The Road to Competitiveness for East Coast LNG: Are We There Yet?

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Canadian Energy Research Institute

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

• Quarterly commodity reports (crude oil, electricity and natural gas)

In addition, CERI hosts a series of study overview events and an annual Petrochemicals Conference.

Overview

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Core Funders:

Donors:

In-kind:

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Presentation Outline

Supply and

Demand in the

Atlantic basin

East Coast LNG:

Specifics and

Competitiveness

Sourcing and

Transportation of

Natural Gas

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Atlantic Basin

Consumers:

• Europe

• South America

• Central America and Mexico

• India

LNG EXPORTER PERSPECTIVE

Suppliers:

• US and Canada

• Norway and Russia

• Middle East

• Africa

• Central and South America

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Atlantic Basin

SECOND LARGEST GAS MARKET

0%

5%

10%

15%

20%

25%

30%

0

10

20

30

40

50

60

70

80

90

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20

02

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17

Demand Growth 2000-2017, bcf/d

Europe Latin, Central America and Mexico India % of world

Last 17-y 5-y

+20 +4.3Demand,

bcf/d

% of world

demand-4% -1%

Gas % in

energy supply23%

Sectors’

growth

Power,

Buildings,

IndustrySource: BP Statistical Review 2018, CERI

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Atlantic BasinMARKET OPEN FOR IMPORT

82 bcf/d

+5%

Demand Supply

47 bcf/d

-7%

Net Import

35 bcf/d+10%

Reserves life

25 years0%

Domestic Balance:

2017 And Change for the Last 5 Years (%)

Source: BP Statistical Review 2018, CERI

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Atlantic BasinTRADE FLOWS 2017

Europe Russia, CIS

Africa

USA

Middle East

Other

27.7 bcf/d

8.6 bcf/d

Pipeline

LNG

Central America

and Mexico

1.9

South AmericaIndia

17.4 0.5

0.7

0.2

0.4

53%

20%

14%

12%

1%

Share

Source: BP Statistical Review 2018, CERI

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Atlantic BasinDEMAND OUTLOOK 2040

Europe: 6.5 bcf/d

India: 5.9 bcf/d

Central, South

America and

Mexico: -2.6 bcf/d

+19 bcf/d

Demand

growth

10 bcf/d

Supply

Opportunity

75 mtpa

Source: IEA World Energy Outlook 2018, CERI

0

10

20

30

40

50

60

2017 2025 2030 2035 2040

Demand Outlook

Europe demand Central, South Amercia and Mexico India

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European Market In Focus WELL SUITED FOR MORE LNG

Total

regasification

22 bcf/d

Planned

regasification

+8 bcf/d

Lack of supply:

6.5 bcf/d

~50 mtpa

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European Market in FocusCOMPETITION AT THE MARKET

Importsbcf/d

LNG3-y

growth bcf/d

Russia 18.3 0% +4

Norway 11.0 4% +1

Netherlands 4.2 0% -0.1

Africa 6.3 42% +1.8

Other Europe (inc. UK)

2.7 3% -

Qatar 2.3 100% -

Other (inc. Iran) 1.7 1% +0.3

South and Central America

1.0 100% +0.1

USA 0.3 100% +0.3

87%

41 bcf/d

13%

6.3 bcf/d

Source: BP Statistical Review 2018, CERI

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European Market In FocusKEY DEVELOPMENTS SHAPING THE FUTURE

• Energy transition to renewables

and lower carbon fuels

• Geopolitical risks of increased

energy dependence from Russia

• Declining supply from Europe

North

Policy and Issues Supply

• Existing import: 47 bcf/d

• Potential expansion: 6.5 bcf/d

Supplier’s plans in the near future:

• Russia: + 7.8 bcf/d

(Nord Stream 2, Arctic LNG 2)

• USA: + 5 bcf/d (LNG)

• Africa: + 3 bcf/d (LNG)

• Qatar: + 2 bcf/d (LNG)Source: EIA, IGU, LNG Journal, CERI

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East Coast LNG Projects

Bear Head LNG

Goldboro LNG

Saguenay LNG

5-10 mtpa

0.7-1.3 bcf/d

8-12 mtpa

1.1-1.6 bcf/d 11 mtpa

1.5 bcf/dAC LNG

4.5-13.5 mtpa

0.6-1.8 bcf/d

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Key DifferentiatorsWest

Abundant WCSB /

Marcellus gas

Conducive

temperature regimeCompetitive

operating costs

Proximity to

Markets

Securing

transportationHigh transportation

costs

Moderate

capital costs

Lack of domestic experience

in LNG Plant delivery

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Supply Cost

THREE MAJOR COMPONENTS

• Transport

• Feed gas

• Capital costs

Source: CERI

USD CAD

Supply cost 11.01$ 13.77$ Captial cost 2.65$ 3.31$

Feed Gas cost 3.67$ 4.59$

Transportation cost 3.33$ 4.16$

Operating cost 0.69$ 0.86$

Corporate taxes 0.50$ 0.62$

Carbon tax 0.18$ 0.23$

Total taxes 0.68$ 0.85$ Sensitivity analysis:

Key metrics (billion USD, nominal):

CAPEX 7.7$ CAPEX/tpa ($) 962$

OPEX 8.3$ Corporate taxes 9.2$

Natural Gas

and Transportation 85.7$ Carbon and LNG Income tax1.9$

Supply Cost, Eastern Canada LNG, 8 mtpa, Greenfield, Merchant, AECO-C natural gas

24%

33%

30%

6%5%

2%Captial cost

Feed Gas cost

TransportationcostOperating cost

Corporate taxes

Carbon tax

$11.2

8.0

9.0

10.0

11.0

12.0

13.0

14.0

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

OPEX CAPEX TRANSPORT GAS PRICE

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Jurisdictional comparison with the US GoM

TAX DIFFERECES

• 6% in total supply cost

• Approximately twice as

in GoM

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

East Coast LNG Lousiana LNG Texas LNG

Taxes, $/mmbtu

Corporate tax Carbon Tax

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Transportation options and costs

Transport route and cost Total cost, $/mmbtu

1

2

3

NIT to DawnDawn to NS

New 1,600 km, $5.5 bln

CAPEX pipeline$1

$2.3

Source

WCSB

Marcellus

Horton

Bluff, NS

PA to Dawn

$0.8

$0.42

New 340 km $1 bln

CAPEX pipeline

$3.3

$0.42

$3.1

4 WCSBMainline -> TQMS -> PNGTS (Dracut) -> M&NP

$2.4 $1 $3.4

Key issue

Building

interprovincial

pipeline

Fracking ban /

proving resource

Available

capacity /

Expansion costSource: CERI

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Natural Gas Cost

COMPETITIVE CANADIAN GAS

• Canadian gas edges

US Henry Hub gas

prices

• EIA Outlook 2019

suggests a steeper

Henry Hub growth:

to $10 dollars nominal by 2050

Source: CERI

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Capital Costs

-

1,000

2,000

3,000

Qatar NigeriaLNG

AngolaLNG

Africa,GolarFLNG

AU PreludeFLNG

AU QCLNG AU NorthWest Shelf

AU Gorgon WestCanada

EastCanada

US GoMGreenfield

US GoMBrownfield

Yamal,Russia

Capital costs, $ per tpa(with pipeline costs except for Qatar and Nigeria)

AT THE HIGHER END OF NEW PROJECTS

Pipeline costs (gray)

Source: CERI

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Change -25%

DISCOUNT

12%

8%

Change +25%

Change -25%

GAS PRICE

25%

-25%

Change +25%

Change -25%

0

1

2

3

4

5

6

7

8

9

10

11

12

13

14

US, brownfield, LA US, greenfield, TX Eastern Canada,Marcellus, NS

Eastern Canada,AECO, NS

Eastern Canada,Horton Bluff Shale,

NS

Qatar Russian pipelinegas

Landed LNG cost at UK, $ per mmbtu

CAPEX Feed gas Transport OPEX Corporate taxes Carbon Tax Shipping

$60

$70

$50

HH*115% + 3.5 + 0.75 = $9.44

HH*115% + 2.5 + 0.75 = $8.44$80

$90

$100

Oil-

linked contract

Competitiveness

Source: CERI, Rystad Energy, LNG Journal

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Path to Competitiveness

$70

$50

$80

$60

Oil-linked

contract

$90

$100

Taxes:

Fiscal incentives

Gas cost:

Integrated gas

Transport cost:

Shared pipeline cost

Reaching toll

reductions

Capital cost:

Plant expansion

Efficient technology

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Are We There Yet?

1. European market and India present supply opportunities for East

Coast LNG

2. Competition is strong and comes from Russia, Africa, Qatar, and

the US, and Australia

3. Quebec, New Brunswick and Nova Scotia have attractive large

shale gas resources, but they are inaccessible for current

proponents aiming at LNG delivery by 2025

4. Costs can be cut to be competitive in the European there but not

without a coordinated effort, specifically on the midstream side

Thank You for Your TimeWWW.CERI.CA

CANADIAN ENERGY RESEARCH INSITUTE

@CERI_CANADA

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Additional slides

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Atlantic BasinTRADE FLOWS CHANGE - LAST 3 YEARS

Europe Russia, CIS

USA

Africa

Other

Middle East

+7.6 bcf/d

+1.8 bcf/d

Pipeline

LNG

Central America

and Mexico

+0.2 0

South AmericaIndia

+0.5 +0.2

-0.5

-0.1

+0.4

+4.3

+2.9

+2.4

+0.3

-0.6

Bcf/d