LNG Canada needs prefab steel duties resolved before final investment decision

Alaska Highway News | Nelson Bennett | February 4 2018

LNG Canada has short-listed two international consortiums for the design, procurement and construction of its proposed liquefied natural gas plant in Kitimat.

But before Shell and its partners make a final investment decision – expected in the second half of this year – it needs Ottawa to exempt the project from trade duties on prefabricated steel from China and Spain, or the project may be a no-go.

LNG Canada announced February 2 that it has short-listed two major international engineering and construction consortiums for the design, procurement and construction for an LNG plant in Kitimat.

“I think the fact that we are at this second short-listing is an indication we are serious about doing this thing,” Susannah Pierce, LNG Canada’s director of external relations.

The announcement came just days after Premier John Horgan returned from Asia, where he met with a number of the companies involved in the consortium.

LNG Canada CEO Andy Calitz also was in on some of those meetings, Pierce confirmed.

In 2016, LNG Canada delayed a final investment decision it had been expected to make that year, and its lead contractor cancelled the bidding process for prefabricated LNG modules.

The company went back to the drawing board, and asked fabrication yards in Asia to come up with some better prices, in an effort to get capital costs down.

The project would have a total capital cost of about $40 billion, including the LNG plant in Kitimat, a new gas pipeline and upstream natural gas assets.

LNG Canada has now shortlisted two consortiums to handle the design, procurement and construction: TechnipFMC plc-KBR, Inc. and JGC Corp.-Fluor Corp.

“I think the fact that we went back to market was really because we believe that there needed to be, and there could be, significant reductions in the overall cost of constructing this project,” Pierce said

But any savings the company might realize through a second bid will be blown entirely out of the water by duties that Canada applied to prefabricated steel imports last year.

In the summer of 2017, the Canadian International Trade Tribunal (CITT) and Canada Border Services Agency imposed anti-dumping duties in response to complaints by Canadian manufacturers that China, South Korea and Spain were dumping cheap steel into Canada.

Imports of fabricated industrial steel components from China and Korea could be hit with 45% dumping duties.

If those duties are applied to the prefabricated LNG facilities, called “trains,” that would need to be built in China or Korea – which are among the few countries with that expertise.

LNG Canada and a number of other companies have applied for a judicial review of the duties. But that is not likely to even be heard until 2019, which would delay a final investment decision.

LNG projects are timed to meet windows of demand, which are affected by long-term contracts. LNG Canada is aiming for 2024 to be in production. Once an FID is taken, it is expected the full project will take five years to build, Pierce said.

In addition to the applying to the federal court for a judicial review, LNG Canada has also applied to the federal minister of Finance for a remission order setting aside the duties for its project.

The modules used in LNG plants are sophisticated pieces pieces of machinery that no Canadian manufacturer is capable of building, according to LNG Canada and other LNG projects, like Woodfibre LNG.

“If we had to wait for a judicial review determination, that could bring us into 2019,” Pierce said. “Hence the only other alternative for us is to go the remission order route.

“We’ve made the argument with finance that we need to know, because this is really critical for us to make a cost-competitive proposal. These modules cannot be built in Canada, and if we have to assume these duties, which we would build into our economics, then it has a significant impact on our competitiveness.”

LNG Canada has also raised concerns over competitiveness issues in B.C. It is a high cost jurisdiction, compared to the U.S., due to a lack of existing pipeline infrastructure and terminals.

In addition to carbon taxes that companies don’t pay in Australia and the U.S., companies here would also pay a special LNG tax, which other LNG-producing jurisdictions don’t have.

The new NDP government has initiated a competitiveness review to look at the issue of competitiveness.

“That’s still ongoing, and we don’t have any clear outcome on what may be done by the government,” Pierce said. “But they have engaged, they are interested, and they want to know whether or not LNG from British Columbia can compete.

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