From: CWC LNG & Gas Leaders' Forum
To: Scott Jenkins,
Subject: Some weekend reading...
Date: Fri May 09 14:45:59 MDT 2014

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Ready, Steady....Go For It Canada!
A Focus on Canada’s West Coast LNG

By Pat Roberts, Associate Director-Gas, CWC Group Ltd.
The LNG industry’s forward looking nature means we are always on the look out for the next train to take a Final investment Decision (FID) and the next creative business model which provide a better balance of risk and reward in the LNG value chain. When this presents itself as a country opening its doors to exports for the first time, this creates new trade routes and improves LNG’s global footprint.  

In February this year, Andy Flower and I compiled a summary of the projects whose sponsors had announced they planned to take FID in 2014. This totaled around 100 Mtpa of new supply capacity expected to be on stream by the end of 2018.

Since then only one of those projects – Petronas’ second Floating LNG project (1.5Mtpa) - has taken FID.  Some of the others, particularly in the US, are experiencing delays in securing all the approvals to take the projects to their boards for final investment decisions.  Elsewhere, Greenfield project sponsors in Mozambique, Nigeria and Canada are actively developing their projects and say they are still hopeful of meeting their targets.

This article focuses on the west coast of Canada, where in the last few months there have been some encouraging signs that Petronas is leading the pack with its Pacific North West LNG project at Prince Rupert (Lelu Island). The first phase – two 6Mtpa trains - currently looks as though it will be the first project to take FID in Western Canada.

Western Canada has been in the spotlight since early 2009, when the Kitimat LNG import project announced it was becoming the Kitimat LNG export project! The presentation at CWC’s LNG Americas conference in New Orleans held everyone’s attention and you could hear a pin drop when the plan was presented to begin commercial operations in 2013 of a 5Mtpa plant at a cost of US$4bn. 5 years on, the project (now with Chevron as operator), is still under development. Currently, it doesn’t look as though it is on course for its target 2014 FID and the costs for a 5Mtpa plant have probably at least doubled.

However, some of the key concepts outlined in the 2009 Kitimat LNG export presentation have proved to be robust and several other sponsors are developing projects using them.  For example, last week Shell announced it was giving renewed impetus to its Canada LNG project with a target of a 2015 FID.
But it has been Petronas who have followed through relentlessly in piecing together the key elements of a viable export supply chain. John Miller wrote an excellent article for the LNG Hub in November 2013 setting out the key success features and the challenges facing all the West Canadian projects. They are still relevant and I refer you to his article for the summary.

Summary of the Pacific North West LNG Project

Below is a summary of how it is I think the Petronas project has earned its current pole position. Its project development shows:

1. A clear fast track strategy to advance a Canadian project

• Pacific North West LNG appears to be a high priority for Petronas and does not appear to be affected by other competition for capital or human resources. This is in contrast with the Chevron Kitimat project where Apache are now looking to sell down some of their 50% share in the project and where Chevron have a clear priority in finalising Gorgon, Wheatstone and Angola LNG.
• The project was awarded its export licence from the National Energy Board in December 2013.

2. Acquisition of a local, expert natural gas company  

• In June 2011, Petronas acquired a 50% share in Progress Energy’s Montney shale gas assets for C$1.07Bn and the two companies agreed to from an LNG export joint venture in which Progress would has a 20% share and Petronas 80%. In June 2012, Petronas made a C$5.5Bn bid to acquire Progress Energy which the Canadian government indicated it planned to block but it finally gave approval in December 2012. The total acquisition cost was put at $6 billion.
• The full acquisition of Progress Energy in 2012 gave Petronas sole access to the Pacific North West LNG project and a first class local company. Progress Energy is:  
i) A leader in Canadian natural gas development and is a current producer of 400MCFD and supplying local markets.
ii) Leading the acquisition of new upstream reserves in the Montney fields, (most recently Talisman’s assets) to shore up sufficient reserves to launch the first phase of the LNG project.
iii) Leading the upstream drilling programme. In 2014 there is a plan to use around 25 drilling rigs and drill around 170 wells.

3. Good stakeholder participation

• Local offices in Vancouver and a community office in Prince Rupert make the project visible, accessible and interactive with its stakeholders.

4. Direct engagement with Government to develop tax levies

• A letter of intent has been signed 6th May for both sides to develop a terms of reference by June 30th of a project development agreement that will include clarification of tax levies on the LNG project, with a view to having an agreement by November 30th.  Petronas and the government have recognised their mutual interests which are the tax treatment and fast tracking the project. Petronas will now have the opportunity to be directly involved in establishing the tax framework for its own project and this may well have an influence on others behind it.

5. Decisive action in the technical design and engineering of the project.
The project is structured around:

• Initially two 6MTpa trains, land based with expectation of a possible 3rd train.
• FEED contracts awarded to Bechtel, KBR/JGC and Technip/Samsumg/ China Huanqiu in May 2013 and expected to be complete in August 2014.
• Expected award of the EPC contract during Q3 2014. 
• A contract with TransCanada Pipeline Ltd to design construct and operate a new pipeline transporting gas from the Montney fields was established in January 2013. Expected cost is around $5bn. An additional link to an existing line which will enable more gas gathering and transportation from the Montney fields will also be developed at a further cost of $1-1.5bn.
• Application submitted for the Environmental Assessment Certificate. This will involve extensive consultation with all stakeholders and with First Nations.

6. Decisive actions in the commercial design of the project

• A sell down of 38% of the equity to four other partners: Petroleum Brunei (3%), Japex (10%), IOC (10%) and Sinopec (15%). Sinopec has on-sold 5% of this stake to China Huadian – a large power producer. Petronas has indicated that it is in discussions with other companies to reduce its share to 50%.
• The sell down of equity, raises significant funds for Petronas to develop the $35bn project more easily.
• The sell down is also linked to long term off-take agreements (announced with Petroleum Brunei, IOC and Sinopec) to secure critical long-term sales for the project.
• Sinopec has also signed a Heads of Agreement for a further 3Mtpa of long term off-take which will be primarily sourced from the project.

Collectively, that places the project with around 7.56Mtpa of its annual sales (63%) currently assigned to Petronas’ partners. Petronas has not announced as yet how it is intending to market its share – but it is reasonable to expect it will be allocating some of these volumes to its own supply portfolio in Asia.  This should help with financing and fast tracking a FID decision.

The business model is equity marketing where investors acquire LNG at cost which has been used successfully to fast track LNG projects and also provides a means of removing the conundrum of the sales price formula of the LNG. Some of the Canadian projects have been stymied by their sponsors selling to third party buyers where the sponsors try to secure sales on an oil related basis (JCC) and the buyers want a Henry Hub index. In the Petronas business model, the equity producers are part of the upstream consortium and are the downstream off-takers and so are hedged across the supply chain.
The Bottom Line

Arguably, countries new to LNG exports present the biggest challenges to LNG developers. All aspects of the project are Greenfield and an FID date is a moving target. 
Canada is one of six Greenfield countries currently grappling with developing LNG exports.  With finite demand growth by 2020, the race is on for all LNG developers/suppliers to secure the premium partners/ customers.

Petronas is very experienced in LNG project development and the pragmatism it has shown to:

i) Engage fully with an expert local gas company
ii) Award the pipeline contract to a local experienced company to design, build own and operate
iii) Offer equity and long-term off-take to partners with growing LNG import markets

This demonstrates a project structure which I think has a high probability of balancing risk and reward adequately amongst the stakeholders, can be developed relatively quickly and will provide a blueprint for several other new Greenfield LNG projects.

This topic and more will be discussed at the upcoming  CWC World LNG Series: Americas Summit in San Antonio, Texas from the 2 -5 June 2014.
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