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The Canadian LNG Export Industry Progress and Prospects

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The Canadian LNG Export Industry Progress and Prospects The Canadian LNG Export Industry Progress and Prospects ABA Section of International Law 2016 Fall Meeting Tokyo, Japan Al Hudec, Farris LLP, Vancouver Don Bell, Torys LLP, New York John Mackay, Latham & Watkins LLP, Singapore Karen Ogen, First Nations LNG Alliance, Wet’suwet’en First Nation 2 Introduction • Canada began to develop a legal regulatory and fiscal regime for LNG exports in 2012 • This regime is now largely in place and 3 large projects and one smaller project now have full regulatory approval • If built, these proposed Canadian LNG liquefaction facilities will be among the largest and costliest energy projects ever built 3 Driving forces behind the Canadian industry • The ‘shale gas’ revolution has made the U.S. self sufficient in oil and gas and has shut in abundant Canadian supplies • The obvious solution is for Western Canada to replace its U.S. and Eastern Canadian markets with Asian exports • This requires a return to JCC oil index based pricing – B.C. announced an LNG strategy in 2012 when price was U.S.$18.11 – Price now U.S.$6.32 – Break even for the Canadian projects is about U.S.$10.30 The view from Asia • Asia is the principal market for Canadian LNG LNG Importers (2013) OTHER ASIA 15% EUROPE 15% Belgium, France, Greece, Italy, India, Indonesia, Malaysia, Lithuania, Netherlands, Portugal, Pakistan, Singapore, Taiwan, Spain, Sweden, Turkey, Thailand MIDDLE EAST 4% U.K. SOUTH KOREA 14% AMERICAS 9% Argentina, Brazil, Chile, Dominican Rep, Mexico, Puerto Rico, Canada, USA CHINA 8% JAPAN 35% Source: International Group of LNG Importers 4 5 The view from Asia • Population growth, rising incomes and the desire to replace coal favour LNG • But: multiple and complex counter-forces Russian – Chinese pipeline deals Nuclear energy in Japan and Europe Shale gas (now China too!) Tremendous increases in world liquefaction capacity outpacing growth in demand Growth of Spot Market 6 Spot and Short-term Market • Variety of factors push growth of spot and short-term market: • LNG contracts with destination flexibility, chiefly from Atlantic Basin and Qatar • LNG glut and price disparity in different basins has created spot arbitrage opportunities • Large growth in LNG fleet - allows industry to sustain the long- haul parts of the spot market • Decline in competitiveness of gas relative to other fuels (including coal and shale gas) has freed up volumes to be re- directed elsewhere • Buyers such as JERA have emerged, which take huge volumes and increasingly favour mid-term and short-term contracts or spot purchases 7 Spot and Short-term Market • Rapid rise in spot volumes traded: • Threatens Canadian projects (most of the spot trade is from non-project financed projects) • Challenge for long term JCC oil-indexed supply agreements, allowing price offtakes pursuant to formulas based on U.S. Henry Hub pipeline gas pricing • Spot LNG (Japan) fell from U.S.$15.21 per MMBtu (July 2014) to U.S.$6.32 per MMBtu as of Sept 2016) 8 Spot and Short-term Market Spot and Short-term Market Development - 1995-2014 Source: Waterborne LNG Reports, U.S. DOE, PFC Energy Global service 9 The view from the United States • The U.S. and Australia are Canada’s principal competitors • U.S. ‘brownfield’ projects on the sites of existing import facilities have significant timing and pricing advantage 10 First LNG tanker through the enlarged Panama Canal 11 Proposed Canadian LNG Projects 12 Affiliated Pipeline Projects 13 Leading Canadian Projects • Pacific Northwest LNG – Petronas • LNG Canada – Royal Dutch Shell • Kitimat LNG – Chevron, Woodside • Woodfibre LNG – Royal Golden Eagle 14 PNW LNG 15 PNW LNG • Majority owned by Petronas with participation by Japex, Sinopec, Indian Oil and Brunei Petroleum • $36 billion, 19 million tonne/year facility • Includes $11.4 billion export terminal, $5.2 billion upstream acquisition, $12 billion of upstream development and $6.7 billion TCPL pipeline • Located on Lelu Island in Prince Rupert Harbour in territory subject to overlapping claims of five First Nations 16 PNW Project Timeline • Feb, 2013: PNW submits its project description to CEAA • Apr, 2013: Japan Petroleum Exploration Co. Ltd. agrees to buy 10 per cent of the offtake over at least 20 years • July, 2013: PNW applies to the NEB for a licence to export up to 19.68 million tonnes of LNG annually for 25 years, beginning in 2019 • Dec, 2013: The NEB grants PNW a licence to export up to 22.2 million tonnes of LNG annually for 25 years • Feb, 2014: PNW submits its environmental impact statement to the Canadian Environmental Assessment Agency • Mar, 2014: The federal government approves PNW's export licence • June, 2015: PNW announces conditional FID – it will proceed with the project as long as it satisfies two conditions: approval of a project development agreement by the B.C. legislature and clearing the federal environmental assessment review process • July, 2015: The B.C. government passes legislation that ratifies a project development agreement with PNW • Mar, 2016: The federal government grants the CEAA more time to review the project • Sept, 2016: The federal government gives conditional approval to the project 17 LNG Canada 18 LNG Canada • Shell Canada, Kogas, Mitsubishi, PetroChina • 24 million tonnes per year at full buildout • Located in Kitimat on the Haisla First Nation Reserve • 700 km pipeline owned and operated by TCPL 19 Woodfibre LNG 20 Woodfibre LNG • 2.1 million tonnes per annum • Located on a brownfield pulp mill site near Squamish in territory of Squamish First Nations • Using pipeline gas as feedstock; electrically fuelled 21 Next Generation Projects Project Proponents Capacity Status WCC Exxon/Imperial 30 MTPA 25 yr. Export Tuc Inlet, license, EA pre- Prince Rupert Harbour application stage Aurora LNG Nexen (60%), 24MTPA 25 yr. Export Digby Island Inpex and JGC (40%) license, EA pre- Prince Rupert Harbour application stage Woodside Petroleum LNG Woodside 20MTPA 25 yr. Export Grassy Point, license, EA pre- North of Prince Rupert application stage 22 The Canadian advantages • Abundant low cost resource base • Climatic advantage • Proximity to Market • Stable fiscal/regulatory regime • Strong local government support • Diversity of supply 23 Western Canada Unconventional Resource Plays 24 Canadian challenges • High Capital Cost of Greenfield Projects • Pipeline Infrastructure requirements • Potential cost pressures • Dynamics of International LNG Pricing • Requirement for First Nations Support 25 Developing a legal framework for LNG 26 Regulatory timeline • Feb, 2012: LNG Strategy announced • Oct, 2014: Greenhouse Gas Industrial Reporting & Control Act announced • Oct, 2014: Liquefied Natural Gas Income Tax Act and a Natural Gas Tax Credit under the Income Tax Act announced • Feb, 2015: the Federal Port Development Act is introduced • March, 2015: The administrative and enforcement components of the Liquefied Natural Gas Income Tax Act are introduced • May, 2015: British Columbia reaches a Project Development Agreement (PDA) with PNW and a Long-Term Royalty Agreement (LTRA) with the North Montney Joint Venture • June, 2015: The Liquefied Natural Gas Income Tax Act Regulations are deposited 27 Export Permits • 40 year export permits issued by National Energy Board • Sole test is whether the quantity to be exported is surplus to Canadian needs, taking into account trends in the discovery of the resource • Simplified process – recent applications approved without a hearing • Expert evidence utilized to determine excess • Extensions of term to 40 years for projects which already have 25 year licenses are being readily granted “Taking into consideration the significant investments required for liquefied natural gas projects, and their significant anticipated economic benefits, the Government is taking additional steps to support the LNG industry and other natural gas exporters by extending the maximum limit of natural gas export licences from 25 to 40 years, to improve regulatory certainty,” (Canadian Federal Government Economic Action Plan 2015) 28 Environmental Assessment • Liquefaction facilities are regulated under the Canadian Environmental Assessment Act and the B.C. Environmental Assessment Act • MOU on the Substitution of Environmental Assessments • 3 stage process: – Application Information Requirements – Application Review Stage – Decision Stage 29 First Nations Consultation • First Nations have a constitutional right to be consulted with respect to all resource development projects within their traditional territories • Supreme Court of Canada historical cases which assert Aboriginal Title to the land does exist: 1997: Delgamuukw 2014: Tsilhqot’in Decision • UN Declaration on the Rights of Indigenous Peoples 30 Challenges to First Nations Engagement • 600 Indigenous Nations in Canada: 203 are in B.C. Treaty Nations vs. Unceded Territory • Of the 50 First Nations in Northern B.C., more than 40 are impacted by major LNG projects • Hereditary Chiefs system vs. Elected system • Revenue sharing and equity ownership Needs to be fair and equitable: benefits must outweigh the risks • Every First Nation community will be different 31 How to Engage with First Nations • Consultation and accommodation must be fair, reasonable, respectful and equitable Start early in the life of the project – make a meaningful effort to learn about the community, its culture and history Fully inform the community about all aspects of the project Maintain consistency in building and nurturing the relationship over the life of the project •
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