Skip to content

Think tank forecasts financial challenges for LNG projects such as Woodfibre LNG

Institute for Energy Economics and Financial Analysis released a new report noting the challenges facing B.C. LNG.
Woodfibre LNG
Rendering of Woodfibre LNG at build-out.

An analyst from the Institute for Energy Economics and Financial Analysis, or IEEFA, says that increased costs for liquefied natural gas projects in B.C. could be challenging for a facility like Woodfibre LNG.

The institute published a report on Jan. 31 entitled, British Columbia LNG Project Costs Rising Again.

In it, the author, Clark Williams-Derry, said that rising construction and gas transportation costs have created a challenging environment for projects such as Woodfibre LNG.

He noted that the cost of the project has increased dramatically.

Woodfibre LNG previously said their project would cost about $1.6 billion, but in summer 2022, that estimate jumped to US$5.1 billion, which amounts to about C$6.8 billion with the currency exchange as of press time.

In a statement to The Squamish Chief, Woodfibre said the US$5.1 billion figure is still current.

"It has been several years since we last updated an estimate for the cost to build the Woodfibre LNG project, and prices have risen considerably — as has the demand for low-emission LNG," said spokesperson Jayne Czarnocki.

"Further, the US$5.1 billion figure now includes the cost to build the pipeline, which our previous estimate did not."

Williams-Derry said that it was correct that the latest number includes pipeline expansion costs associated with the project, but people haven't entirely realized how much construction costs alone have increased.

By his calculations, the original estimate, when inflation and the pipeline expansion are taken into account, would've been C$2.8 billion at the most.

"The comprehensive cost for Woodfibre LNG, including the pipeline supplying the project, has increased by roughly 135% since 2015, only 21% of which can be attributed to general inflation," he wrote in his report.

In an interview with The Squamish Chief, he said that the cost of LNG for Woodfibre will be significantly higher compared to other LNG facilities.

As an example, he calculated that the U.S. Port Arthur project would have a capital cost of $780 per tonne of LNG each year.

"For Woodfibre, that same number is about $2,400," said Williams-Derry. "So it's not just a little bit more expensive, it is a lot more expensive to build … Woodfibre in particular."

The role of the BP deal

BP struck a deal to buy 70% of Woodfibre LNG's capacity a few years ago.

The price remains unknown, but he said if this deal was based on the previous prediction of Woodfibre's construction costing $2.8 billion, that could be a challenge.

"If it paid for that capacity, something closer to the $2.8-billion price tag, and now it's $6.6 billion Canadian, you know, the finances are just not going to work out," said Williams-Derry.

"But it does depend on the nature of that contract."

Market forces

There are also market forces that are going to add to the challenges that Woodfibre LNG faces.

Asia was predicted to be a booming market for natural gas, and it was expected that a number of countries would be scrambling to get their hands on the product.

But the high prices of LNG have dampened the demand, he said.

The war in Ukraine has pushed prices of LNG up, as Russia has curbed a significant amount of gas that flowed to Europe. European countries have been snapping up all the spare gas they can find, generally outbidding Asian countries.

Expensive gas has made it too costly for the surge in Asian demand to occur, he said.

"What's not happening is this rush that the global LNG industry was counting on to underpin their bullish demand growth scenarios," Williams-Derry said.

He also noted that many countries — many of which are in developing parts of Asia — that were predicted to drive the demand for LNG are not racing to build the infrastructure needed to make use of the product.

"It's not just about, 'We've got the factories, we've got the power plants, we just need the gas to turn them on,'" said Williams-Derry. "We have to build the things that are going to demand the power, and the power plant, and the pipeline, and the transmission lines and the import facilities, that entire value chain has to get built in order to justify the LNG imports."

Investing this much time and money in all of this infrastructure is only worthwhile if gas is cheap.  

"Vietnam cannot do that. The Philippines can't do that," he said. "And, you know, even Japan and South Korea are talking about turning on their nukes, so they can stop importing expensive LNG. So that's going to be the picture over the next few years is the suppression of demand growth."

Worldwide competition

A few years down the road, around 2025 to 2027, which is close to when construction on Woodfibre is anticipated to start wrapping up, there will be another challenge, he noted.

A wave of new LNG projects worldwide will start coming online, including a mega project in Qatar, which is expected to produce extremely cheap LNG.

Williams-Derry said this will flood the market with a lot of competition when Woodfibre LNG starts to get its footing.

When asked what he would do if he was to give Woodfibre LNG financial advice, he said he'd tell them to offload the risk and get taxpayers to foot more of the bill.

"They have two choices — one is to try to offload the risks to their buyers, to get BP to commit to essentially pay them to build their LNG facility," said Williams-Derry.

"See what you can do to milk the B.C. taxpayer. Get another concession from the government. Get cheap hydropower. Get tax concessions. Do whatever you can to lower your costs."

Defining success

Speaking in general terms, he noted that an LNG facility doesn't always have to be successful for the proponent to make a profit.

"You don't necessarily make money when you run a successful operation; you make money when you get paid — when the loan goes through," said Williams-Derry.

"So if you're a shopping mall developer, you don't care whether The Gap ever makes money; you just care that you get to build a shopping mall … Your success as a project developer hinges on getting the loan, building the thing and taking your slice of the profits from construction."

Making another metaphor to clarify the point, he said, "I describe it as like a firehose of money, you hold out your cup, some splashes in your cup, you go out and you buy your house in the Hamptons, right?"

He emphasized he didn't know enough about the finances of Woodfibre LNG and its parent company to know if these generalizations would apply to their case, but he said it's been relevant for some projects.

In one example, he noted a project that has been unsuccessful in moving forward, but it's made millions from raising money from the capital markets.

"If you're that guy, you don't have to pay it back," said Williams-Derry. "Like, if you're raising equity, you never have to pay back your equity. That's risk money."