Study No. 172 July 2018 - ceri.ca

1 Study No. 172. July 2018. CANADIAN. ENERGY COMPETITIVE ANALYSIS OF. RESEARCH. INSTITUTE CANADIAN LNG. Canadian Energy Research Institute | Relevant Independent Objective Competitive Analysis of Canadian LNG i COMPETITIVE ANALYSIS OF CANADIAN LNG. July 2018. ii Canadian Energy Research Institute Competitive Analysis of Canadian LNG. Authors: Andrei Romaniuk Paul Kralovic Kaleem Asghar ISBN 1-927037-57-7. Copyright Canadian Energy Research Institute, 2018. Sections of this Study may be reproduced in magazines and newspapers with acknowledgement to the Canadian Energy Research Institute July 2018. Printed in Canada Front cover photo courtesy of Google images Acknowledgements: The authors of this report would like to extend their thanks and sincere gratitude to: Geoffrey Cann, Partner (retired), Deloitte Selina Lee-Andersen, Partner, Environmental/.

2 David Campbell, President, Jupia Consultants Aboriginal, McCarthy T trault LLP. Inc. Jeremy Llewellyn, Director, Wholesale Markets, John Baguley, COO, LNG Limited/Bear Head LNG Australian Energy Regulator The authors would also like to thank other industry, government and consulting experts as well as CERI. staff that provided insightful comments and essential data inputs required for the completion of this report, as well as those involved in the production, reviewing and editing of the material, including but not limited to Allan Fogwill, Dinara Millington and Megan Murphy. ABOUT THE CANADIAN ENERGY RESEARCH INSTITUTE CANADA'S VOICE ON ENERGY. Founded 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.

3 Our mission is to provide relevant, independent, and objective economic research of energy and environmental issues to benefit business, government, academia and the public. For more information about CERI, visit CANADIAN ENERGY RESEARCH INSTITUTE. 150, 3512 33 Street NW. Calgary, Alberta T2L 2A6. Email: Phone: 403-282-1231. July 2018. Competitive Analysis of Canadian LNG iii Table of Contents LIST OF FIGURES .. v LIST OF TABLES .. vii ACRONYMS AND ABBREVIATIONS .. ix EXECUTIVE SUMMARY .. xi CHAPTER 1 INTRODUCTION .. 1. Global LNG Overview .. 1. Significant Trends in LNG .. 12. Technological 12. The Changing Business Model .. 13. Pricing and Contracts .. 15. Carbon Management .. 18. Canadian LNG Developments .. 19. Eastern Canada Projects .. 19. Western Canada 23. Structure of the Report .. 27. CHAPTER 2 RESEARCH QUESTIONS AND 29.

4 Research Questions .. 29. 30. Supply Costs .. 31. Pipeline Transportation Costs .. 33. LNG Shipping Costs .. 35. Natural Gas Feedstock Costs .. 35. Other Modelling Assumptions .. 39. Landed LNG Costs Comparison and LNG Pricing .. 39. Optimized Supply Costs: Sensitivity Analysis .. 41. CHAPTER 3 LNG SUPPLY COSTS AND COST DRIVERS .. 43. Western 43. Supply Costs and Key Differentiators .. 43. Sourcing Natural Gas from AECO-C Hub .. 48. Government LNG-focused Incentives .. 49. Economies of Scale Effect .. 51. Eastern Canada .. 53. Supply Costs and Key Differentiators .. 54. Marcellus-sourced Natural Gas Supply .. 56. Maritime Provinces-sourced Shale Natural Gas Supply .. 57. Government LNG-focused Incentives .. 58. Canadian LNG Projects Supply Cost Comparison .. 58. US Gulf of Mexico .. 59. Greenfield LNG Project.

5 60. Brownfield LNG 63. Addition of One 65. July 2018. iv Canadian Energy Research Institute Effect of the New US Tax Regime .. 65. Australia .. 67. CHAPTER 4 LNG COMPETITIVE ANALYSIS .. 71. LNG Shipping Advantages and Costs .. 71. Path to Competitiveness .. 72. Western Canada LNG and Asian Market .. 72. Eastern Canada LNG and European Market .. 79. Optimized Supply Costs for Locally-sourced Gas .. 84. Comparative Perspective and Other Important Factors .. 84. Potential Economic Impacts of LNG Projects .. 86. Cooperation with Indigenous Peoples on LNG Developments .. 87. LNG Environmental Stewardship Initiative .. 88. Capacity Building Initiatives .. 89. Economic Benefit Agreements .. 90. CHAPTER 5 97. BIBLIOGRAPHY .. 105. APPENDIX A SUPPLY COST ASSUMPTIONS .. 113. General Assumptions for All Liquefaction Plants.

6 113. Project-specific Assumptions .. 114. Western 114. Eastern Canada .. 115. US, Louisiana, Brownfield .. 116. US, Texas, Greenfield .. 117. US, Texas (additional train) .. 118. Australia .. 119. APPENDIX B PIPELINE SUPPLY COST MODEL .. 121. APPENDIX C SHIPPING 123. APPENDIX D JURISDICTIONAL COMPARISON OF NON-OPTIMIZED LNG SUPPLY COSTS .. 125. July 2018. Competitive Analysis of Canadian LNG v List of Figures LNG Supply Costs Comparison in Canada .. xiii Path to Competitiveness for Western Canada LNG .. xiv Path to Competitiveness for Eastern Canada LNG .. xv LNG Value 1. Major Trade Movements, 2017 .. 2. LNG Trade Volumes, 1990-2016 .. 3. 2016 LNG Exports and Market Share by Country .. 4. Australian LNG Supply Capacity by Liquefaction 5. Eastern Australia Daily Spot Natural Gas Price and LNG Export Price.

7 5. US LNG Export Capacity .. 8. 2016 LNG Imports and Market Share by Country .. 9. Japan's Regasification Terminals .. 10. Global Regasification Capacity .. 11. An LNG Tanker at the Canaport LNG Terminal .. 12. Non-Long-Term LNG Trade .. 14. Historical Natural Gas and LNG Prices .. 17. Natural Gas and LNG Prices, 2013-2018 .. 18. Maritime Natural Gas Market .. 21. Woodfibre LNG 25. LNG Canada Location .. 26. Natural Gas Transportation Costs .. 34. Feedstock Gas Costs for Modelled Projects .. 38. Feedstock Gas Costs for the Modelled Project .. 39. Natural Gas Basins, Western Canada .. 43. Western Canada LNG Project Supply Cost, 44. Historic LNG Plant Capital Costs .. 46. BC LNG Environmental Inventive Program .. 50. LNG Project Costs Breakdown .. 51. LNG Economies of Scale Effect .. 52. Eastern Canada LNG Project Supply Costs (AECO-C).

8 54. Eastern Canada LNG Project Supply Costs (Marcellus vs AECO-C natural gas supply) .. 57. Eastern Canada LNG Project Supply Cost (local shale gas) .. 58. LNG Supply Costs Comparison, Canada .. 59. Status of LNG Export Terminals in the US Gulf of Mexico .. 60. US, Texas, Greenfield Project Supply Cost .. 61. US, Louisiana, Brownfield LNG Supply Cost .. 64. US Tax Regime Change Effect on LNG Projects .. 65. Comparison of Former US Capital Allowance and Canada's Current Capital Allowance for LNG Plants .. 66. Australia LNG Supply Costs, Queensland .. 67. July 2018. vi Canadian Energy Research Institute Capital Costs, Australia, Canada, US Greenfield LNG Projects .. 69. LNG Shipping Costs .. 71. Landed LNG Cost at Japan .. 72. Total Liquefaction Costs Comparison for Western Canada .. 73. Path to Competitiveness for Western Canada LNG.

9 75. LNG 76. Optimized Supply Cost, Western Canada LNG .. 79. Landed LNG Cost in the UK .. 79. Total Liquefaction Costs Comparison for Eastern Canada LNG .. 80. Path to Competitiveness for Eastern Canada LNG .. 82. Canadian LNG Project Costs .. 98. Cost Competitive Analysis Landed at Japan .. 99. Cost Competitive Analysis Landed at the UK .. 100. Optimized Canadian LNG Project Costs .. 103. Optimized Eastern Canada LNG Costs .. 104. July 2018. Competitive Analysis of Canadian LNG vii List of Tables Jurisdictional Comparison of Non-Optimized LNG Supply Costs .. xvi LNG Liquefaction Projects in Eastern Canada .. 20. Current Key LNG Liquefaction Projects in British Columbia .. 24. LNG Projects Considered for the Study .. 32. LNG Shipping Costs .. 35. Natural Gas Feedstock Costs .. 37. Key Destination Markets for LNG Projects for the Study .

10 40. Natural Gas and LNG Prices for Benchmarking .. 40. Comparative Perspective on LNG Projects .. 85. Summary of Financial Benefits from Natural Gas Pipeline Benefit Agreements Between the Government of British Columbia and Indigenous Groups Potentially Impacted by the Proposed Natural Gas Pipeline Projects .. 93. Jurisdictional Comparison of Non-Optimized LNG Supply Cost .. 102. July 2018. viii Canadian Energy Research Institute July 2018. Competitive Analysis of Canadian LNG ix Acronyms and Abbreviations AGT Algonquin City-Gate bbl Barrels BC British Columbia Bcf Billion cubic feet Bcm Billion cubic metres Brownfield project A project where a liquefaction capacity is added on top of existing liquefaction or regasification capacity CAPEX Capital expenses CERI Canadian Energy Research Institute CSG Coal Seam Gas E&P Exploration and Production EIA Energy Information Administration (US).