Late, over budget and made worse by the coronavirus, will “Canada’s largest infrastructure project” ever produce one gram of liquefied natural gas?
LNG Canada’s project in Kitimat is now under construction (Photo by LNG Canada)
TO SOME, it might be tempting to feel sorry for the LNG Canada construction project, now under slowing construction near Kitimat. A variety of reasons might invoke sympathy.
For one thing, the world is quickly moving away from fossil fuels. To pick just one example, on the afternoon of December 18, 2020 Great Britain’s wind farms generated 17.3 gigawatts (GW) of electricity, amounting to a record 43 percent of Britain’s power at the time, according to Renewable UK. And it was just when the country needed it most, on a cold winter day. British solar isn’t far behind, in a country that not long ago relied heavily on burning coal to produce electricity. On April 20, 2020, solar produced a record 9.7 GW, or nearly 30 percent of UK demand, reported the Solar Power Portal.
And let’s not forget that in December Prime Minister Justin “Kinder Morgan” Trudeau announced an increase in the carbon tax to $170 per tonne by 2030, which might even lead to Canada actually meeting its Paris climate targets in greenhouse gas (GHG) emissions.
Originally expected to begin churning out liquefied natural gas (LNG) by 2025, the Shell-led foreign consortium building the LNG Canada project faces intense competition from US plants that are either already operating or are further ahead than the Kitimat facility. Delays may well have pushed LNG Canada’s first production to at least 2026, possibly allowing competitors to jump ahead.
The LNG Canada project calls for two trains (production units) to open initially, producing a total of 14 million tonnes per annum (MPTA) of LNG. How does this compare with competing US LNG export projects?
There are currently 15 large-scale LNG export trains operating in the US, 4 of which began commercial operation just in 2020. The 15 now-operating trains have a total capacity of 76 MTPA—or more than 5 times the output of LNG Canada’s first stage.
As well, another 7 are under construction in the US, all of which are projected to start exporting by 2025. One, in Corpus Christi Bay, Texas, will begin production in May 2021, according to the US Energy Information Agency. These new facilities will add a further 38 MTPA to US exports, bringing total US capacity to 114 MPTA in 2025, the year in which LNG Canada originally expected to begin producing one-eighth as much. While it is entirely possible that some of the new US facilities will also be delayed, it is clear that our southern neighbours have a significant head start on BC. According to a September 23, 2020 report by data analysis company Statista, COVID-19 “leaves the future of [LNG] terminal projects unclear.”
By 2026, despite projections from industry cheerleaders of increased Chinese demand for LNG over the next decade, the combination of falling prices for renewable energy, growing US competition, and the greening of government policy could mean that the LNG Canada partners—Shell, Mitsubishi, Petronas, Petrochina and Korean Gas—could be stuck with a truly stranded asset, unable to profitably sell the plant’s fossil fuel despite $6 billion in subsidies from the BC government.
Work sites are like “landlocked cruise ships”
In recent months, the project has been hit by a number of unexpected issues.
A few days before Christmas 2020, janitors at the LNG Canada site voted 84 percent in favour of a strike. In normal times, the threat of reduced or no cleaning might amount at most to a bit of a nuisance, but not earth-shattering. Serious pandemics such as COVID-19, however, mean that the times are far from normal.
The accommodation facilities for workers at LNG Canada’s project in Kitimat (Photo by LNG Canada)
“LNG janitors work on the front lines in construction sites surrounded by heavy machinery, cleaning work camps staffed by hundreds of other LNG workers,” said the janitors’ union, Unite Here, in a December 21 statement. “They are among the lowest paid workers on the LNG site. Janitors have not been provided with a living wage, adequate staffing levels, fair workloads, and enough health and safety equipment to protect against COVID-19 until recently.”
The janitors, many of whom are Indigenous, work for Burnaby-based subcontractor Dexterra, which has since said that it continues to negotiate in good faith and is optimistic about reaching a satisfactory resolution. (Before November 13, Dexterra was known as Horizon North Logistics.)
After the pandemic hit North America early in 2020, LNG Canada seemed to be taking appropriate steps. In March, the project laid off approximately 750 “non-essential” workers as a preventative measure against the virus, flying them back to their homes across Canada.
But not all experts were convinced it was enough. The former Chief Medical Health Officer for Northern Health called for the immediate closure of all industrial work camps in the region, including LNG Canada. In a March 28 open letter to Provincial Health Officer Dr Bonnie Henry, Dr David Bowering referred to such work sites as “essentially landlocked cruise ships.” Added Bowering: “The camps are and will be COVID-19 incubators placing the workers, the host communities, and the home communities of the workers at unacceptable risk.”
However, Dr Henry declined to order such projects closed, noting that many had already reduced their staffing levels. “You can’t just abandon a large mine or industrial site,” Dr Henry said at a March 30 news conference.
The LNG plant construction is governed by a contract between LNG Canada and a venture formed by Texan company Fluor and Japanese firm JGC.
In November, the builders said they had received a number of questions about how careful they were about protecting workers and the local community. In response to the queries, LNG Canada construction manager Vince Kenny and JGC-Fluor Joint Venture construction director Berni Molz were reassuring. For one thing, the project is adhering to orders from Dr Henry, the pair said in a November 19 statement. Not only that, it was following the Industrial Camp Guidance issued by the BC Centre for Disease Control and also obeying WorkSafeBC’s safe construction worksite requirements.
Actually, boasting that the consortium is abiding by such rules is a somewhat hollow gesture: Companies operating in BC are required to follow them. It’s a little like telling the world that you promise not to rob banks.
In their statement, Molz and Kenny summarized the project’s approach: “We can assure you that together we are taking prudent measures to help stop and reduce the spread of the virus.”
Apparently, those “prudent measures” were not enough. As it happened, though the statement did not mention it, on the same day (November 19), Northern Health declared a COVID-19 outbreak at the LNG Canada site, an outbreak in which 56 site workers eventually tested positive. (However, by December 11 all but one of the 56 had recovered.)
A few weeks later, COVID-19 hit the project for a second time in an unrelated outbreak. Northern Health said in a December 17 statement that 15 of the 40 employees of Diversified Transportation who work at the LNG Canada site had tested positive. The outbreak declaration will remain in place until at least January 14, 2021.
Wet’suwet’en worries confirmed
The pandemic is also affecting LNG Canada in other ways.
Adding insult to injury are problems with the Coastal GasLink pipeline, intended to ship fracked fossil gas 670 km from the Dawson Creek area to LNG Canada, over the continuing, strenuous objections of the Wet’suwet’en hereditary chiefs.
In case anyone remains unsure as to whether the chiefs remain opposed to the pipeline, a November 30 open letter from 22 female Wet’suwet’en hereditary chiefs to Dr Henry puts any doubt to rest. “We understand that the Province has declared oil and gas work an essential service, however, we strongly encourage you to reconsider,” the chiefs said in the letter. “The economy cannot come before Indigenous lives.”
“Living in these northern rural communities, we see and feel the influx of transient workers in our communities” they told Dr Henry in the letter, which calls for both the pipeline and the LNG Canada site to be shut down.
“Our hotels are occupied by LNG workers, we see the traffic through our territories increase ten-fold, we see the workers eating in our restaurants, shopping at our grocery stores and visiting our local pubs and bars on a regular basis,” they said in the letter. “Not only have we witnessed an increase in drugs, alcohol and gang related violence in our communities, we are now faced with a disease that could kill any one of us.”
The chiefs’ concerns were prescient. Less than one month later, Northern Health declared a COVID-19 outbreak at two Coastal GasLink worker accommodation sites, in the Burns Lake and Fraser Lake areas. To date, 27 employees had tested positive for the virus, and 17 cases remain active, Northern Health said in a December 20 statement. In addition, medical health officers issued an order that the worksites be limited to all but essential workers until health authorities approve an updated COVID-19 safety plan. The outbreak declaration will remain in effect till at least January 17.
The multitude of COVID-19 outbreaks related to LNG Canada has not gone unnoticed by BC’s Provincial Health Officer.
On December 23, Dr Henry announced new orders for northern industrial projects like LNG Canada and the Coastal GasLink pipeline, including a requirement that these companies must slow their usual January ramping-up of activities, when workers return to the sites from both inside and outside BC.
“This large movement of people means potential for higher spread amongst employees, but also into communities along the areas where the industrial camps are in the north, and right now we know Northern Health is stretched,” Henry said, according to a transcript of her comments provided by the Ministry of Health. “We are already seeing many small, rural, and remote communities in the north under strain,” she said, adding that the order will help ease that pressure at the start of the year.
Cost increases could lead to stranded asset
Apart from the effects of the pandemic, how is pipeline construction coming along? In a December 18 update, Coastal GasLink issued a statement boasting that its team “has made an incredible amount of progress,” having completed 23 percent of the 670 km pipeline.
But there was one slight hiccup. Ten days earlier, the BC Environmental Assessment Office (EAO) issued an order following an inspection. Builders had failed to mitigate adverse effects of erosion and sediment control, as required by the project’s environmental assessment certificate, Clayton Smith, a senior compliance and enforcement officer, said in the December 8 order. Smith ordered the project to take a number of steps, including providing biweekly monitoring reports from an independent erosion auditor, beginning February 8, 2021.
Not only must the auditor be independent, any monitoring reports the auditor writes must be provided directly to the EAO “without first being reviewed by [Coastal GasLink Pipeline Project Ltd.]” Given the disastrous record of BC’s supposed monitoring of mining, forestry, fracked gas and other so-called “natural resource” industries in recent years, the condition is reassuring. The sad part is that the EAO felt it necessary to spell out that an independent auditor must actually be independent.
Such challenges, along with disruptions due to COVID, will affect both construction costs and the schedule for building the LNG plant.
When costs rise above what was anticipated, the joint venture could end up losing money. In fact, less than a year after the LNG Canada contract was signed on October 31, 2018—and long before the pandemic—Fluor officials expressed concern about such fixed-price contracts, announcing that it would be much more cautious before accepting similar contracts.
Construction of a storage tank at LNG’s Kitimat site (Photo by LNG Canada)
On August 1, 2019, Fluor’s then-executive chairman Alan Boeckmann said he was “extremely disappointed” with the company’s performance. In the three months ending June 30, 2019, Fluor lost $555 million US. As a result, Fluor fired both its chief executive officer and chief financial officer, began selling off real estate, and cashed in some of its insurance policies.
In a December 10, 2020 conference call with analysts, present Fluor chief executive officer Carlos Hernandez said that the LNG Canada project was moving along. “Up in Kitimat, progress continues to be made on the LNG Canada project despite the ongoing challenges presented by the government-imposed restrictions due to the COVID-19 pandemic,” Hernandez said during the call.
The impact is also being felt on aspects of the project outside Canada. The modules for the LNG Canada plant are being built at the Zhuhai fabrication yard in China, which has been affected by the pandemic. “Ongoing COVID impacts and travel restrictions to China are hampering progress but mitigation actions are being taken,” the company said in the December 10 presentation.
Explaining how COVID-19 has affected Fluor projects, Hernandez said that clients understand the impact. “[W]e are negotiating with the clients on the effects of the COVID impacts both as to schedule and as to cost, and I think that the discussions are very collaborative for the most part,” he said.
“There is no question that there will be compensation to the contractor for impacts beyond our control, and we’re in process of resolving some of those at this point in time,” added Hernandez. “The problem is that, obviously, we don’t know what the final COVID impact is going to be until we get past the pandemic. But we’re engaged in some discussions right now with clients to resolve them to this point and then reserve the right to further negotiate, down the road, additional impacts.”
Asked specifically about resolving problems with delays at LNG Canada, Hernandez said in the call he expects a “partial resolution” of the impacts to date. “And then later on when we’re in a position to assess additional impacts, we’ll negotiate that,” Hernandez said in the call. “[I]t’s not something we can negotiate all at once because situation of the effects are pretty lengthy.”
Hernandez indicated that many of the impacts are the result of “government-directed lock-downs.” In other words, many of the delays are due to a “change of law,” a fact that may “give us the basis for resolution.”
My translation: “The delays are costing us, but they aren’t our fault. So we’re expecting more money from LNG Canada. Oh, and we’re going to be late.”
Joint venture partner JGC also hinted in November that COVID-19 is affecting the project. During a call with investors on November 10—nine days before the first outbreak at the plant—JGC was asked about the impact of COVID-19 on the company’s major projects. In response, an unnamed JGC official said that the pandemic had slowed the LNG Canada project, according to a company-supplied transcript of the call. “Production of some equipment ordered from European manufacturers has been delayed, but we are working with the client [LNG Canada] on this matter as we move ahead,” added the official.
As the 40 percent owner of LNG Canada, Shell would likely control a decision on whether to throw extra cash at the joint venture. However, these days, like other fossil fuels companies, Shell may not have a lot of extra cash to throw around.
In October 2020, Shell—the world’s largest LNG trader—said it did not expect to ever build another “greenfield” (previously undeveloped) gas-to-liquid project, like LNG Canada. And in a series of announcements in 2020, Shell wrote down the value of its oil and gas assets by a total of approximately $22 billion US, including a $1 billion US write-down of its Australian LNG assets.
Adding to its problems, In December 2020 Shell appeared in a Dutch court facing demands by Greenpeace, Friends of the Earth Netherlands and other activist groups that the company cut its emissions by 45 percent below 2019 levels by 2030.
LNG Canada senior communications advisor Crystal Sharwood said in an email that the consortium had no comment regarding possible variances in the construction contract. Fluor did not reply to a request for comment by the time of publication.
What if Shell and their four foreign cronies dig in their heels, refusing to pay another cent to the Fluor-JGC joint venture contractor? If Fluor-JGC gets the bum’s rush from LNG Canada, the joint venture could end up losing money on its $14 billion US contract. And thanks to falling prices for renewable energy, increased competition from US plants, and greening government policy, delays could make selling LNG unprofitable by the time the Kitimat plant is actually finished.
Horror of horrors: Canada’s largest infrastructure project—the one that was supposed to bring countless jobs and prosperity—could quickly become a stranded asset, never producing a single gram of LNG. This is despite $6 billion in the form of reduced hydro rates, cancelled LNG export tax, temporary waiving of provincial sales tax, and carbon tax subsidies from BC taxpayers (that’s us), plus another $1.275 billion from federal taxpayers (that’s also us, in part).
“Stranded asset” is a term increasingly applied to antiquated ventures like the Alberta tar sands, a reference to the fact that vast sums of money have been invested in a facility that will no longer operate. But calling such projects “assets” may misrepresent their true status, as it implies that they retain some net value. Rather, Shell and company may end up losing their shirts, pants and socks on LNG Canada.
In other words, LNG Canada could end up as a stranded liability. Not good for the fossil fuel industry.
But an excellent outcome for the planet.
Russ Francis is pleased to learn that after inexplicably cancelling the $5 increase in the carbon tax scheduled for April 1, 2020, the BC government is resuming the annual $5 increase per tonne of carbon dioxide equivalent, reaching $45 this April 1.