Rising construction costs in the US and falling oil prices give LNG export projects in western Canada a window of opportunity in competition with otherwise advantaged projects to the south.
At present, says a report by Wood Mackenzie, US developments lead the race. About 50 million tonnes/year of LNG production capacity is under construction in the US, the report notes. No such construction has begun in Canada.
Until now, US projects have had a cost advantage. Most involve retrofitting existing liquefaction plants in Gulf Coast industrialized areas with large labor pools.
Projects in western Canada involve greenfield construction in remote areas requiring long-distance pipelines for access to natural gas. Labor supply for the Canadian projects is lower than it is on the Gulf Coast.
“These higher capital costs have made it difficult for projects in western Canada to demonstrate the commercial returns necessary for investment to be sanctioned,” WoodMac says.
US costs up
But construction costs are rising in the US as new supplies of cheap natural gas encourage industrial development. In addition to nine liquefaction trains on the Gulf Coast, six world-scale ethane crackers are under construction in Texas and Louisiana along with methanol, fertilizer, and other petrochemical plants.
According to WoodMac, capital expenditure on firm and probable LNG and petrochemical projects in the US could exceed $130 billion over the next 5-6 years.
Most Gulf Coast construction will proceed despite the oil-price collapse because projects are in advanced stages. Although upstream layoffs will moderate wage increases this year, the consultancy says, “tightness in the craft labor market will persist for some time.”
Capital costs for new US LNG developments therefore won’t decline to their levels of before the gas-related construction boom for 18-24 months, the firm predicts.
Collapse of the oil price “has the potential” to lower LNG construction costs in Canada.
With 16 oil sands project phases having started production during 2011-14, the construction market in western Canada was cooling when oil prices began to fall last year. WoodMac expects oil-sands development spending to drop to $17.1 billion (US) this year from $27 billion in 2014. Costs are falling as companies further defer investments, “causing a sharper reduction in capital spend and greater slack in the labor market, including crafts.”
Canadian LNG projects also benefit more than their US counterparts from falling steel prices because of their greater need for pipeline construction. And they have received offers of tax concessions from the Canadian and British Columbian governments.
A diminished cost advantage doesn’t jeopardize US Gulf Coast projects close to sanction, according to WoodMac.
“But with the cost of US LNG construction continuing to increase and competition between projects growing, developers will likely need to reduce expectations of returns if they are to remain competitive,” it says.
Canadian LNG developers, meanwhile, have the chance to try to become cost-competitive with US projects targeting Asia.
WoodMac says Petronas of Malaysia will seek cost reductions from contractors of at least 15% from 2014 tenders to sanction the Pacific NorthWest LNG project, which it and partners propose to build in British Columbia (OGJ Online, Mar. 10, 2014).
If contractors don’t oblige, WoodMac says, “the worry will be that a rising oil price will push the costs of western Canadian LNG back up again.”