy in the way oil sands made Alberta richer.
“I’m pretty comfortable with where we are at this stage,” Coleman told Reuters. “It’s not a conversation about ‘if,’ but rather a conversation about ‘when,’ and I’ve seen that shift in the last four or five months.” Coleman played down concerns about rivals, citing British Columbia’s shorter shipping distances to Asia, Western Canada’s massive Montney shale field, and Canada’s cold climate, which lowers the cost of cooling gas for shipment.
“I think the competitiveness and price will be there,” he said. “And the resource we have is so great, it is so steady, that someone can make an investment decision here and know that they will have supply for 100 years plus.” British Columbia has tried and failed to foster LNG exports before, but coastal terminals were simply too expensive at a time when there were ready US customers for Canadian gas.
But a shale gas boom has nudged the United States closer to energy independence, sending natural gas imports from Canada to a 20-year low. Canadian producers need new markets.
“Traditionally, we never needed to make that huge capital investment to get our gas out of North America, because the United States would buy everything we had,” said Cameron Anderson, an energy lawyer with Stikeman Elliott in Calgary.
“But the Americans are awash in oil and gas now and for the foreseeable future. That’s the huge impetus to get these facilities up and running.” The end game is Asia, where natural gas prices are over $15 per BTU compared with about $2 at the British Columbia wellhead.
Liquefaction and transportation cost $6 or $7, so billion-dollar export terminals are now viable.
Securing long-term sales contracts remains a hurdle, and Canadian deals lag those south of the border. Cheniere Energy Partners LP, for example, has sold all the output from its Sabine Pass liquefication project in Louisiana, while Freeport LNG has made deals with Toshiba Corp and SK E&S LNG.
“There is intense competition, not only in North America, but frankly worldwide,” said Greg Kist, President of Pacific NorthWest LNG, a Petronas-backed project near Prince Rupert.
The Malaysian energy company plans to spend $35 billion on its Canadian gas business, including a terminal and pipeline, with the first exports targeted before the end of the decade.
Based only on the projects with export licences, Canadian LNG exports could top 30 million tonnes a year by the end of the decade.
US exports should hit 37 million tonnes a year by 2020, while Australian exports should rise to around 80 million, in line with current output from top LNG exporter, Qatar.