webinar: competitive analysis of canadian lng webinar...note: numbers in the legend represent total...

WEBINAR: COMPETITIVE ANALYSIS OF CANADIAN LNG

Dinara Millington, Vice President, ResearchDecember 3, 2019

www.ceri.ca

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Allan Fogwill

CANADIAN ENERGY RESEARCH INSTITUTE

OverviewFounded in 1975, the Canadian Energy Research Institute (CERI) is an independent, registered charitable organization specializing in the analysis of energy economics and related environmental policy issues in the energy production, transportation, and consumption sectors.

Our mission is to provide relevant, independent, and objective economic and environmental research of energy issues to benefit business, government, academia and the public.

CERI publications include:

Market specific studies

Geopolitical analyses

Quarterly market reports (crude oil, electricity and natural gas)

In addition, CERI hosts a series of study overview events, executive briefings for organizations and an annual Petrochemicals Conference.

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CORE FUNDERS

FUNDING SUPPORT

IVEY FOUNDATION

IN-KIND SUPPORTAlberta Energy Regulator | Bow Valley College

JWN Energy | Northern Alberta Institute of Technology Petroleum Services Association of Canada

AGENDA

Market Overview

Methodology and Assumptions

Supply Costs

Competitive Analysis

Q&A Period

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GLOBAL MARKET OVERVIEW

Global trade in LNG increased by 28.2 MT in 2018, setting a new annualrecord of 316.5 MT. Combined with 2017, this marks the strongest second-year growth period for international LNG demand since 2010-2011.

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Source: IGU, 2019 World LNG Report

2018 MARKET SHARE OF LNG SUPPLY

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Note: Numbers in the legend represent total 2018 exports in MT, followed by market share. Source: IGU, 2019 World LNG Report

2018 INCREMENTAL LNG EXPORTS (relative to 2017)

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2018 LNG IMPORTS

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Note: Numbers in the legend represent total 2018 exports in MT, followed by market share. Source: IGU, 2019 World LNG Report

Presenter

Presentation Notes

“Other” includes markets with imports less than 2.0 MT (by order of size): Poland, the Netherlands, Brazil, Malaysia, the Dominican Republic, the United Arab Emirates, Greece, Bangladesh, Lithuania, Israel, Canada, Malta, Jamaica, and Colombia.

2018 INCREMENTAL LNG IMPORTS (relative to 2017)

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SIGNIFICANT TRENDS

1. Asia remains the driver of international LNG demand growth

2. Increase in Natural Gas Supply from Unconventional Sources

3. Changes in the Business model (70/30)

Fragmentation of projects

Redirection of shipments and profit sharing

Changes in reference pricing, time periods and use of tolling

4. Technological changes

Offshore regasification

Offshore liquefaction

5. Carbon Management – substitution of LNG for coal in electricity markets

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CANADIAN PROJECTS

35 LNG export licenses issued 28 in BC 3 in QC 3 in NS 1 in NB

Key projects Goldboro LNG NS – 5-10 MTPA, integrated, 2019-20 FID Bearhead LNG NS – 8-12 MTPA, tolling, n/a Woodfibre LNG BC – 2 MTPA, merchant, active LNG Canada BC – 13 - 26 MTPA, integrated, 2018 FID Kitimat LNG BC – 10 MTPA, integrated, n/a

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METHODOLOGY

Supply cost model – 6 projects in 5 jurisdictions (2 in CA, 1 in AU, 3 in the US)

Cases: a) liquefaction added to regasification, b) another train added to an existing project and c) a greenfield project

Feedstock costs - multiple supply basins

Pipeline cost model – for projects lacking pipeline capacity (long distance mainly for CA and AU)

Shipping cost model – includes distance, charter rates, cost of fuel and destination LNG spot price

Sensitivity analysis

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FEEDSTOCK COSTS

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IMPORT MARKETS

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Market Benchmark, early May 2018

Average 2000-2017

Maximum for 2000-2016

Japan Spot (proxy for Japan, Korea, China)

$8.2 $9.2 $16.8 (2012)

Old North-East Asia (NEA) Contract price (14.5% of Brent + $0.5)

$11.6 $9.8 $16.7 (2012)

New North-East Asia (NEA) Contract price (11.5% of Brent price)

$8.9 (-$2.7 or 24% compared to old

contracts) - -

India $8.0 N/A N/A

UK NBP $7.4 $6.3 $10.8 (2008)

TRS France / Spain (MIB Gas) $7.6 N/A N/A

Presenter

Presentation Notes

NE Asian price in 2018 - $9.78/mmbtu US – 7.44/mmtu

COST OF WESTERN CANADA LNG PROJECT

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Cost 13 MTPA 26 MTPA Economies of scale

USD CAD USD CAD % Capital 3.42 4.27 3.00 3.75 -12 Feedstock 2.51 3.13 2.51 3.13 0 Pipeline 0.96 1.21 0.67 0.84 -31 Operating 0.69 0.86 0.69 0.86 0 Corporate taxes 0.50 0.62 0.42 0.52 -16 LNG Income tax 0.09 0.12 0.08 0.10 -12 Carbon Tax 0.18 0.23 0.18 0.23 0 Total (mmbtu) 8.35 10.44 7.54 9.43 -10

COST OF EASTERN CANADA LNG PROJECT

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Cost AECO Marcellus Local USD CAD USD CAD USD CAD

Capital 2.77 3.46 2.77 3.46 3.09 3.87 Feedstock 3.67 4.59 3.69 4.61 3.44 4.30 Pipeline 3.33 4.16 3.09 3.86 0.07 0.09 Operating 0.69 0.86 0.69 0.86 0.69 0.86 Corporate taxes 0.53 0.67 0.53 0.67 0.61 0.76 LNG Income tax - - - - - - Carbon Tax 0.18 0.23 0.18 0.23 0.18 0.23 Total (mmbtu) 11.17 13.96 10.95 13.69 8.09 10.11

KEY DIFFERENTIATORS

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Abundant WCSB / Marcellus gas

Conducive temperature regime

Competitive operating costs

Proximity to Markets

Securing transportation

High transportation

costs

Moderate capital costs

Lack of domestic experience in LNG Plant

delivery

Presenter

Presentation Notes

In our work, we identified at least eight differentiating factors for eastern developments. I’ll stop on several. First, is an abundant gas supply in Western Canada or more close Marcellus/Utica shale gas which can easily accommodate several projects’. But securing transportation is an issue that has to be solved. Proximity to markets is a big thing: it is 8 days to Europe. It is more than Algeria, but comparable for Russian Arctic LNG, and edges US GoM and Africa by 5 days, and Qatar by 12 days. If we translate that into dollar amount and take Qatar, we are talking to a dollar per mmbtu advantage. It is much further to Indian market, 24 days via Suez canal. In this case, we are at disadvantage to West Africa, Australia, and Qatar, but not to US GoM, who already ships 1 bcf to India proving viability of distant LNG on that market. Another differentiator is lack of domestic experience in delivering LNG plants. This could translate in uncertainty in project execution including from regulatory perspective in comparison to expansion projects in established LNG jurisdictions. NOTE: Australia, Westafrieca are closer by 5-14 days, for Qatar which is half of India supply by 19 daysto India West: Abundant liquids-rich natural gas reserves in the proximity Competitive cost of natural gas Competitive temperature regime Competitive operating costs Closeness to the Asian markets Relatively high capital costs Need for a dedicated pipeline built in a mountainous terrain Relatively remote area Additional specific taxation: carbon tax and LNG income tax No domestic experience in delivering LNG project East: Reliable AECO-C/Marcellus gas Competitive temperature regime Competitive operating costs Closeness to European and Latin American and India Markets Lack of developed local natural gas supply (fracking ban) Need for a dedicated trans-provincial pipeline High transportation costs Moderate capital costs No domestic experience in delivering LNG projects

MERCHANT VERSUS INTEGRATED FACILITIES

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LANDED COSTS IN JAPAN

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Presenter

Presentation Notes

2018 average price US9.78/mmbtu

PATH TO COMPETITIVENESS AT JAPAN

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LANDED LNG COSTS AT THE UK

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Presenter

Presentation Notes

UK avg price US7.44/mmbtu

PATH TO COMPETITIVENESS LANDED AT THE UK

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CONCLUSION

Global trade is increasing faster than expectations – mostly in Asia

Domestic Competitiveness Eastern integrated projects (if local gas was available) slightly more

competitive than western projects Merchant projects in the west more competitive mainly due to

proximity to AECO Incentives a factor in project FIDs (steel tariff exemption, LNG tax

exemption)

Asian Markets CA projects slightly more expensive than Japan spot Western CA market more competitive than AU and US Breakeven price is $8.99 in Japan

European Markets CA projects more expensive than UK spot US projects more competitive than Eastern CA projects Breakeven price is $11.4 in the UK Market dynamic uncertainty = Gazprom

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QUESTIONS?

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Please submit your text questions and comments using the Questions panel.

A recording of the presentation will be available following the event.

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webinar: competitive analysis of canadian lng webinar...note: numbers in the legend represent total...

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