When it comes to investing in the Canadian liquid natural gas industry, many big international players are shaking their dice here, but so far no one is rolling them. In other words, despite forging joint ventures, snapping up natural gas plays and sinking millions in planning and environmental applications, no companies involved in the 14 potential LNG projects announced so far for British Columbia have yet to make an FID — a final investment decision.
While the world undergoes an LNG boom, industry watchers suggest if the oil and gas majors don’t lay their chips down by the end of 2014, Canada will lose the bet on developing an export LNG sector in British Columbia against other nations.
Several countries, Qatar and Australia in particular, have surged far ahead of Canada in developing LNG export facilities to feed energy-hungry Asian markets. Qatar is the world’s leading LNG exporter. But Australia, which currently has three operating LNG terminals and seven more under construction, could overtake Qatar this decade. Meanwhile in BC a handful of dozers have been levelling dirt for possible construction of a Chevron Canada and Apache Corp. joint venture, the Kitimat LNG project. But that’s about it in Canada so far.
The United States, rapidly reversing existing plants once used to import and de-liquefy natural gas, also leads Canada, which won’t have an operational LNG export plant until at least 2018.
Australia, Qatar and the US have locked up long-term LNG supply contracts to Asian countries such as Malaysia, South Korea and India that Canada has now missed out on. Meanwhile, the once touted economic prospects of a Canadian LNG industry have witnessed erosion in just a few short years. When fracking spurred a huge increase in North American natural gas production, the resulting surplus depressed domestic prices to the $2 and $3 a-million-British-thermal units (MMBTu) range. Meanwhile, Japan was paying four or five times those prices. It was that relatively consistent price differential that got the energy industry thinking about investing billions to develop a Canadian LNG export industry.
But natural gas prices in North America have risen recently. In June, the average spot price for North American gas was US $4.56 per MMBTu. Couple that with efforts by LNG buyers in Asian markets to reduce the price they pay for gas and the price gap narrows, and so do the economic prospects for a North American LNG industry. Last year, spurred by Japan, the world’s number one LNG importer, Asian buyers there and in India, South Korea, China and Taiwan formed buyers clubs in a bid to force LNG prices down.
Despite growing skepticism surrounding a future Canadian LNG industry, Tom Valentine remains a strong believer. Few Canadian corporate lawyers have waded into the rapidly evolving LNG sector quite as deeply as Valentine. In 2002, Valentine, now a Calgary-based partner with Norton Rose Fulbright Canada LLP, took a sabbatical from a previous firm to learn more about the legal side of LNG. The following year, before there was a peep from industry or governments about developing a British Columbian LNG industry, Valentine headed to Doha, Qatar, for a nearly two-year gig as senior counsel, LNG projects, with Qatar Petroleum.
“I am still very bullish on Canada and LNG projects coming out of British Columbia,” says Valentine, who helped Qatar Petroleum to launch LNG projects in the UK, Spain and India. He currently advises foreign governments in Asia, Africa, South America and the Middle East on LNG development.
All that broad experience convinces Valentine that Canada still has an edge over the US and countries in Africa and South America trying to birth their own LNG export industries. “When we look at these types of projects the number one fundamental driver is always the geology. If you don’t have attractive resources, then nobody is interested,” says Valentine.
“One of the things that gives Canada such a wonderful advantage over other parties in the race – I always call it a horse race – is the fact that assessment number one stacks up nicely in Canada’s favour: the resources, although they are a little bit more expensive to develop than in other parts of the world, are abundant.”
With an estimated 1,965 trillion cubic feet (TCF) of gas-in-place in BC – among the richest in North America – “Canada continues to look like a true leader,” says Valentine. But those aren’t the only metrics in our favour. Canada, he adds, has energy sophistication, a strong desire to export LNG and federal and provincial governments working hard to make an LNG industry happen.
“We have been exporting energy for the better part of a century,” says Valentine, who does legal work for Kitimat LNG, the first project likely to be completed on the west coast. “And on that basis we do it well.... The government of Canada, the provinces of Alberta and British Columbia, they know that they need to find a customer for their natural gas. So all the regulatory, administrative and bureaucratic mechanisms have to be put into place. And they are being put into place quickly.”
Well, mostly. The prime concerns remaining in Canada are not environmental issues or Aboriginal relations, argues Valentine. It’s timeliness. “In this industry it is important to be able to advance your decision-making process quickly. So if anyone could be concerned about anything here, they would say the province of BC has to be timelier in the generation of its fiscal regime. Fiscal regimes will drive these projects.”
The key question is taxes. In February, Premier Christy Clark’s Liberal government, which has touted LNG as the saviour of BC’s economy, proposed a two-tiered Liquefied Natural Gas Income Tax. If passed this fall companies would pay 1.5 per cent tax on profits at the start of production — allowing them to begin recouping start-up costs. Later, as those costs are recovered, they would pay up to a 7 per cent tax.
Alicia Quesnel, a Calgary partner with Burnet, Duckworth & Palmer LLP, is a leading oil and gas lawyer. She says LNG companies that want to develop Canadian projects have expressed concerns the tax regime is too high “given who we are competing against. Right now, for instance, we are competing against brown-field projects in the US. And there are a lot of them.”
Those brown-field projects, which are getting off the ground faster than Canadian projects, have the advantage of lower costs because much of the infrastructure is already built. If the tax regime here is viewed as too high, it just adds to dwindling economics factors favouring a Canadian LNG industry. Especially, adds Quesnel, in light of recent contracts between producers in other countries with Asian buyers, which were de-linked LNG from crude-oil prices. That has made the LNG in those deals cheaper to buy. “So the question is, is what the [BC] government is proposing going to make us competitive vis-à-vis our principal competitors?”
The industry itself has given us a good hint at the answer: soon after BC proposed the tax regime several developers – including Petronas, Apache Corp. and one of Quesnel’s clients, Shell Canada – either sold down equity or reduced capital expenditures on their Canadian LNG projects. Since then, the BC government has indicated it will take a second look at the tax.
There’s another new wrinkle facing the nascent Canadian LNG. On June 26 in a historic decision, the Supreme Court of Canada (SCC) unanimously held – in Tsilhqot’in Nation v. British Columbia – that even in absence of treaties, Aboriginal title exists. The ruling substantially lowers the proof required to substantiate Aboriginal title to lands. Regular, though not necessarily intensive, use (as required before) of land for traditional practices such as hunting, trapping and fishing is now sufficient for a title claim.
“Up until the Tsilhqot’in decision the obligations on both government and companies weren’t particularly onerous,” says Bruce McIvor, founder and principal at First Peoples Law in Vancouver. “But with this decision, it really does change the playing field.”
In BC, compared to provinces such as Alberta and Manitoba, there are very few treaties. The SCC ruling solidifies and intensifies the duty of both government and industry to consult with all Aboriginal groups, regardless of whether treaties exist, when developing projects where First Nations claim sovereign rights to land.
Prior to the ruling, says McIvor, many resource companies seeking government approval on projects that might impact on First Nation communities engaged in what Aboriginal advocates call “drive-by consultations.” They would log the number of times they contacted Aboriginal communities, often for superficial reasons, and, before the Tsilhqot’in ruling, that was often enough to fulfil their “duty to consult.”
Now, warns McIvor, “the dinosaurs” – those companies that made ingenuous efforts to work with First Nations – face a real possibility of being sued in court for damages or having their projects blocked if they fail to properly secure consent from Aboriginal communities. Even prior government approvals for development could be reversed in court.
“In fact the Supreme Court was clear about this,” explains McIvor. “There is one paragraph in the judgment where the court said to avoid these kinds of risks government and individuals – which would include companies – should be going out there and trying to get First Nation consent for their projects before they proceed, period. That is the best way to get certainty.”
While many legal experts have said the SCC ruling should benefit industry by giving it more clarity about how to achieve consent with Aboriginal stakeholders, it may also increase the risk of lawsuits and will certainly increase the workload of companies trying to secure project consent from native bands. That could make the LNG industry more skittish about Canada and look to countries like Mozambique, where, recently, there have been huge natural gas discoveries and there are far fewer regulatory hurdles.
“I don’t think we currently know the full implications of that decision for existing production or the ability to put in more pipelines, or more processing capacity and the ability to essentially grow the LNG business as yet,” says Quesnel.
Not long ago, she attended a conference in BC where several native chiefs spoke about how the SCC ruling gives their communities a significant seat at the table when it comes to determining how energy projects will proceed on their territories. “We are literally talking about chiefs that maybe represent 100 people,” says Quesnel. There are many such tiny bands throughout BC claiming sovereignty over land. Now they must all be dealt with individually on the basis of the SCC ruling, which will mean increased work and lost efficiencies for oil and gas companies investing in the province.
Nevertheless, points out the still optimistic Valentine, “It’s important to bear in mind that there is a very real difference in the Aboriginal community when it comes to a gas project versus an oil project. When I spent time in Kitimat that came across very clearly. They see a move to natural gas as being in the best interest of the country and their communities. It’s cleaner, safer, more abundant, easier to monetize in many respects. They have greater concerns with respect to crude oil pipelines.”