This is Blog #3 in our series of blogs to Jan 31 on overlooked “Lasting Changes To Oil & Gas” that emerged/solidified in the last several months and are reshaping (both positively and negatively) the 2019 to 2025+ outlook for oil and natural gas. The timing for this blog was driven by three Dec events – First and foremost BC’s Dec 5 Clean BC plan that caused our fears that no more major BC LNG projects will be built, then this week’s Exxon/Imperial’s subsequent Dec 20 withdraw of their WCC BC LNG project from BC’s environmental review process, and finally the key Premier Horgan Dec 20 year end interview that effectively shoots down the possibility for any new BC LNG project (after LNG Canada) to fit into the Clean BC emission targets. Horgan said that in setting the Clean BC emissions targets “we have decided that one plant, LNG Canada, can fit in and we’ve built our plan around that. Additions to that emission profile are going to be harder to prove”. Horgan then says that other BC LNG projects can proceed, but his conditions to do so are impossible in today’s world. He said any other BC LNG projects effectively have to have “their emission profiles are close to zero, then I don’t see why not. But they’re going to have to prove that to us before they proceed.” It’s a good thing for western Canada natural gas that Shell was able to negotiate BC govt approval of its LNG Canada project. LNG Canada is a big relief valve for western Canada natural gas at ~1.7 bcf/d for Phase 1 and an additional ~1.7 bcf/d for Phase 2. This compares to total western Canada natural gas production of 14.6 bcf/d in 2017, US imports of Canada natural gas peak month of 9.25 bcf/d in Jan 2018, and its low month of 7.09 bcf/d in Sept 2018. However, unless there is a change in Clean BC emissions targets or LNG plants can be built with close to zero emissions, the reality of Clean BC and Horgan’s comments is that Shell’s LNG Canada is surely the last major BC LNG project approved for the foreseeable future.
Exxon/Imperial withdraw their WCC LNG from the BC environmental review process. Our concern is that the BC’s new climate change plan “Climate BC” would make it impossible for any new major BC LNG projects to be approved with the emission restrictions. On Dec 20, Exxon/Imperial announced “after careful review, ExxonMobil Canada Ltd. and Imperial Oil Resources Ltd. have withdrawn the WCC LNG Project from the BC Environmental Assessment process” [LINK]. By doing this, it effectively takes WCC LNG off the list of potential BC LNG projects. WCC LNG was a two phase LNG project out of Port Rupert that was to have ~1.97 bcf/d LNG capacity per phase. Reuters reported [LINK] on the withdraw and noted that Exxon’s environmental review “has been going on since Feb. 2015”. The reality is that the withdraw isn’t likely linked to the length of the review process. Rather, it is linked to the Clean BC plan. There is likely no one (we certainly don’t) that would think that an Exxon/Imperial LNG project wouldn’t be proposed to the highest standards. Exxon has had major projects approved in probably every country of the world including in Canada. The fact that that this withdraw happened two weeks after Clean BC was announced is why we believe the withdraw is directly linked to the challenge for any new major LNG project to be approved within the constraints of the Clean BC emissions limits. We became convinced of this view when we saw the Horgan interview later on Dec 20.
Horgan clearly explained why Exxon’s WCC or any other new BC LNG project has essentially zero chance today to fit into Clean BC emissions targets. On Thurs, Premier Horgan stated the impossibility or near impossibility for any new BC LNG projects today. The Tyee.ca posted its 20 min interview with Horgan “Premier Horgan on LNG, Climate Change and the Year’s Highlights” [LINK] later on Dec 20. The Tyee.ca noted how the “the Clean BC plan identifies ways to cut 18.9 megatonnes of greenhouse gas emissions from transportation, buildings and industry. That will get the province three-quarters of the way to the 2030 goal. Meanwhile, the LNG Canada project will add 3.45 megatonnes of carbon emissions, and that’s only accounting for two of the four processing units that the project may eventually include. And that’s not including the emissions from other LNG projects companies are still considering.” Horgan’s comments then clearly explained that BC has only built one major LNG project, LNG Canada, into the Clean BC plan and that any new LNG projects would need to be close to zero in emissions, an impossible task today. Horgan said “We are now government and we have decided that one plant, LNG Canada, can fit in and we’ve built our plan around that. Additions to that emission profile are going to be harder to prove, and the investors will have to make the argument to us that they can realize their economic agenda and fit into our plan. It’s not just the market… I don’t want you to think that’s the only criteria. It is a criteria, if they believe they can make money they’re going to want to invest. But they have to prove to us they can make their money and not have a negative impact on our targets… If they can fit, they proceed. If they can’t fit, they don’t proceed.” Considering the LNG Canada emissions noted above, Horgan’s next comment showed the impossibility today for the next LNG project. Horgan referred to other potential major LNG projects saying “They’re still kicking the tires, but again, the space for them is getting smaller and smaller. If they’ve got eDrives [compressors driven by electricity rather than natural gas], if they are using best practices and their emission profiles are close to zero, then I don’t see why not. But they’re going to have to prove that to us before they proceed.” Horgan’s comments clearly show, in particular the need for the next LNG project emission profiles to be “close to zero”, why we believe Exxon saw that it would be impossible at least today to get its WCC LNG project over the goal line. Maybe in the future, someone will be able to design and prove to BC that an LNG project can be built with close to zero emissions, but that isn’t in the cards today. And this is why we don’t think any other major BC LNG project will be able to meet the new Clean BC emissions program.
Horgan says Clean BC emissions targets were built around one LNG project – Shell’s LNG Canada. We give Shell a lot of credit for their summer 2017 call that global LNG markets were tight in 2017 when investors, the markets and its major LNG competitors were still in the camp of an oversupplied 2017 LNG market. It was the impetus for our two Sept 20, 2017 blogs “Shell: “Every LNG Cargo That Could Technically Be Produced In This World Has Been Produced And Has Found A Well Paying Customer” and “China’s Plan To Increase Natural Gas To 10% Of Its Energy Mix Is A Global Game Changer Including For BC LNG” [LINK]. And most importantly for Shell, it allowed them to be early in moving to FID on LNG Canada such that it could be provided for in the Horgan calculations for his emissions plans. In the Tyee.ca interview, Horgan confirmed that the Clean BC emissions targets were built on one BC LNG project proceeding and that was LNG Canada. Horgan said “we have decided that one plant, LNG Canada, can fit in and we’ve built our plan around that”, and “We’ve factored the emission profile [of that project] into our plan”
It’s a good thing LNG Canada provides a material relief to western Canada natural gas takeaway. After Exxon’s withdraw and Horgan’s comments, we believe LNG Canada is almost certainly the last major LNG project for the foreseeable future or unless BC reverses its emissions targets. Its a good thing LNG Canada will provide material relief to western Canada natural gas takeaway volumes. Putting the Woodfibre (Squamish, BC) ~0.25 bcf/d LNG capacity project aside, LNG Canada, by itself, provides material takeaway relief for western Canada natural gas. LNG Canada went FID on its Phase 1, which has planned capacity of ~1.7 bcf/d. Its Phase 2 has the same capacity, which brings the total takeaway capacity to ~3.4 bcf/d. The LNG total capacity of ~3.4 bcf/d is 23% of CAPP’s [LINK] estimated 2017 Alberta/BC natural gas production of 14.6 bcf/d, 37% of the EIA’s [LINK] peak monthly (Jan 2018) US imports of Cdn natural gas of 9.25 bcf/d, and 48% of low monthly (Sept 2018) US imports of natural gas of 7.09 bcf/d.