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Can Mega LNG Export Project Take Canada to New Heights?

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Previously a booming market, the Canadian energy sector has not witnessed any major milestones since the past few years. Industry downturn coupled with U.S. shale revolution hit the country hard, nullifying years of expansionary phase within Canada’s energy industry. With the cancellation of major projects like Northern Gateway, Pacific NorthWest and Energy East along with uncertainties relating to the existing ones, things have been quite dispiriting for investors in the Canadian oil energy space.

However, a recent event has provided a ray of hope to the Canadian energy industry’s plight. Just a couple of days back, Canada marked a significant turning point when its mega LNG Canada project, located in Kitimat, British Columbia, was given the final go-ahead by its owners. This represents the single largest private sector investment in the Canadian history.

Kitimat Project Approval: A Major Breakthrough

Cashing in on the improving energy landscape and booming demand for liquefied natural gas, LNG Canada project finally saw the light of day. Owners of the project made their final investment decision (FID) on the multi-billion project, bringing in the much-needed sunshine to the Canadian energy sector.

Royal Dutch Shell plc (RDS.A - Free Report) is currently the largest shareholder of the project with 40% stake and Petronas is the second-largest partner in the project with 25% interest. PetroChina Company Limited (PTR - Free Report) and Mitsubishi will own 15% stake, each. The remaining 5% interest will be held by KOGAS. Notably, Shell had delayed the FID on the project twice owing to global supply glut and weak prices. Reportedly, the company has actively worked its way to lower the project cost and take advantage of the tax breaks announced by the government of British Columbia. Banking on increasing demand for LNG, the project has been witnessing a flood of events lately. Good news is that it has finally received the much-awaited nod this time.

The LNG Canada project, located in Kitimat, British Columbia, is estimated to cost C$40 billion. It also marks the nation’s largest infrastructure project ever. The first phase of the project incorporates the construction of two LNG processing units and facilities for export. The initial shipping capacity of the project will be around 14 million tons of LNG a year with potential to expand to four trains in the future. The project will liquify and carry the gas from Montney and other fields to the energy-starved Asian markets.

A joint venture between Fluor Corporation and JGC Corp., a Japan-based global engineering firm, has secured a $14-billion contract from LNG Canada to design and build its LNG export facility in Kitimat. The JV will initiate construction right away with the first LNG delivery expected around the middle of next decade.

LNG Canada to Rejuvenate Canadian Gas Industry

While the production of gas is soaring in Canada, lack of pipeline construction and export facilities are forcing producers to sell their products at a discounted rate. The LNG Canada project will certainly provide a fresh lease of life to Canada’s gas industry. The additional export facility will certainly help mitigate the oversupplied gas market of Canada, which has debilitated the gas prices in the country since the past few years.

Notably, Canada is net natural gas exporter with U.S. market being the chief importer of Canadian gas.  As the United States is itself revving up its production, U.S. demand for Canadian gas is likely to decline. Therefore, Canadian producers must access the new emerging oversees market to enhance its competitive edge.

Importantly, demand for LNG has been witnessing robust growth of late, primarily as China and other Asian countries are making efforts to switch from coal to natural gas, which is billed as the cheaper and the cleaner burning fuel. In fact, LNG demand reached 293 million tons in 2017 — up 29 million tons from 2016 and significantly higher than 100 million traded in the year 2000. Individually, China’s LNG imports in 2017 escalated 50% year over year and the momentum is likely to sustain.

The mega export facility will help Canada tap into growing gas demand for Asia. Moreover, with trade tensions between The United States and China gathering steam, Canada can exploit the situation to its advantage. With China proposing tariffs on US LNG imports, Canadian gas is likely to become more competitive.  

Due to Canada’s proximity with the Asian markets along with robust natural gas production in British Columbia and Alberta, the nation is a much-preferred destination for the LNG export facilities. The startup of the Kitimat project is likely to unleash a new LNG wave in the nation.

The Much-Coveted Win Despite Various Setbacks

While the natural gas and oil prices in Canada have been witnessing a downward curve, capital spending in the country has also been curtailed. Also, since oilsands development is not in its excellent form, pipeline projects have been hitting constant roadblocks and facing delays. Though several major pipeline projects have received the nod from country wide review agencies, Canadian industry observers felt that it is not going to be a smooth ride amid environmental and political turmoil.

TransCanada Corporation’s (TRP - Free Report) $8-billion worth Keystone XL pipeline has been grappled with regulatory obstacles and opposition from landowners, environmentalists and Native American tribes. While the project received a green signal from the US State Department last month, it does not put an end to all woes. The venture has been witnessing a backlash from green campaigners. TransCanada currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The C$7.4-billion Trans Mountain Pipeline is also struggling with various concerns. Thanks to ecological and political turbulence, Kinder Morgan, Inc. (KMI - Free Report) divested the pipeline project to the Canadian government for C$4.5 billion. However, the hurdles and headwinds associated with the project just do not seem to abate. Just about a month ago, the Federal Court of Appeal rejected Canadian President Justin Trudeau’s approval of the controversial Trans Mountain pipeline.

In spite of such deadlocks and hindrances, Kitimat project sanction is a much-needed victory for the Canadian energy sector and possibly an encouraging precedent for the upcoming investments. Post the FID of Canada LNG, TransCanada has also decided to proceed with its Coastal GasLink pipeline to transport natural gas from Montney shales to LNG Canada facility in Kitimat.

New Cycle of LNG Projects Around the Corner?

The consent to the LNG Canada project will reflect the turnaround of the LNG market after years of surplus supply and soft gas prices that have significantly lowered investments in the industry. In fact, the excess supply in LNG market is likely to be hit by a looming deficit by 2022, in case there is dearth of new projects.

Reportedly, 2019 is likely to emerge as the landmark year for LNG investments with around 11 projects set to receive the final approval. Several projects are expected to be given the official push over the next two years. These include Russia’s Arctic LNG, Golden Pass and Calcasieu Pass in the United States as well as four units in Qatar and at least one plant in Mozambique.

Final Thoughts

While the LNG Canada project has been green-lit, it is also drawing its share of flak from the environmental agencies. The green crusaders have been questioning the project’s potential carbon emissions, which according to them fail to meet the British Columbia climate goals.

Amid all this negativity, approval of the LNG Canada project still seems a game changer. Though it is not expected to boost the gas prices in the near future, higher demand will lead to an uptick in the commodity prices once the facility becomes operational.

The final investment plan sealed between the operators on the C$40 billion project marked a historical milestone for Canada by helping the country secure a new source of growth in the coming decades. Importantly, the project should provide a massive impetus to Canada's stalled energy sector.

However, there still remain a lot of obstacles that the country needs to overcome to boost the energy infrastructure in the nation. The industry needs a streamlined regulatory system, tax reforms and inflated capital investments to take it to greater heights.

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