Wood Mackenzie: Lower Canadian costs offer competitiveness with US LNG

The huge gas resource base in North America offers potential for liquefied natural gas (LNG) exports, but currently it is the US, not Canada, that is building an LNG export industry, according to Wood Mackenzie’s latest analysis. However, with potentially lower LNG related costs in Canada due to the oil price collapse, Canada may have the opportunity to potentially be cost competitive with US LNG.

“Some 50 million tonnes per annum of LNG production capacity is now under construction in the US, compared to none in Canada,” notes Alex Munton, principal analyst of Americas Primary Fuel Fundamentals at Wood Mackenzie.

Wood Mackenzie’s analysis points to cost as a key reason behind the different pace of US and Canadian LNG development. In Western Canada, where most of the large-scale project activity is focused, multiple factors add to cost: the proposed large-scale developments are all on remote greenfield sites that have little of the infrastructure needed for an LNG development; the long-distance pipelines, up to 900 kilometers, required to access feed gas; and the lower labor availability relative to the US.

These higher capital costs have made it difficult for projects in Western Canada to demonstrate the commercial returns necessary for investment to be sanctioned. In the US, it is quite the opposite. LNG developers have focused on low-cost brownfield expansion where the incremental expenditure needed for LNG exports is primarily the cost of adding the liquefaction trains, as well as some modifications to the existing marine facilities, storage tanks, and pipelines. The facilities are typically being built in industrialized areas of the US Gulf Coast (USGC) with good access to a large local labor pool. 

According to Wood Mackenzie, as the level of US LNG construction activity increases, costs are rising. Munton explains, “The availability of cheap gas feedstock has brought about a resurgence in gas industry investments in the US, which has pushed up demand for craft labor, leading to wage pressures and overall cost increases. In addition to the nine liquefaction trains now being built on the USGC, construction has also started on six world-scale ethane crackers in Texas and Louisiana, as well as methanol, fertilizer, and other petrochemical plants. Total capital expenditure on firm developments in the petrochemicals and LNG industries in the US could exceed US$130 billion over the next five to six years. Much of this investment is in the USGC region.”

Wood Mackenzie emphasizes that the oil price collapse has had little effect on the level of construction activity on the USGC.  “Although Sasol has delayed plans to build a project in Louisiana with a capacity of 96,000 barrels per day gas to liquids, most of the big industrial projects are too far advanced to slow down now,” Munton says. “Also, there is a shortage of welders, pipefitters, machinists, and other technical crafts in USGC, and we estimate that it could be at least 18 to 24 months before capital costs for new LNG developments return to the level they were at prior to this gas-fed construction boom.”

In Canada, however, the oil price collapse offers the potential for a lowering of LNG-related costs, according to Wood Mackenzie’s analysis. The local construction market in Western Canada has already started to cool with the end of a period of heavy investment in oil sands between 2011 and 2014, as 16 unique oil sands project phases got delivered into production. Development spend in oil sands is expected to drop from over Cdn$29 billion (US$27 billion) in 2014 to under Cdn$20.5 billion (US$17.1 billion) in 2015. Now the collapse in oil prices is contributing to more rapid industry cost deflation as companies defer further phases of investment, causing a sharper reduction in capital spend and greater slack in the labor market, including crafts.

Munton adds that the outlook for steel prices is also bearish. “This improves the cost structure for LNG developments in Canada to a greater extent than those in the US because of the need for long-distance feedgas pipelines. Steel is a major component of the overall cost of those pipelines and with a slump in steel prices, cheaper pipelines help lower overall costs.” 

In addition, Wood Mackenzie highlights the implications of recent tax concessions by both the federal Canadian government and the local British Columbian government in improving project profitability. 

In conclusion, as outlined by Munton, “A window of opportunity is opening for Canadian LNG to become potentially cost competitive with US LNG into Asian markets. In order to proceed with Pacific North West LNG in 2015 for instance, Petronas will be hoping for cost reductions of at least 15% from contractors compared to levels tendered in 2014. It remains to be seen whether contractors will oblige. If they do not, then the worry will be that a rising oil price will push the costs of Western Canadian LNG back up again.

For the US, the reduction of the USGC’s cost advantage does not jeopardize projects close to be sanctioned like Corpus Christi and nor does it preclude a second wave of US LNG from getting sanctioned later. There are other benefits to US LNG, such as greater operational and destination flexibility than many other supply options available. But, with US LNG construction costs continuing to increase and competition between projects growing, developers will likely need to reduce expectations of returns if they are to remain competitive.”

 

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