From Financial Post, Sept 4.

Fracking-infographic_webCanadian liquefied natural gas may soon be lighting up Hawaii, if plans to ship the super-chilled gas to the Pacific island state come to fruition.

As 16 LNG consortiums consider investments on the West Coast, Vancouver, B.C.-based FortisBC Energy Inc. is expected to beat the traffic and start supplying LNG to Hawaiian Electric Co. under a 15-year agreement starting mid-2017, subject to regulatory approvals.

“This is our first long-term agreement of this type,” said Doug Stout, vice-president, market development and external relations at FortisBC. “It’s a niche LNG project, and a different kind of play than the northern B.C. and U.S. Gulf Coast projects, which are very large scale and have large shipping logistics.”

Hawaiian Electric, or a third-party determined by the power company, will need to secure an export licence from the National Energy Board.

While small, the Hawaii deal underscores the breadth of possibilities and untapped markets for Canadian natural gas.

“We have had some interest from other offshore markets in North America, Asia and South America,” Mr. Stout said. “It’s early days, so we haven’t nailed anything down, but there has been an interest when people see the opportunity and what they might be able to do.”

FortisBC will require regulatory approval from the province to expand its Tilbury Island LNG facility in Delta, B.C. The facility, built in 1971, began supplying LNG as a transportation fuel in 2009 to local and regional markets including truck-based exports to the United States, and is currently in the midst of a $400-million expansion to boost output and storage facilities.

Nearby, Irving-C.A.-based WesPac Midstream LLC is planning a new marine terminal in the Fraser River adjacent to the Tilbury LNG Plant to accommodate exports of LNG by barges or ships. The company applied for a licence in the summer to export up to 400 million cubic feet of gas a day over 25 years from Delta.

Hawaiian Electric has agreed to purchase about 800,000 tonnes per year for the first five years, 700,000 tonnes for the next five years and 600,000 tonnes per year for the last five years, at a price of $12-$13 per million British thermal units.

“Here’s an example of possibilities — folks in Hawaii want to access West Coast Canada gas supply,” said Bill Gowzd, senior vice-president, gas services at Ziff Energy, a division of Solomon Associates. “It’s not just Asia. I don’t think we ever contemplated exporting gas to Hawaii — these are new concepts.”

The development comes at a crucial time for British Columbia’s LNG industry. After drumming up interest in the fledgling sector during the past few years, the provincial government is set to announce its fiscal regime governing LNG exports in the fall.

The government intends “to have legislation ready for introduction by fall 2014, once the complex drafting process is complete,” Glen Plummer, senior communications officer in B.C. government said in an email. The B.C. legislature will begin its fall session on Oct. 6.

Proponents had balked at the government’s initial proposal to levy a 7% tax on exports once capital costs were recouped, but the government is working to “provide certainty” as companies move toward making final investment decisions, Mr. Plummer said.

Although the LNG tax structure remains unclear, “we believe this tax is likely to negatively impact return economics for these projects,” investment bank Peters & Co. said in a report.

B.C. is hoping the fiscal terms will be attractive enough for proponents to proceed with the development of a new export industry at a time when its other major exports such as paper and mining are flagging.

The development is especially crucial for the natural gas sector that has fallen on hard times amid low prices and as the United States, Canada’s only natural gas customer, is increasingly self-sufficient in the commodity.

LNG proponents are also expected to focus their minds in the next few months.

Malaysian giant Petroliam Nasional Berhad (Perronas) and its Asian partners will decide on their B.C. LNG project by the end of the year, while a consortium led by Royal Dutch Shell Plc. may also decide on the project by mid-2015.

A third project expected to make a decision in early 2015 may have suffered delays after Apache Corp. decided to exit the development in June, leaving its partner Chevron Corp. in the lurch. The Kitimat project was widely seen by analysts as among the three most likely to succeed, but Apache’s exit under shareholder pressure suggests proponents remain jittery of pouring billions in an uncharted West Coast industry.

While success is far from certain, the government is taking heart from the ceaseless flow of new players coming to the market.

“We are seeing the continuation of new LNG proposals. In the past little while more than 10 billion cubic feet of LNG capacity have sprung up,” Mr. Gowzd said.

Apart from WesPac, Fort Worth, Tex.-based Quicksilver Resources Inc. applied for a licence to export 20 million tonnes of LNG per year for 25 years. Australia’s Woodside Petroleum also announced its intention to enter the crowded market with plans to export 20 million tonnes of LNG per year for 25 years from a proposed terminal at Grassy Point, B.C.

In addition, upstart Steelhead LNG is proposing a US$30-billion LNG export facility on Vancouver Island to export up to 30 million tonnes per annum (mtpa) of liquefied natural gas for 25 years.

Analysts expect more activity with new players clamoring for a piece of the LNG prize.

“We expect additional Asian LNG players to participate in Canadian West Coast LNG export projects through off-take agreements and/or direct equity participation,” said Peters Co., adding that major regasification operators such as Tokyo Gas, Tokyo Electric Power Company and Osaka Gas are among the major players absent.

B.C. has some significant development cost issues to overcome, with billions more in capital investments compared to its rivals on the U.S. Gulf Coast, and lack of pipeline infrastructure connecting reservoirs to exporting facilities.

But if Premier Christy Clark can get the fiscal terms right, the province could see as many as three facilities by 2025, according to market observers.

“If she spins it properly, she can get away with it,” said Mr. Gowzd, noting that the B.C. teachers’ strike under way highlights the need for the government to find new revenue streams as costs escalate.

“If she get her energy guys involved and they try to extract the lifeblood out of the system, then there is no LNG golden eggs any more. She [the premier] is being squeezed between revenue expectation and collecting that revenue. She has to balance it.”

 

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