Lower Canadian costs may compete with US LNG

According to the latest research from Wood Mackenzie, lower Canadian costs are offering competitiveness with LNG exported from the US.

While the sizeable gas resource in North America offers significant potential for LNG exports, it is currently the US that is building an export industry, not Canada. However, Wood Mackenzie reports, with potentially lower LNG related costs in Canada due to the oil price collapse, the country may have the chance to be cost competitive with the US.

Alex Munton, Principal Analyst of Americas Primary Fuel Fundamentals, noted: “Some 50 million [tpy] of LNG production capacity is now under construction in the US, compared to none in Canada.”

US vs Canada

The analysis highlights cost as a key reason behind the different rates of development in the US and Canada. For example, in Western Canada, where most of the large scale projects are located, the following factors add to cost:

• Proposed developments are on greenfield sites that lack infrastructure needed for LNG development.
• Long distance pipelines (up to 900 km) required to access feed gas.
• Lower labour availability in Canada, 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.

On the other hand, in the US, LNG developers have focused on low cost brownfield expansion where the incremental expenditure needed for LNG exports is mostly the cost of adding the liquefaction trains (in addition to some modifications to existing marine facilities, storage tanks and pipelines). The facilities are typically being built in industrialised areas of the US Gulf Coast (USGC) with easy access to local labour.

US LNG costs rising

The analysis from Wood Mackenzie reports that 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 labour, 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, fertiliser 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.”

The oil price collapse has had little effect on the level of construction activity in the region: “Although Sasol has delayed plans to build a 96 000 [bpd] gas to liquids project in Louisiana, most of the big industrial projects are too far advanced to slow down now. 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 – 24 months before capital costs for new LNG developments return to the level they were at prior to this gas-fed construction boom,” Munton continued.

Canadian LNG costs falling

In Canada however, the oil price collapse offers the potential for a lowering of LNG related costs according to the 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. Development spend in oil sands is expected to drop from over CAN$29 billion (US$27 billion) in 2014 to under CAN$20.5 billion (US$17.1 billion) in 2015. The collapse in oil prices is now contributing to more rapid industry cost deflation as companies defer further phases of investment.

Munton added that the outlook for steel prices is also bearish, which “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 feed gas 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.”

Wood Mackenzie also highlighted the implications of recent tax concessions by both the federal Canadian government and the government of British Columbian (B.C.) in improving project profitability.

Conclusion

Munton concluded: “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 jeopardise 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.”

Edited from Wood Mackenzie press release by Katie Woodward

Read the article online at: https://www.lngindustry.com/liquid-natural-gas/30042015/wood-mackenzie-canada-vs-us-competitiveness-674/