The nascent liquefied natural gas (LNG) industry in British Columbia (BC) on Canada’s west coast presents a compelling opportunity to connect Canada’s massive gas resources to energy hungry Asian markets, including India. As Asian demand for this clean-burning fuel grows, Canada is racing to develop the critical infrastructure necessary to liquefy and transport its considerable gas resources to Asian markets.
Canada ranks fifth in the world in terms of estimated shale gas reserves, and the rapid commercialization of hydraulic fracturing technologies has rendered these reserves more accessible. Canada’s National Energy Board (NEB) now estimates that just one of BC’s main shale gas resource plays, the Montney formation, contains 449 trillion cubic feet of marketable gas, making it one of the largest natural gas basins in the world. This abundance of resources coupled with low domestic pricing has led international oil and gas players to attempt to exploit the opportunity to export gas.
In June 2013, the BC government set a target of achieving at least three commercially operational LNG facilities by 2020. BC currently has 12 proposals for LNG projects at various stages of development, seven of which have received export licences from the NEB. On 16 December, the NEB granted 25-year export licences to four LNG projects, proposed by BG Group, ExxonMobil, Petronas and Woodfibre LNG. Four other applications for long-term LNG export licences are pending.
The construction and operation of LNG facilities in BC is subject to the approval of a plethora of government agencies. The key approvals are outlined below.
Federal environmental assessment approval: If a proposed LNG facility meets the thresholds under the federal Regulations Designating Physical Activities, a federal environmental assessment will be conducted by the Canadian Environmental Assessment Agency. The focus of the federal process is on assessing potentially adverse environmental effects that are within the federal jurisdiction, including fish and fish habitat, migratory birds, effects that cross provincial boundaries and impacts on aboriginal peoples. The assessment is likely to take 24-36 months to complete.
Provincial environmental assessment approval: Under BC’s Environmental Assessment Act, if a project meets the thresholds set out in BC’s Reviewable Projects Regulation, a provincial environmental assessment will be triggered. That assessment will focus on the potential environmental, economic, social, heritage and health effects of the project, and can take up to 24 months to complete.
The federal and provincial approval processes occasionally overlap. To avoid duplication of efforts, the federal and BC governments have entered into a series of agreements to establish a harmonized review process in the event both assessments are required.
LNG export licence: A licence from the NEB is required before a project can export gas from Canada on a long-term basis. The NEB must be satisfied that the quantity of gas to be exported does not exceed the surplus remaining after due allowance has been made for the reasonably foreseeable requirements for use in Canada.
Depending on the project design, LNG projects may require additional permits from federal and provincial agencies that have jurisdiction over various aspects of the project.
As LNG projects advance, two other challenges, in particular, need to be considered.
First, the BC government has proposed imposing an export tax on LNG shipped from BC. Final details on the proposed regime are expected to be published in the first quarter of 2014. There is a serious risk that the proposed tax will undermine the fragile economics of these expensive projects. As such, the BC government is under pressure not to price Canadian gas out of a highly competitive global market.
Second, virtually all development in connection with the various proposed projects takes place on lands over which First Nations (Canada’s aboriginal peoples) have asserted land claims. If aboriginal concerns are not properly addressed, project approvals could face legal challenges resulting in delays and increased costs. Effective risk management of LNG projects must include meaningful engagement with affected First Nations, which can help to avoid confrontation and resistance to project development by local communities.
Based on the investment criteria applied by the global LNG industry, the main projects proposed for the BC coast look relatively good. Canadian projects benefit from access to extraordinary resources, a stable and transparent political and regulatory environment and an advantage in shipping times to Asia. To date, proponents have displayed a progressive approach to stakeholder relations and a commitment to environmental sustainability. However many challenges, both internal and external, remain to be overcome prior to the first LNG shipments, planned for later this decade.
Vivek Warrier is a partner at Bennett Jones LLP, a law firm with offices in Calgary, Toronto, Edmonton, Ottawa, Dubai and Doha, and representative offices in Washington DC and Beijing.
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