LNG projects hit supply snags

COMMENT: Gateway Pipeline down. Kitimat LNG not far behind ...

Proposed terminals in B.C.’s north stalled as gas competition grows and costs head skyward

Krisendra Bisetty
Business in Vancouver
January 16-22, 2007

The future of close to $1 billion worth of liquefied natural gas projects in B.C.’s north is being threatened by acute commodity supply constraints and upwardly spiralling capital costs.

Kitimat LNG’s $500 million plant was scheduled to have broken ground in the northwestern B.C. city this spring, but the project has been pushed back at least until the fall. The company now expects to come on stream in 2010, a year later than planned.

“Really that’s due to the fact that we’re still working on our commercial arrangements to get the LNG supply secured for the terminal,” company president Rosemary Boulton said in an interview from Calgary, where parent company Galveston LNG Inc. is based. “Without that we’re really a little bit on hold.”

Kitimat LNG has secured only one relatively small potential contract with Australia’s Liquefied Natural Gas Ltd. for the supply of 1.8 million metric tonnes per year of LNG to its natural gas terminal and regasification facility.

The volume would fill only about 25 per cent of the proposed terminal in Bish Cove, which is south of Kitimat.

Meanwhile, rival WestPac LNG Corp., a privately-held Calgary company, is yet to secure any firm commitments because suppliers will consider serious discussions only after WestPac gets its environmental permit, something Kitimat LNG obtained in 2006.

WestPac is proceeding with plans to build a trans-shipment terminal at Ridley Island near Prince Rupert. But Stu Leson, the company’s Vancouver-based vice-president for business development, conceded that, with about a dozen competing LNG projects proposed for the North American west coast and one already being built in Baja, Mexico, gas supply is an issue.

“Certainly there is not enough supply to fill all the terminals if they were all built,” he said.

“Our position is on the West Coast there is potentially enough supply perhaps for two terminals.”

As well, WestPac and others are contending with ballooning capital costs.

Initially projected at $350 million, WestPac’s Prince Rupert project costs could jump by as much as 50 per cent by 2011 when construction is in full swing, said Leson. He added that the increase is due primarily to the price of nickel-content steel needed for LNG infrastructure rising by as much as 400 per cent in the past few years.

But Boulton regarded the supply constraints as more of a challenge than a setback.Things could look a little better around 2010, she said, when more LNG supply is expected to come on stream.

Global LNG supply, according to Vancouver energy expert Brian Moghadam, is expected to increase to about 44 billion cubic feet (bcf) a day by 2012 compared with current levels of around 22 bcf a day. About 13 bcf per day would then be available for North America’s needs.

Almost all North American LNG projects are having difficulty in sourcing supply, said Moghadam, not because there’s a shortage of gas but because of delays in building LNG liquefaction facilities overseas.

“These are huge multibillion-dollar projects, mired often in political risk (Russia, Nigeria, Iran, for example), environmental challenges and so on,” he said. “So for the time being, it’s an LNG sellers market.”

But there’s lots of customer interest, said Boulton.

“It’s a nice combination of utilities and some industrial customers in the oilsands area in Alberta.

“What we need to do is be able to match them with potential suppliers.”

The company initially was looking to source gas from Sakhalin Island north of Japan, a seven-day voyage to Kitimat, but it’s now scouring the rest of the world.

WestPac’s project will have a total capacity to transship the equivalent of up to one billion cubic feet of natural gas per day by LNG barges, trucks, railcars and an existing pipeline system, to the Pacific Northwest, Vancouver Island and Lower Mainland markets.

It’s looking to import LNG from Asia Pacific sources –Australia, Malaysia and Indonesia – as well as the Middle East, and sees Terasen Gas Inc. and BC Hydro as among potential local customers.

WestPac is aiming to supply between 150 million and 200 million cubic feet of natural gas per day, representing 15 per cent to 20 per cent of Terasen’s peak daily volumes.

kbisetty@telus.net