The Jordan Cove liquefied natural gas project — the long-awaited 7.8 million tons per year (MMT/year) market savior for Piceance Basin drillers — likely will not happen.
Because it’s about to be outcompeted by a 14 MMT/year project 900 ocean miles to the northwest in Kitimat, British Columbia.
Expandable to 28 MMT/year, LNG Canada is sponsored by “Big Gas” heavyweight Shell Oil Co. which gave its Final Investment Decision (FID) OK on Oct 1. At the same time, the project got its government license by B.C.’s reigning New Democrat/Greens.
LNG Canada is now breaking ground while Jordan Cove is still awaiting both FID from its sponsor and a US government OK from the Federal Energy Regulatory Commission. Betting here is that it will never get either one.
Location, location, location is why this happened. Jordan Cove is proposed for a very scenic undeveloped place on the Oregon coast beloved by locals and tourists alike, and they are hollering their disapproval. But LNG Canada creates no complainers since Kitimat is a brownfield site with a smelter, deep water port and rail.
That location also leads to lower operating costs. Being 900 miles as the albatross flies northwest of Jordan Cove gives LNG Canada’s ship carriers a significant head start on the Northern Great Circle route. Going to Asia from the West Coast, you go northwest, not west.
The biggest location story: Room for expansion on Kitimat’s brownfield site yields huge capital cost savings via vast economies of scale. Spreading more incremental output over less incremental cost slashes the cost/unit. Even LNG Canada’s first stage is nearly twice Jordan Cove’s size. Going to 28 MMT/year puts it at nearly four times.
“The chances of 28 MMT/year to happen are almost inevitable due to economies of scale,” says National Bank of Canada analyst Greg Colman. And LNG Canada is not likely to be alone for long. After Oct. 1 Chevron is dusting off old plans for its own LNG plant at Kitimat. Meanwhile, folks in nearby big city seaport Prince Rupert, far from complaining, want in on the action.
Mayor Lee Brain says, referring to a once-proposed Exxon plant: “There’s a partnership opportunity for one project in Prince Rupert, and one central pipeline.”
“Once a suitable location is found, LNG export facilities tend to sprout up en masse,” says analyst Colman. Safe to say, Jordan Cove is not “a suitable location.”
Cost underruns are likely for LNG Canada once economies of scale kick in as the project starts to build out to 28 MMT/year and/or it gets to share base facilities with other Kitimat/Prince Rupert plants. But Jordan Cove, due to its location prized for scenery and recreation, will have no exposure to either type of economy of scale, leaving it with little chance to minimize costs/annual ton. A 7.8 MMT/year plant will be permanently alone if it ever gets that far. Cost overruns are therefore likely.
Capital costs at LNG Canada are also spread widely due to its unique structure, which has turned customers into investors. This slashes the sponsor’s cost exposure. Instead of 100 percent, Shell only has 40 percent of the LNG plant. The biggest world consumers are No. 1 Japan and No. 2 China, here represented by Mitsubishi and Petro China at 15 percent of the plant each. Petronas, the Malaysian kingpin, has 25 percent and Kogas, the Korean major, has 5 percent. These Asians will get to use the percentage of the plant equal to their ownership shares. Just like the Alberta gas supplies they are developing with major Canadian operator Encana for just $2/thousand cubic feet. Market price today is $4.
These Asian players are obviously locked into the project by their investment — unlike the unnamed Japanese buyers at Jordan Cove, who reportedly have issued only letters of intent, with no prices, volumes or duration specified.
The Asians’ gas supplies will be linked to their Kitimat plant by the 420-mile Coastal Gas Link pipeline being built through wilderness by Canadian pipeline king Trans Canada. A huge 48-inch wide, it starts at 2.1 billion cubic feet/day and can be expanded to 5 billion with more compression when LNG Canada goes to 28 MMT/year and/or when other LNG plants appear.
The Jordan Cove sponsor is also a Canadian, Pembina Pipeline Corp., which would build a 230-mile Pacific Connector pipeline to get a mix of Canadian and Piceance Basin gas to the coast through developed hostile country. Unlike Shell, Pembina as sole sponsor is 100 percent on the hook for the pipe and the plant.
If I were Pembina, I would drop the opposition-plagued cost overrun-exposed Oregon project and joint venture with Canadian pipeline lodge brother Trans Canada on the Coastal Gas Link line to Kitimat.
But why can’t LNG Canada and Jordan Cove coexist? Because West Coast supply is not a slam dunk. Its rivals for Asian supply are not the easy targets on the Gulf Coast, 24 days and a Panama Canal toll away from Asia, while Kitimat is only 10 days voyage away with no tolls, and Jordan Cove maybe 2-3 days further. The real competitors for Asia are Australia and Russia, both bottomless LNG pits just 1-2 days away. LNG Canada has secured its position in the supply line only as the flagship of a coming cost effective LNG fleet at Kitimat/Prince Rupert with its innovative customer/investor structure.
Douglas Gill, an editor with Gas Processors Report in Houston from 2000-2006, now lives in Paonia.