Mon, Jun 17 2024 17 June, 2024

Canada’s Woodfibre LNG rests on shaky financial prospects

The proposed Woodfibre LNG project has seen costs soar, and is not competitive with larger LNG projects on the U.S. Gulf Coast, despite generous public subsidies. Critics say it will not offer the economic benefit for which British Columbia is hoping.

Picturesque Howe Sound, in British Columbia, is under threat from the proposed Woodfibre LNG project, say critics (Photo credit: Nicholas Cunningham/Gas Outlook)

This is the second part of a Long Read centred on the climate, social and financial impact of building Woodfibre LNG on Canada’s British Columbia coastline. Read the first part here.

(Squamish, British Columbia) The west coast of Canada is well-positioned to ship gas to Asia, but rising costs and medium-term market risks raise questions about the region’s viability as a major source of LNG exports.

Nowhere is that more apparent than in Squamish, a town about a little more than one hour’s drive north from Vancouver. A project called Woodfibre LNG hopes to export gas to Asia, using gas that is drilled 1,600 kilometres away in the northeastern corner of the province. In addition to the proposed 2.1 million-tonne-per-year (mtpa) LNG terminal on the coast, Woodfibre LNG will require a new 40-kilometre pipeline to connect to existing gas infrastructure.

But progress has been slow. The project was originally proposed nearly a decade ago, and in the intervening years, costs have exploded.

Back in 2015, the project was estimated to cost US$1.2 billion. But by 2022, that estimate was sharply revised upwards, rising to an estimated USD$5.1 billion. The price tag could continue to balloon.

Even though costs have soared by more than 130 percent since 2015, only 21 percent of that increase is attributable to general inflation, according to a February 2023 report from the Institute for Energy Economics and Financial Analysis (IEEFA).

Woodfibre is not alone. In July, at the LNG2023 conference, a high-profile gathering of gas industry professionals, analysts warned about creeping costs imperiling new gas projects. Summing up the atmosphere at the multiday proceedings, Michael Stoppard, global gas strategy lead at S&P Global Commodity Insights, said that there is a lot of “confidence” in the LNG industry broadly about its growth trajectory, but industry insiders also expressed apprehension about soaring costs during the summit.

“There’s been some quite concerning discussions about cost inflation and cost management. It’s going to be tough to manage those costs and ensure that our product remains affordable,” Stoppard said at the conference, which was held in Vancouver, British Columbia.

Most LNG forecasts predicting strong growth in demand “are generally based on the assumption that that product can continue to be priced at an affordable level,” Stoppard said, “so costs I do see as a dark cloud hanging over this conference and this debate.”

Ed Crooks, vice chair of Americas at consultant Wood Mackenzie, agreed. “Cost inflation is very much on the rise,” he said, adding that rising interest rates are squeezing margins across the LNG industry.

Woodfibre LNG

Budget-busting cost inflation comes at a time when the LNG market is increasingly competitive, with a flurry of investment flowing into new LNG supply following Russia’s invasion of Ukraine.

But Woodfibre LNG is not in the same class as larger and cheaper LNG projects in other parts of the world, experts say.

“It used to be that about $700 per tonne was kind of okay. Now it’s $1,000,” Clark Williams-Derry, an energy finance analyst at IEEFA, told Gas Outlook, referring to the rough industry average cost for developing a new LNG project, which has crept up in the recent past.

He pointed to a few high-profile examples. For instance, Port Arthur LNG in Texas is a 13.5-mtpa project with a price tag of around $13 billion. Phase 1 of Rio Grande LNG, to be built in south Texas, would be a roughly 17.5 mtpa-project with a cost of around $18.4 billion. That puts both projects roughly in the $1,000-per-tonne range.

“That seems pretty typical for the U.S. Gulf Coast,” Williams-Derry said.

But Woodfibre LNG’s expected cost of $5.1 billion for a 2.1 mtpa project would translate into a price of more than $2,400 per tonne.

“So, it looks to me like it’s clearly an expensive project. That’s the way the economics look to me. It’s what, two and a half times the going rate?” Williams-Derry said.

Others who have closely followed the project have a similar interpretation.

“There’s something wrong with this picture. There’s no way you can make money doing that,” Eion Finn, a retired partner at accounting firm KPMG, told Gas Outlook during an interview in Vancouver in July, referring to the rising price tag for Woodfibre. Finn cofounded the Squamish-based NGO My Sea to Sky, which opposes the project.

“They look like they’re serious about going ahead. I’m scratching my head thinking, ‘I don’t see the economics in this,’” he said. “It’s not competitive, and it’s a very competitive commodity business they’re in.”

Medium- and long-term demand risks

Former B.C. Premier Christy Clark flew by helicopter to Squamish in November 2016 to appear with Woodfibre LNG for what appeared to be a highly-anticipated final investment decision.

“This is the first of 20 projects that are in the pipeline somewhere to go forward so far, and we are just delighted to be able to say that LNG in British Columbia is finally becoming a reality,” Clark said at the time.

But the company did not actually announce a final investment decision. Because Woodfibre is privately-held, it does not announce FIDs in the same way as other LNG projects, company officials said. The company nevertheless insisted that the project was moving forward, but critics called it a publicity stunt.

Several years passed without much progress. In April 2022, Woodfibre gave a notice to proceed to McDermott International, a signal to begin construction. Again, the company said this was akin to an FID without being one. The situation may be more than a mere difference in semantics. Analysts say Woodfibre is signaling its intention of moving forward while leaving some wiggle room to reverse course if market conditions deteriorate.

Chris Pettingill, a city councillor for Squamish, said that for years Woodfibre LNG has tried to present its project as “inevitable,” perhaps in an attempt “to discourage people from feeling like they might be able to stop this project.”

But the project has seen years of delays, staff turnover, and promised start dates for construction that come and go, he said. In addition, the project needs to demonstrate that construction has “substantially started” before 2025 or else its environmental certificate will expire. Along with murky global demand for LNG, the outlook for Woodfibre LNG remains unclear. Pettingill said he is “skeptical about the certainty” of Woodfibre LNG.

“When I look at the realities of our climate crisis, and the direction and pace of technology, I don’t honestly think the Woodfibre LNG fossil plant will remain operational for long, even if it finishes construction,” he told Gas Outlook. “As far as I can tell, there really isn’t a future for fossil fuel development like what has been proposed with Woodfibre LNG so far.”

“My big frustration is the amount of our time and money being wasted on this project as currently proposed before enough of us realize we have so much more important things to be focusing on,” he said.

Woodfibre LNG

Residential housing in Squamish, British Columbia (Photo credit: Nicholas Cunningham/Gas Outlook)

As of July 2023, when Gas Outlook visited Squamish, there appeared to be scant activity at the site. Both Woodfibre and the associated gas pipeline to be built by Fortis BC, a gas utility, still need a handful of permits in order to move forward.

The permitting and regulatory hurdles do not appear to be significant, and indeed, in late August, Fortis BC said it was mobilizing equipment to soon begin construction of the pipeline.

But the larger challenge is that the commercial logic for high-cost LNG remains uncertain. For years, Woodfibre remained short on the volume of commercial deals for what is typically needed to get an LNG project off of the ground. The project had 15-year agreements with BP Marketing, totaling about 70 percent of the project’s capacity. A general rule of thumb is that an LNG project needs 80 percent of its capacity secured under 20-year deals.

“They’ve got 70 percent at 15 years, which is not the same thing as 80 percent for 20 years. Those are not the same numbers,” Williams-Derry told Gas Outlook, during an interview in late August.

In early September, BP announced that it was committing to buying the rest of Woodfibre’s capacity, a boost to the fortunes of the project.

“This news certainly adds a tailwind to the project,” Williams-Derry said in a follow-up email in September. “However, the fact that the contracts only last for 15 years could be troubling to lenders, if Pacific Energy is looking for debt financing,” he said, referring to Woodfibre’s parent company.

While high costs remain a stubborn problem for the project, another looming dark cloud is the prospect of oversupply hitting the LNG market in the latter half of the decade. As it stands, Woodfibre is projecting to start up operations in 2027, coming online at the same time as so many other LNG projects that moved forward after Russia’s invasion of Ukraine.

“They’re launching in 2027, when they’re competing directly with LNG Canada, with all these other projects that are coming online from Russia to Mozambique, to Senegal, to the U.S.,” Williams-Derry said.

Market conditions look set to decline in the years ahead with the flood of new supply. LNG futures prices in East Asia — the so-called JKM marker — are trading at $17.90 per MMBtu for January 2024, but prices for January 2027 are currently trading at just $12.80/MMBtu. January 2028 prices are even lower, trading at $10.

Of course, prices are subject to change, but they are an indication that, at least from today’s vantage point, the LNG market looks set to be potentially oversupplied in a couple of years’ time, right when Woodfibre would start up operations.

“We think there is significant risk of a glut starting in 2026,” Williams-Derry said.

In other words, if Woodfibre LNG does move forward, it will be entering into a global LNG market at exactly the wrong time.

“This is a project that is still facing significant financial headwinds due to cost and risk, which I think is why even in the face of relatively strong market signals over the past year — build, build, build — why there aren’t crews scrambling there to get gas out,” Williams-Derry said.

In his report from early 2023, Williams-Derry wrote that there are parallels between Woodfibre and Tellurian’s Driftwood LNG project in Louisiana, a project that has run into serious financial trouble. Driftwood saw costs soar and struggled to keep its buyers on board.

“All the signs are there that they’re not moving forward at speed, but rather slow walking to try to figure out how to make it work maybe someday,” Williams-Derry said.

Support from B.C. government

In the middle of the last decade, former British Columbia Premier Christy Clark promised that an LNG bonanza would wipe out the province’s debt burden and create 100,000 jobs. But those promises ring hollow with so many gas export projects still on the drawing board.

Today, of the more than a dozen new LNG projects proposed for B.C. over the past decade, only one is under construction — the Shell-backed LNG Canada on the northern coast of the province. Woodfibre LNG would be the second, but while it is inching forward, it remains in a curious limbo. (A third, Tilbury, is an existing gas facility near Vancouver that serves the province, but the owners want to expand the terminal to export more LNG abroad).

Many projects were delayed or cancelled over the years. A handful of additional projects remain in the proposal phase, as developers look for buyers overseas and scramble to find financing for their multi-billion-dollar export terminals. Their fate remains unclear.

The slow progress comes even as Woodfibre, like other LNG projects, would benefit from generous provincial and federal subsidies.

British Columbia is offering cheap electricity gas export terminals. The massive Site C dam in eastern B.C., which will cost more than $16 billion and is still under construction, will sell power to LNG terminals at less than half the cost of what it takes to produce the electricity. Because it is a publicly-led infrastructure project, the Canadian public will effectively be subsidizing electricity for LNG operations to the tune of tens of millions of dollars per year.

“I can’t think of a stupider proposition than taking relatively clean energy from a dam — hydroelectricity — and using it to prepare a fossil fuel export. At public expense,” Finn, the retired KPMG partner, and cofounder of My Sea to Sky, told Gas Outlook.

The project will also receive other public subsidies, including exemptions from steel tariffs, a reduced corporate tax rate, accelerated depreciation, to name a few. By Finn’s estimates, Woodfibre LNG alone will receive at least 11 major subsidies, totaling $1.63 to $1.86 billion over 25 years. That would be equivalent to a subsidy of $653,000 to $744,000 for each worker employed by Woodfibre per year.

Squamish will also need to pick up the tab for a rising cost of policing due to the influx of hundreds of workers. For 2023, the city allocated $470,000 in additional policing costs, a sizable sum for a small city. Critics point out that those costs amount to yet another hidden subsidy for the project.

But there are also concerns that one of the main selling points of the project – the allure of a major source of revenue for the province, stemming from billions of dollars of investment — may be oversold. And part of that relates to Woodfibre’s overseas corporate owners.

Woodfibre LNG is a subsidiary of Pacific Energy Corp., an energy company with upstream gas production assets in Canada, as well as gas-fired power plants in China. Pacific Energy, in turn, is a unit of Singapore-based Royal Golden Eagle (RGE) group, a global conglomerate controlled Sukanto Tanoto, an Indonesian business titan that has major holdings in timber, palm oil, energy, pulp & paper, and power generation.

Part of the distrust from some of the Squamish community towards Woodfibre LNG is due to its links to Tanoto.

Tanoto’s companies have been accused of profit-shifting, moving billions of dollars through offshore companies in order to avoid paying tax. One of his companies was forced to pay more than $200 million in fines for tax evasion in Indonesia in 2012. RGE and its subsidiaries have also been linked to deforestation in Indonesia, despite having issued a no-deforestation pledge in 2015.

His name appeared prominently in the Paradise Papers, a landmark series of global investigations into corruption and tax evasion by the international business and political elite, published by a consortium of several hundred journalists in 2017.

“Most self-made billionaires aren’t any candidates for choir boy of the year,” Finn said. “But he has to stand out even amongst that lot.”

Finn believes the company’s corporate structure is likely organized in such a way that profits would be moved to entities overseas, resulting in British Columbia receiving fewer economic benefits than the provincial government suggests.

Over the past decade, there has been public pressure on the B.C. government to cut ties with Woodfibre LNG because of its links with Tanoto, but to no avail. Several administrations at the provincial level have promoted more LNG exports as a way to create jobs and economic growth.

The office of B.C. Premier David Eby did not respond to questions from Gas Outlook.

Woodfibre LNG did not respond to repeated requests for comment and to a list of questions from Gas Outlook.

The federal government also maintains support for LNG, asserting that it can be done with minimal environmental impact. “The Canadian Government is taking steps to grow the Canadian economy, create good jobs and opportunities for Canadians, while protecting our environment for future generations,” the federal ministry, Natural Resources Canada, states on its website in its official position regarding the 18 proposed LNG projects across the country.

But opponents of Woodfibre do not believe the economic windfall for the province will materialize.

Woodfibre LNG

A public mural in Squamish, photographed in July 2023 (Photo credit: Nicholas Cunningham/Gas Outlook)

“The benefits that were sold to B.C. for getting into the LNG business was how good it was going to be for our taxation —the opportunity of a lifetime with thousands of jobs created, billions in taxation, and a debt-free BC,” Finn said. “Of course, none of that ever was, or is now, going to happen.”

(Words by Nick Cunningham; editing by Sophie Davies)

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