Competitiveness of Canadian LNG ProjectsPresented at 3rd LNG Summit

Dinara Millington, VP, ResearchCanadian Energy Research Institute

February 2019

Canadian Energy Research Institute

Overview

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.

Our mission is to provide relevant, independent, and objective economic research

of energy and environmental issues to benefit business, government, academia

and the public.

CERI publications include:

• Market specific studies

• Geopolitical analyses

• CERI Energy Quarterly

In addition, CERI hosts an annual Petrochemical Conference.

Core Funders:

Donors:

In-kind:

Ivey Foundation

Energy Council of Canada

Canadian “Knot”

Source: Brian Gable, Globe & Mail, Editorial Cartoons, January 2019

Presentation Outline

▪ Canadian LNG Projects – Overview

▪ Basic Parameters and Assumptions

▪ Supply Costs for Western and Eastern Canadian LNG

▪ Key Differentiators of Canadian Projects

▪ Landed Costs in Asia and Europe Comparison

Canadian Projects• 35 LNG export licenses issued (July 2018)

• 28 in British Columbia (BC)

• 3 in Quebec (QC)

• 3 in Nova Scotia (NS)

• 1 in New Brunswick (NB)

• Key projects

• Goldboro LNG NS – 5-10 MTPA, integrated, 2019 FID

• Bearhead LNG NS – 8-12 MTPA, tolling, 2019+ FID

• Woodfibre LNG BC – 2 MTPA, merchant, active

• LNG Canada BC – 13 - 26 MTPA, integrated, 2018 FID

• Kitimat LNG BC – 10 MTPA, integrated, n/a

• Steelhead (floating) LNG BC – 24 MTPA, delayed

Model Assumptions

Variable Unit Western Canada

Eastern CanadaAECO/Local

US Gulf (Greenfield)

Australia

Capacity Mtpa 13 8 9 8.5

Capex US$/tpa 1,184 1,006 1,028 2,091

Opex US$/Mmbtu 0.69 0.69 0.91 1.34

Project life Years 30 30 30 30

Transport Cost

US$/Mmbtu 0.96 3.33/0.07 0.42 0.14

Shipping to Europe

US$/Mmbtu 1.56 0.42 0.75 1.84

Shipping to Asia

US$/Mmbtu 0.64 1.76 1.64 0.58

Natural Gas Prices and Supply Costs

WCSB Natural Gas Production

Merchant versus Integrated Facilities

Key Differentiators of Canadian ProjectsWest East

• Reliable AECO-C/Marcellus gas

• Competitive temperature regime

• Competitive operating costs

• Proximity to European, Latin American and India Markets

• Lack of developed local natural gas supply (fracking ban)

• Need for a dedicated trans-provincial pipeline

• High transportation costs

• Moderate capital costs

• No domestic experience in delivering LNG projects

• Abundant liquids-rich natural gas reserves in the proximity

• Competitive cost of natural gas

• Competitive temperature regime

• Competitive operating costs

• Proximity to the Asian markets

• Relatively high capital costs

• Need for a dedicated pipeline built in mountainous terrain

• Relatively remote area

• Additional specific taxation: carbon tax and LNG income tax

• No domestic experience in delivering LNG project

Landed LNG Costs in Japan

Path to Competitiveness at Japan

Landed LNG Costs in UK

Path to Competitiveness at UK

Canadian “Knot” Untied

• Global LNG trade is increasing faster than

expectations – mostly in Asia

• Partial fracking ban lift in New Brunswick

• Announced Consortia of gas producers in BC and

AB

• BC’s lift on steel duties and BC incentive package

• LNG Canada – 2018 FID

• Goldboro – 2019 FID

Conclusion

• Domestic Competitiveness

• Eastern integrated projects (if local gas was

available) slightly more competitive than western

projects

• Merchant projects in the west more competitive

mainly due to proximity to AECO

• Incentives a factor in project FIDs (steel tariff

exemption, LNG tax exemption)

Conclusion - continued• Asian Markets

• CA projects more expensive than Japan spot

• Western CA market more competitive than AU and US

• Breakeven price is $8.99 in Japan

• European Markets

• CA projects more expensive than UK spot

• US projects more competitive than Eastern CA

projects

• Breakeven price is $11.4 in the UK

• Market dynamic uncertainty = Gazprom

Thank You for Your TimeWWW.CERI.CA

CANADIAN ENERGY RESEARCH INSTITUTE

@CERI_CANADA

Appendix: Western Canadian LNG Project

Fabricated steel duties Fabricated steel duties BC LNG incentive package Additional cost savings Expanded plant

Constant 2018 dollars USD CAD

Supply cost 8.35$ 10.44$

Captial cost 3.42$ 4.27$

Feed Gas cost 2.51$ 3.13$

Pipeline Transportation cost 0.96$ 1.21$

Operating cost 0.69$ 0.86$

Corporate taxes 0.50$ 0.62$

LNG Income tax 0.09$ 0.12$

Carbon tax 0.18$ 0.23$

Total taxes 0.78$ 0.97$ Sensitivity analysis:

Key metrics (billion USD, nominal):

CAPEX: 16.1$ CAPEX/tpa ($): 1,237$

OPEX 13.4$ Corporate taxes 15.2$

Natural Gas and Transportation 67.9$ Carbon and LNG Income tax 5.8$

Key differentiators:

▪ Abundant liquids-rich natural gas reserves in the proximity

▪ Competitive cost of natural gas feedstock

▪ Relatively high capital costs

▪ Need for a dedicated pipeline built in a mountainous terrain

▪ Competitive temperature regime

▪ Competitive operating costs

▪ Relatively remote area

▪ No domestic experience in delivering LNG project

▪ Need for the Indigenous Peoples support

▪ Additional specific taxation: carbon tax and LNG income tax

▪ Closeness to the Asian markets

Supply Cost, Western Canada LNG, 13 mpta, Greenfield, Integrated, Montney Gas

41%

30%

12%

8%

6%

1% 2% Captial cost

Feed Gas cost

Pipeline Transportationcost

Operating cost

Corporate taxes

LNG Income tax

Carbon tax

8.35

5.0

6.0

7.0

8.0

9.0

10.0

11.0

12.0

-75% -50% -25% -10% 0% 10% 25% 50% 75%Su

pply

cost

, $ p

er m

mbt

uOPEX CAPEX TRANSPORT GAS PRICE

Appendix: Eastern Canadian LNG Project

Fabricated steel duties Incentive package Additional cost savings Expanded plant

Supply costs 8.09$ 10.11$

Captial cost 3.09$ 3.87$

Feed Gas cost 3.44$ 4.30$

Pipeline Transportation cost 0.07$ 0.09$

Operating cost 0.69$ 0.86$

Corporate taxes 0.61$ 0.76$

LNG Income tax -$ -$

Carbon tax 0.18$ 0.23$

Total taxes 0.80$ 1.00$

Sensitivity analysis:

Key metrics (billion USD, nominal):

CAPEX 9.1$ CAPEX/tpa ($) 1,006$

OPEX 8.3$ Corporate taxes 11.1$

Natural Gas and Transportation 42.9$ Carbon and LNG Income tax 1.9$

Key differentiatiors:

▪ Large natural gas supply in the proximity to the LNG plant (provided the

resource base is proved and fracking ban is lifted)

▪ Low natural gas transportation costs

▪ Moderately high capital costs and industrially developed area

▪ No domestic experience in delivering LNG projects

▪ Need for a dedicated intra-provincial pipeline

▪ Competitive temperature regime

▪ Competitive operating costs

▪ Government and Indigenous People support

▪ Closeness to European and Latin American and India Markets

Supply Cost, Eastern Canada LNG, 8 mtpa, Greenfield, Merchant, local shale gas

38%

43%

1% 8%

8%

0% 2%Captial cost

Feed Gas cost

Pipeline Transportationcost

Operating cost

Corporate taxes

LNG Income tax

Carbon tax

$8.1

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

11.0

12.0

-75% -50% -25% -10% 0% 10% 25% 50% 75%

OPEX CAPEX TRANSPORT GAS PRICE