Thursday, September 18, 2014
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First Nation opposition biggest challenge for B.C.’s LNG sector: report

Ernst & Young report says increased global competition will also pose major hurdle for sector

VANCOUVER—Global competition, First Nation opposition and fiscal policy are some of the major factors standing in the way of British Columbia’s liquefied natural gas (LNG) sector reaching its multi-billion-dollar potential, according to a new report.

Published by Ernst & Young, the report, Competing in a global LNG market, says the future of the industry in B.C. hinges on five factors—factors that need to be addressed in order to take advantage of the opportunity that exists in the province.

The LNG industry in B.C., which the advisory firm estimates could be worth as much as $280 billion in the coming years, will need to deal with issues relating to fierce global competition, First Nations opposition, capital allocation, fiscal policy and labour, processes and costs in order to succeed on an international scale, according to the report.

“Canada’s extensive reserves, stable and reputable political environment, and transportation cost advantages won’t be enough to attract the attention of investors and secure long-term supply contracts in today’s competitive LNG market,” the report reads.

Global competition

While nations like Australia and Qatar are known threats to Canada’s “LNG potential,” emerging suppliers out of East Africa, Russia and the United States could hamper industry growth here.

What’s more, the report says energy resources like coal and nuclear, particularly in Japan, South Korea and Germany, could prove to be a stumbling block for Canadian LNG exports if the industry doesn’t shift into high gear soon.

“While much of the current demand for LNG originates from Japan and Korea, it may be China that represents the largest potential buyer of future LNG,” the report states.

The industry here is also facing global competition when fighting for funding—and not just against other new LNG projects.

According to the report, “the significant capital requirements for pipelines, infrastructure, liquefaction facilities and development of the required natural gas reserves for Canadian projects will have to compete with brownfield projects in the U.S.”

With that existing infrastructure in place, projects south of the border have a slight leg up on the uncharted territory of the LNG industry here.

Even then, Canadian LNG projects will face difficulty with the capital structuring required given the multifaceted nature of the industry.

Projects will also be impacted by the difficulty in assessing how LNG cargo is priced for shipment around the world, the report says.

Fiscal policy

Canada’s fiscal policies play a crucial role in determining the nation’s competitiveness, and the LNG sector is no different.

The report says government and industry stakeholders have to come together to find an effective fiscal framework in order to ensure LNG projects in B.C. are competitive globally.

The looming LNG tax in the province will also have to be sorted out before any major projects get off the ground.

“Proponents are … looking for assurance that tax and other fiscal policies will not change adversely in the future once they have committed to projects and incurred capital costs,” the report reads. “On a positive note for projects, the B.C. government has signalled through a very active process that it knows it must act quickly to provide this certainty to enable projects to move forward and compete globally.”

Labour woes

Finding adequate skilled labour to fill jobs in the sector will also be an impediment, according to the report.

“High levels of development and construction activity are causing shortages of skilled labor across the country,” the report says, noting a particular lack of mechanical, electrical and process engineers, construction foremen and welders.

“Exacerbating this challenge is the increased need for specialized LNG specific skill sets, where experience is limited in Canada. Increased demand for specialized skills will drive costs up and lead to higher salaries, perquisites and training costs, and, at the end of the day, high project costs.”

Recent criticism of the use of temporary foreign workers in Canada will only add to the labour force dynamic, the report warns.

Aboriginal opposition

Of all the issues hampering the sector’s growth, though, the report notes that gaining First Nation support “may be the most complex for energy companies to address” to get projects off the ground.

“Technical and cost challenges such as LNG facility design can certainly impact project economics, but those issues are in many ways more manageable than gaining acceptance and support from communities that are determined to preserve their heritage and traditional territories and where there isn’t a shared consensus across all of the various First Nations communities,” the report states.

The report goes on to say that “new models of cooperation and sharing will have to emerge” from consultations if projects want to see the light of day, and that “simply granting regulatory approval will not be enough to move projects forward.”

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