LNG decisions not for the faint of heart

Malcolm Baxter does not envy the task facing the LNG proponent majors in deciding whether to green light plans for plants on the B.C. coast

I do not envy the task facing the LNG proponent majors in deciding whether to green light their plans for large scale plants on the B.C. coast.

Let’s have a look at some of the factors I mentioned last time.

On the supply side there is no question it is going to increase, but by how much?

Platts, an oil product pricing service, pegs new production in Australia at 32.4 million tonnes per annum (mtpa) of LNG just this year. And BG Group, a Brit oil and gas company, says another 58 mtpa of Aussie production will hit the market by 2019.

Assuming both are correct, that’s a total of 90 mtpa. To put that into perspective, that’s equal to total LNG imports by Japan last year, which was a record.

BG is also bullish about United States output, predicting 21 mtpa will start up there this year with more to come. And still others wax lyrical about the possibilities in Africa. Heck some analysts even throw B.C. into the mix.

Now increased supply is not of itself a bad thing. After all, if increased demand matches increased supply, LNG prices will theoretically hold steady.

So will the increase in demand match that of supply?

A year ago everyone was predicting it would not only do that, but would actually exceed new supply. Today they’re singing a very different song, citing slowing economies in China and South Korea (never mind both are still growing at a rate that most other countries would envy), Japan firing up its nuclear power plants (don’t hold your breath on that one), and continuing depressed prices for oil to which most long term LNG contract prices are linked (can we believe that analysts who never saw the oil price crash coming have got it right this time?).

Base your final investment decision (FID) on the bearish forecasts of today and you’d quite rightly have severe doubts about the wisdom of proceeding with multi-billion dollar projects.

But shave a few points off supply expectations, add a few to demand side and maybe it looks like a reasonable gamble.

And remember, these companies will base their decisions on what they believe will happen over the next 30 – 40 years, a significantly longer period than many analysts look at.

So, you’ve calculated what average price you’ll get over the life-time of the project and the revenue looks good enough to justify proceeding. But you also have to look at the other side of the coin, expenditures. You have lots enough experience running LNG plants so it is pretty straightforward coming up with a dependable operational costs number.

But what about construction costs? The Australian projects were plagued by huge cost over-runs – as much as 50 per cent in one case – so will the experience be the same here?

Northwest B.C. at the moment seems to offer excellent conditions in that with the Rio Tinto Alcan (RTA) Kitimat smelter project set to pour first metal within the next few months, more than 3,000 workers will soon be looking for work.

Given the ready availability of workers generally translates to keeping labour costs under control, that’s a good thing, right?

However, if you look at what the smelter project cost Rio Tinto, you have to wonder. RTA was realistically the only game in town during its construction period and yet the latest project cost of closing on $5 billion is near double the figure being thrown around when it got its FID. As I said, I don’t envy the decision-makers.

FOOTNOTE: Back in February I wrote about a Canadian-based outfit called Pacific Rubiales Energy (PRE) that had put plans for a barge-based LNG export plant in Colombia on hold given the crash in prices.

Things have gone from bad to worse since then. A couple of weeks later a report came out from the Colombian oil chamber that predicted growing domestic demand and depleting reserves meant the country would actually have to import LNG by 2018, if not sooner. So what sense did exporting make?

The final blow came last month when state-owned Ecopetrol told PRE its contract to operate the Rubiales gas field – from which it gets 30 per cent of its supply – would not be renewed.

Add another body to the it-seemed-like-a-good-idea-at-the-time LNG graveyard.

Retired Kitimat Northern Sentinel editor Malcolm Baxter lives  in Terrace, B.C. msdbax@citywest.ca.