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Three factors have the big LNG export proposals for Canada's west coast moving ahead at only a snail's pace:

  • Permits
  • Taxes
  • Offtake deals

In this article I want to talk about permitting - but before that, remember that the first LNG proposal that will export BC and Alberta gas, the Douglas Channel project with Golar (NASDAQ:GLNG), is so small at 0.2 bcf/d that it doesn't need all this permitting.

Very small projects like that don't need the big permits, just some small ones. This article is about the big LNG proposals, like Shell and Chevron and Petronas.

So with that in mind…what is the permitting process for a proposed liquefied natural gas export facility? What are the biggest challenges?

Step One: The National Energy Board [NEB]

The first hurdle - an export license from the federal National Energy Board - tests whether the project is in Canada's economic best interests.

LNG proponents apply to the NEB to ship certain volumes of LNG annually for a set number of years. To grant an export license the board must find that the proposal is in the public interest and that the energy commodity to be exported is surplus to Canada's energy needs.

Here the "best interest" question is only economic - the NEB is not charged with considering environmental impacts. Since the province - nay, the continent - is overflowing with natural gas and its export should generate all kinds of jobs and tax revenues, it's little surprise that the board has approved every single LNG export license so far.

Three projects - Douglas Channel, Kitimat LNG, and LNG Canada - have already obtained NEB authorization. Three other applications are under review.

Step Two: Environmental Approval

The environmental assessment (EA) process is the longest and most complicated permitting step - and it carries the least certainty. To earn a green light projects have to meet the goals of environmental, economic, and social sustainability.

To that end, the EA process examines each project for anything that could be environmentally, economically or socially bad, and what heritage and health effects that may occur over the project's entire life cycle.

That means talking to A LOT of people...

  1. Consulting with First Nations,
  2. Completing in-depth technical studies on potential significant adverse effects,
  3. Designing strategies to prevent or reduce those adverse effects, and then putting all the input and findings into a huge report that carries a recommendation to the Minister of the Environment and the Minister of Natural Gas on whether the project should be allowed - or not.

There's a "Pre-Application Phase," where the Environmental Assessment Office [EAO] decides if the project does indeed need EA approval and, if it does, how the approval process should work.

There is a lot of back-and-forth between the government and the company submitting the proposal-more technical data, engineering, proof of consultation, etc.

Once the full "Application Review Phase" starts, the EAO has 180 days to complete its review. That period includes a 45- to 60-day public comment period that includes open houses.

The EAO writes up a draft report that it shares with the proponent, the working group, and with First Nations, adding in any input. The final report includes a recommendation from the executive director of the EAO on whether an EA certificate should be issued and a draft EA certificate.

The draft certificate lists commitments the proponent made during the EA process to address concerns. It is not uncommon for an EA certificate to have more than 100 commitments - which are all legally binding if the certificate is signed.

It then goes to the government and the ministers have 45 days to make a decision. They can issue the EA certificate with the commitments listed, refuse to issue a certificate, or require further study.

Things have gotten easier on the EA front in recent years. In its recent budget the federal government handed almost all control of the EA process for energy projects to the provinces-before, they both did one. Sigh.

It's a good move, but pipelines are still considered separate projects from the LNG facilities themselves, so that's another entire EA approval process.

The First Nations Question

First Nations support is vital. Earning support for a LNG facility might not be too hard. Pipelines are a different story - and every facility needs one.

Anyone who wants to build a pipeline across northern BC likely has to consult with at least half a dozen First Nations, each with a different set of expectations and demands.

If you can find common ground, deals between project proponents and affected First Nations take the form of Impacts and Benefit Agreements. There are a lot of examples - but the biggest challenge is that there still is no clear definition of what constitutes sufficient consultation, mitigation and benefits. A poorly defined end game, to say the least.

Sometimes the road is smoother. The Haisla First Nation that occupies territory near Kitimat and at the head of the Douglas Channel is involved in three LNG proposals.

The Haisla are viewing this as an opportunity: they believe the deals that will flow from these LNG projects could give their people the ability to simply buy the lands they believe are theirs, without a treaty (and negotiations have been going on for years, if not decades).

More Permits

After this, work cannot start on the liquefaction plant until the project earns a facility permit from the BC Oil and Gas Commission. Then there are five different Acts that a facility must comply with - after the big EA approval has been won.

The process isn't any more arduous than in other places, though it is a new ballgame with rules being made up on the fly. But BC offers advantages to would-be LNG exporters over other locales.

  1. The transport route from BC to Asia is only 9-10 days vs. 20-plus days for LNG ships out of the Gulf of Mexico.
  2. LNG is 30% more efficient in the cold weather of northwest BC vs. tropical areas.
  3. Canadian gas fields have liquids like ethane and butane, which add value by increasing the fuel's energy density. A lot of U.S. LNG has to add this in.

That's great for would-be exporters...but on the flip side, the flood of interest raises some big picture questions for British Columbians and for the regulators charged with developing this brand new industry.

How many natural gas pipelines should be built across northern BC?

Is a fleet of independent facilities the best approach, or should proponents be required to rationalize some of their infrastructure?

How should the operations be powered? How much should they be taxed?

We are going to find out all these answers in the next two years.

Source: The LNG End Game Begins Here

Additional disclosure: The Oil and Gas Investments Bulletin is a team of writers. This article was written by Keith Schaefer, Editor/Publisher. We did not receive compensation for this article, and we have no business relationship with any company whose stock is mentioned in this article. The author of this article has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.