Last week’s news that the Bear Head LNG export project has received Canadian government approval for a licence to import natural gas from the US, then export LNG from its proposed Nova Scotia terminal for 25 years did not register on the Richter scale.
The scheme still has many obstacles to overcome before it can come to fruition, and several look insurmountable in the current business environment.
Bear Head, near Point Tupper on the Strait of Canso 200km north of Halifax, was conceived in 2003, when US gas reserves appeared to be dwindling and plans for massive LNG imports were unveiled.
It was envisaged that Bear Head would regasify imported LNG for injection into the Maritimes and Northeast Pipeline (M&NP) system linking the northeast US to Canada, helping to meet the needs of the large New England gas market.
Anadarko became involved with the scheme early and, after receiving environmental approval, began clearing the site and laying the foundations for two 180,000m3 LNG storage tanks.
With the same US market and logistics in mind, Irving Oil and Repsol simultaneously began to build the Canaport LNG import terminal near St John in the neighbouring Canadian province of New Brunswick.
However, Canaport went ahead, but Bear Head did not. In summer 2006 Anadarko, unable to line up an LNG supplier, got cold feet and put the project on hold. When methods to exploit the vast shale gas resources of the US were implemented shortly afterwards, the raison d'être for Bear Head as conceived was undermined and Anadarko mothballed the project.
As weeds reclaimed the cleared land, nothing more was heard of Bear Head until July 2014 when Australia-based LNG Ltd purchased the 100-hectare site for US$11 million. Its Perth-based managing director Maurice Brand said he aimed to replicate at Bear Head the company’s approach with the proposed Magnolia LNG export project at Lake Charles, Louisiana.
Magnolia is being developed using LNG Ltd’s proprietary, small-scale gas liquefaction technology to toll-treat gas belonging to third parties for export as LNG. Reversing the earlier plans for Bear Head, LNG Ltd is seeking to pump gas from the Marcellus shale region in the northeastern US northbound through the M&NP system.
As configured, the project seeks to export up to 8 million tonnes per annum (mta) of LNG from Point Tupper terminal in 2019, expanding to 12 mta by 2024 – a volume that would require gas for at least 4 mta of exports from Canadian sources, as Bear Head has only requested enough for 8 mta from the US.
Magnolia LNG is LNG Ltd's priority North American project. In December 2012 the company announced plans for a Calcasieu River Ship Channel export terminal across the water from the Trunkline LNG receiving facility.
The Magnolia LNG terminal masterplan calls for two 160,000m3 storage tanks and four LNG production trains, each of 2 mta capacity and based on LNG Ltd’s optimised single mixed refrigerant (OSMR) liquefaction technology. Heads of agreement have been signed with Meridian LNG/E.ON, AES, Gas Natural Fenosa (GNF) and Gunvor for the plant's output.
In their arrangements with Magnolia the business partners will act as tolling parties, arranging and delivering their own gas to the Louisiana plant for liquefaction and loading onto the LNG carriers they charter. To be responsible only for building, owning and operating the LNG facility, Magnolia LNG will receive a fixed monthly capacity fee, an operating and maintenance fee and a process fee for the LNG loaded onto the ships.
In July 2013 Stonepeak Partners agreed to provide 100 per cent of the project equity financing for the construction and operation of the Magnolia LNG’s Lake Charles export terminal. LNG Ltd and Stonepeak both own a 50 per cent equity interest in the US$3.5 billion scheme.
Another major hurdle was cleared in November 2015 when the US Federal Energy Regulatory Commission (FERC) issued the final environmental impact statement (FEIS) for Magnolia LNG. The document points out that the construction and operation of the proposed project would result in negligible adverse environmental impacts, as long as it implements the recommended mitigation measures.
Slackening global demand for LNG worldwide has slowed progress towards a final investment decision (FID) for Magnolia LNG, reflecting some potential tolling parties’ reluctance to convert their heads of agreement into sales contracts.
However, LNG Ltd is confident that the comparatively low capital costs associated with the scheme will ensure its success, pointing out that the project is flexible enough to go ahead with less than the full, four-train complement if required.
Back in Canada, LNG Ltd is extolling several strengths for Bear Head, not least the same low costs associated with North American gas supplies and the use of its liquefaction technology. The east coast terminal also offers proximity to the major European gas markets.
On the down side, Bear Head is among myriad proposed North American LNG-export projects tabled prior to the global drop in demand for gas. Today’s rock-bottom gas prices are deterring investment in new projects as gas buyers are reluctant to commit to long-term purchases.
The project economics of Bear Head have disadvantages compared to many competing projects. LNG Ltd has yet to line up buyers for its output; Europe isn’t exactly clamouring for new supplies of LNG at the moment, as evidenced by the fact that only about 20 per cent of the regasification capacity at the region’s terminals is being utilised.
Bear Head is also a greenfield project. Unlike a number of North American LNG export schemes now taking shape, it is not an import terminal that can add liquefaction trains to existing onsite storage tanks and marine facilities to reduce development costs.
Even a terminal’s status as a current import facility does not guarantee success. Irving Oil and Repsol had considered giving the neighbouring Canaport receiving terminal a bidirectional capability by adding liquefaction trains but shelved the plan in March after investors failed to support the US$2-4 billion scheme.
The Bear Head scheme also requires supplies of US pipeline gas to be viable. Although there is plentiful gas in the northeast US Marcellus and Utica shale plays, the existing New England gas pipeline system that links with the M&NP network cannot cope with peak winter demand loads, let alone the feedstock requirements of mooted Canadian east coast LNG export projects such as Bear Head, Canaport and Goldboro LNG.
Until the pipeline infrastructure of either the northeastern US or Canada’s domestic network is upgraded, and until the global demand for LNG picks up, reaching a final investment decision on an LNG export project in eastern Canada is going to be a bridge too far.