Arc Pacific calls its project \u201cWESCO LNG\u201d\u00a0, and it\u2019s bringing together major<\/p>\n
What they are moving forward is the WESCO LNG project.\u00a0 \u00a0This is a\u00a0very<\/em>\u00a0early stage project.\u00a0 But it is pursuing a novel idea \u2013 an LNG production terminal located inland in a sparsely populated area away from the most active opponents of large energy projects, with the ability to tie into an existing underutilized, long-haul pipeline and use existing infrastructure to transport the LNG to the coast.<\/p>\n \n Getting the Gas (LNG) to Tidewater<\/strong><\/span><\/p>\n WESCO plans to use an existing pipeline to transport the feed gas to the production facility. By avoiding the high cost of a major new pipeline, the project saves billions in capital cost.<\/p>\n So it SHOULD be able to deliver the LNG to the coast at a much lower cost than any other proposed West Coast projects. And this means that the project can be phased-in to meet market demand.\u00a0\u00a0This is not an option for other LNG projects in Western North America which must cover the pipeline development cost \u2013 up to $7 billion \u2014 from Day 1.<\/p>\n Management says that WESCO\u2019s approach also saves years and tens of millions of dollars of permitting time and expense. Long-haul pipelines by definition cross many jurisdictions and so have a significant environmental and landowner impact.<\/p>\n This means that the process involves countless government agencies and the land rights of many property owners plus exposure to many First Nations land ownership claims.<\/p>\n West Coast energy projects have been plagued with<\/p>\n Having an inland LNG terminal has the potential to avoid that.<\/p>\n Once the LNG is near the coast, WESCO will then transfer the LNG to large, standard LNG tanker vessels which will transport the LNG to Asian markets.\u00a0\u00a0This transfer process is referred to as a Ship to Ship transfer<\/p>\n This is not new technology. Privately owned Excelerate Energy has done over 1,500 such ship-to-ship (STS) transfers with more than 171 million cubic meters of LNG transferred.\u00a0 Complete STS technology solutions are now available on the market and STS operations are becoming routine in both Europe and Asia.<\/p>\n Source: Company Presentation<\/em><\/p>\n Getting Canadian NatGas to Market Cheaper<\/strong><\/span><\/p>\n Building an LNG terminal inland has its advantages.<\/p>\n First off, investors are saving the capital cost of the pipeline. The Coastal GasLink pipeline from Dawson Creek to Kitimat, which would serve a competing, proposed LNG project, has an\u00a0\u00a0estimated cost of $6.6 billion.\u00a0 It will transport 2.1 Bcf<\/span>\/d with further expansion potential.\u00a0 In contrast, on a per Bcf<\/span>\/d basis, WESCO\u2019s approach will require only a fraction of that capital investment.<\/p>\n A second advantage is cheap power.\u00a0 WESCO has easy access to abundant, low-cost renewable hydro and wind power which already exists in its region.\u00a0\u00a0This power is in surplus and that surplus is expected to increase.<\/p>\n Management says that by using renewable energy for nearly 100% of its energy input, WESCO will be one of the \u201cgreenest\u201d LNG projects in the world.<\/p>\n Transportation and operating costs for WESCO should compare favorably to other West Coast LNG projects \u2013 total input costs are ~1\/3 t0 50%\u00a0\u00a0of other West Coast LNG projects according to the company.<\/p>\n \n Sourcing Gas from North America\u2019s Cheapest Hub \u2013 AECO<\/strong><\/span><\/p>\n Still, transportation costs to tidewater are higher than the Gulf Coast.\u00a0\u00a0But a couple of factors more than make up for that expense:<\/p>\n AECO pricing has lagged US Henry Hub natural gas pricing for years.\u00a0 As increasing US shale gas production has taken more market share there, the AECO price discount versus Henry Hub has only increased\u2014a pattern which could last for decades.<\/p>\n Source: Arc Energy<\/em><\/p>\n Even with recent mandated changes to the operation of the Nova Gas transmission line (a topic we covered in the blog post: How Cheap are NatGas Stocks), AECO prices still trail Henry Hub . The futures price shows the AECO price trailing the Henry Hub price for the year 2024 by over $US.80\/MMBtu<\/span>.<\/p>\n What\u2019s more, the market is not enthusiastic as you look further out \u2013 the current futures price for the year 2024 shows AECO at US$1.69\/MMBtu<\/span> while Henry Hub is at US$2.51MMBtu.<\/p>\n To get the gas from British Columbia and Alberta gas production fields to their LNG terminal, WESCO will use the existing TC Energy pipeline system.\u00a0 Traditional natural gas markets that used natural gas for power generation are increasingly turning to renewable energy. As a result the company expects no problems accessing capacity on these pipelines.<\/p>\n Asian Shipping Costs<\/strong><\/span><\/p>\n And of course, the US west coast is MUCH closer to Asia than the US Gulf Coast.\u00a0LNG from the Gulf Coast must travel 10,000 nautical miles compared to 5000 nautical miles for a West Coast project; plus a Gulf Coast project must first transit through the Panama Canal which causes an additional delay and incurs a hefty Canal fee.<\/p>\n LNG from the US Gulf Coast either must travel through the Panama Canal or along a long, expensive route via the Cape of Good Hope in South Africa.<\/p>\n Last year the Canadian Energy Research Institute (CERI) compared various Canadian LNG export options to Gulf Coast LNG and to LNG from Australia.<\/p>\n Source: CERI Competitive Analysis of Canadian LNG, 2018<\/em><\/p>\n Shipping costs from Western Canada to Asia are\u00a0much<\/em>\u00a0cheaper than US Gulf Coast gas, and only 9% more expensive than LNG from Australia (where capital costs and costs of gas production are substantially higher than in North America).<\/p>\n Keep in mind the CERI report is looking at LNG terminal costs\u00a0off the coast of British Columbia<\/em>\u00a0that include the full transportation cost.<\/p>\n The shipping method proposed by WESCO lowers costs even further.<\/p>\n Contracts are expected to be primarily a blend of low-risk, fixed-price tolling contracts and take-or-pay offtake agreements that provide more upside from LNG prices.\u00a0 A small amount of capacity is expected to be allocated to merchant sales that will capture the full upside in price.<\/p>\n This leads us to the other reason for the inland terminal.\u00a0 The belief is twofold:<\/p>\n \nFinal Investment Decision Not Until 2023<\/strong><\/span><\/p>\n The project is calling for a 6 MTPA liquefaction facility located inland. One MTPA (million tons per annum is approximately 135,000 MMBtu<\/span>\/day).\u00a0\u00a0The project can be built in three phases of 2 MTPA at a time.<\/p>\n The project will use a floating LNG terminal.\u00a0This minimizes onshore land use and\u00a0\u00a0reducesA LOT of the environmental impact \u2013 again making permitting much easier and quicker.<\/p>\n Floating LNG terminals (which can largely be built in\u00a0\u00a0Asian shipyards) also typically have much lower capital costs versus traditional \u201cstick-built\u201d LNG plants built onshore which are prone to cost overruns and labor shortages.<\/p>\n As the map below shows, Western North America has an extensive existing pipeline grid that links all major supply basins. An inland project can tie into this highly integrated pipeline grid to ensure supply security and competitive feed gas prices.<\/p>\n WESTERN NORTH AMERICA SUPPLY BASINS AND PIPELINE GRID<\/strong><\/span>\n<\/p>\n Source: NWGA<\/em><\/p>\n The only pipeline requirements for WESCO is a short lateral pipe connecting the project terminal with an existing major long-haul pipeline mainline.\u00a0The company says this line would not pose any significant environmental concerns.\u00a0 A short electrical transmission line to the site will also be built\u2014all in a very sparsely populated, rural area.<\/p>\n Capital expenditures for WESCO are expected to come in around $4 billion for the full 6 MTPA (million tons per annum) build out (mgmt. suggests it could actually be $3 billion; $4 billion is playing it safe), which includes the terminal and the transport barges.\u00a0 A conservative estimate pegs that price tag on a 4 MTPA terminal, but the company believes they can deliver 6 MTPA for the cost.<\/p>\n Source: Sprott Korea Presentation<\/em><\/p>\n The Final Investment Decision (FID) is expected in 2023, which gives a little over 3 years for permitting approvals and construction financing to be arranged. Final permitting approval is expected June 2022.<\/p>\n ArcPacific can earn up to 75% in the project by spending $50 million on the development over the next 3 years.<\/p>\n The remaining equity of WESCO would be split 50\/50 between the project originators and a Sprott Korea affiliate.<\/p>\n Subsequent construction capital will come from the market, but could be guaranteed by the Korean Export-Import Bank.\u00a0 The guarantee would bring down the cost of capital significantly.\u00a0 It is expected that debt to equity will be around 75\/25.<\/p>\n \n Project Economics<\/strong><\/span><\/p>\n If management can pull this off, the WESCO project should have some excellent economics.<\/p>\n The combination of cheap, abundant Western Canadian gas, no pipeline and a relatively short and direct path to Asia make the project competitive with any global LNG project.<\/p>\n\n
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