LNG projects in Canada may play an important role in Japan’s energy supply

Following the March 11, 2011, earthquake, tsunami, and nuclear disasters, Japan’s energy policy changed drastically. A country that had depended on nuclear power for more than 30 per cent of its electricity production was forced to rapidly shift to alternatives. Given that oil and coal produce high amounts of greenhouse gases, there was a strong need for energy sources that were relatively clean.

Liquefied natural gas (LNG) is an option that filled the bill. LNG is natural gas that has been cooled to -162°C, causing the gas’s volume to decrease 600-fold. In this form, it can easily be transported, often by ship, to places that would be unreachable by pipeline, or to locations where pipelines can’t be built. It can then be used for heating or for electricity production. According to the global LNG operator Elengy, which runs three such terminals in France, the fuel produces 30 per cent less carbon dioxide than fuel oil and 45 per cent less than coal; it also produces significantly less nitrogen oxide emissions and almost no sulphur dioxide compared with fuel oil or coal.

The fuel source has come to play a strong role in Japan’s energy mix. According to the latest data from the Ministry of Economy, Trade and Industry, LNG accounted for 25 per cent of Japan’s primary energy and 40 per cent of the country’s power in fiscal 2016. Shinya Miyazaki, senior adviser in the Canada Oil & Gas Business Department at Mitsubishi Corporation, says that Japan imports more than 80 million tons of LNG per year, making it far and away the world’s largest importer of the gas. The trend shows no signs of slowing.

Canadian LNG

An artist’s illustration gives a bird’s eye view of the proposed LNG Canada project.

A substantial volume of the natural gas that Japan imports in the future may come from Canada. The country is the world’s fourth-largest producer of natural gas and its fourth-largest exporter, with part­icularly rich gas fields in the Northern Alberta region and the province of British Columbia. Over the years, a few Canadian LNG projects have gone into the planning phase but, owing to volatility in the energy markets — particularly a decline in oil prices in 2014 — have been postponed or cancelled.

But this doesn’t mean that interest isn’t there. As Masami Yukawa from Chevron, which is investing in an LNG project in Canada, pointed out, “LNG from Canada is attractive due to proximity to the Japanese market, longstanding trade relationships with Japan, geopolitical stability, a low greenhouse gas profile, and the abundance of prolific and low-cost gas resources.”

Chevron Canada Limited and Woodside Energy International are involved in a 50–50 joint venture, the Kitimat LNG project. It involves natural gas resource development, gas pipeline transmission, and LNG lique­faction. Although a number of Canadian projects have been cancelled, according to Yukawa, “Chevron and Woodside have continued to invest in the project, including step change improvements in the LNG plant design, incorporation of significant innovative technologies, and substantial reductions in unit costs, execution risk and emissions.”

“We believe that this project will play a crucial role for the future energy security of Japan in terms of … the diversification of energy supply sources.”

A Project to Watch

However, the project that is showing the strongest promise at the moment is LNG Canada. Petronas of Malaysia recently announced an interest in the project which would see equity participation shared across Royal Dutch Shell (40 per cent), Petronas (25 per cent), PetroChina (15 per cent), Mitsubishi Corporation (15 per cent), and KOGAS South Korea (5 per cent).

The project, in Kitimat, British Columbia, has the potential to be a massive operation. The first phase of development calls for the building of two trains — the LNG processing units where carbon dioxide, water, condensate, and sulphur are separated from the natural gas and the natural gas is cooled. Each train will be able to process up to seven million tons of LNG per year. Another two trains are to be built in the second phase. The project will include a marine terminal that will be able to accommodate two LNG carriers with capacities of 140,000 to 265,000 cubic meters, a rail yard, and a water treatment facility.

The proposed site, viewed from southwest.

The co-venturers of the project are expected to reach a final investment decision (FID) later this year, but the recent addition of Petronas as a co-venturer is a good sign, as are projections that global demand for LNG is likely to exceed supply in the years to come.

The project has already decided on a team to design and build the project: a joint venture between the US company Fluor and the Japanese firm JGC won the US$14 billion order for engineering, procurement, and construction in April. Optimistic observers believe that an FID is very close, and that construction could begin this year.

Major Upside

There is significant support from the New Democratic Party of British Columbia for the project — they are offering Shell and its partners a fiscal framework to help the emerging LNG industry in Canada compete with other global players. LNG Canada also has the support of the First Nations. The project will be located on the traditional territory of the Haisla Nation, while the traditional territory and communities of seven other First Nations will be along the project’s shipping route, and LNG Canada has put a high priority on getting their approval.

Mitsubishi Corporation’s Miyazaki explained that the project could be pivotal for Japan and Canada: “We believe that this project will play a crucial role for the future energy security of Japan in terms of long-term stable supply of LNG and the diversification of energy supply sources. At the same time, we believe that this project will play a significant role for B.C. and Canada’s economy and employment, through the construction and operation of the facilities, and production and export of its abundant natural gas resources.”

He is also bullish on the general trends in the energy market and the potential for the LNG Canada project: “The major decline in oil price in 2014 not only stalled projects, but also shut many of them down. Fortunately, the dynamic has started to change and the demand for LNG is projected to exceed LNG supply around the timing of LNG Canada’s LNG production.”

Susannah Pierce, external affairs director for LNG Canada, believes that there are several factors that will help to make the project a success. “I think the key thing for success in the long run is being price resilient … so what we have done over the past couple of years is really focus on how we can be a low-cost producer in any scenario.” Another factor in their favour is that they plan to maintain a very low carbon intensity for the project. Pierce feels that the decision makers have been given a proposal with a good chance for a positive FID later this year, and it could be monumental. “If completed, it will be the largest single energy investment in Canadian history,” she explained.

(Photo: LNG Canada)

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