Fluor, Shell-led group discuss delays in North America’s West Coast LNG plant construction

LNG Canada, a Shell-led joint venture behind the biggest private investment in Canadian history, has fallen behind in construction mostly due to the pandemic, leading the owner and contractor to hold talks, according to Fluor Corp. executives.

Image shows LNG Canada construction progress as of Sept. 2020. Courtesy of LNG Canada

“LNG Canada is behind because of the pandemic, and both the client and us acknowledge that, and we are engaged in discussions with the client about this,” Fluor Corp.’s CEO Carlos Hernandez said on Sept. 25, 2020, according to a Motley Fool transcript of earnings and outlook discussions.

“And we acknowledge that and we are engaged in discussions with the client about this. In fact, we had a conversation yesterday. Alan and I met with their, some of the leadership yesterday,” Hernandez added, according to the transcript. Alan Boeckmann is Fluor’s executive chairman.

Hernandez announced in the same discussion of earnings and outlook with analysts that Fluor changed its future approach to EPC contracts, citing too much risk placed on the side of the contractor.

LNG Canada announced on Oct. 2018 a final investment decision to build an LNG export facility in Kitimat, British Columbia with the intention to supply markets in Asia. LNG Canada is a joint venture of Shell (40%), Malaysia’s Petronas (25%), Japan’s Mitsubishi Corp. (15%), Petrochina (15%) and South Korea’s Kogas (5%).

The estimated total cost of about $31 billion is the biggest private sector investment ever in Canada, the country’s Prime Minister Justin Trudeau said at the time.

The project involves two processing units each with 14 million tonnes/year capacity, for a total 28 million tonnes/year. It will be the first LNG exporting facility in North America’s West Coast.

Covid-19 impact in construction, fabrication

“Obviously, COVID has impacted everyone, and the client and I have had those discussions for some time now,” Hernandez said.

“On an overall basis, if you take a composite of the engineering, procurement, construction, fabrication, etc., this project is about 27.5% complete,” he added. “Now obviously, that's not construction. Construction is less than that.”

Legislation changes and force majeure events contributed to the delays, but Covid-19 caused a “considerable workforce reduction,” Hernandez said.

“Our workforce is now back where it was before the drawdown, and we expect to increase it to 2,500 on-site by the end of 2020,” he added.

The company site lodging currently accommodates 1,500 workers with a plan to add another 1,500 beds by year-end, and maximum occupancy of 4,500 by March, Hernandez added.

That “will be dependent on government regulations and restrictions with respect to social distancing,” he said.

Fabrication in China also delayed

“As it relates to our fabrication efforts for this project, China is still restricting its borders due to COVID-19,” Hernandez added.

“We do anticipate having the balance of our management team mobilized and back into China by year-end, depending of course on government restrictions,” he said.

“Construction on the LNG storage tank and marine offloading facility are also underway,” he added.

Once complete, the facility will be used to unload the fabricated LNG modules starting in the middle of 2021, Hernandez said.

EPC lump sum is $14 billion

“We remain committed to delivering first cargo by the middle of this decade,” a spokesperson at LNG Canada said by email on Oct. 19.

The C$40 billion (US$31billion) is “a total project cost estimate that includes five scopes: upstream, pipeline, plant, shipping and site works,” he added.

“LNG Canada is responsible only for plant construction, which is an engineering, procurement and construction (EPC) lump sum plus company-provided items. The EPC lump sum is approximately US $14 billion,” he said.

“Additional costs that we are not responsible for include upstream investment, pipeline, shipping/trading and marketing,” he added.

Pipeline work

The gas supply will come to the Pacific from eastern British Columbia, near Alberta, through the 416-mile Coastal GasLink pipeline.

The pipeline will move 2.1 billion cubic feet per day (bcf/d) of gas but could be eventually expanded to up to 5 bcf/d.

According to Coastal GasLink, owned by TC Energy (formerly Trans Canada), construction progress is at 13.9% with 3,488 workers as of Oct. 20.

In October 640 workers were added compared with the previous month.

Project’s competitive advantage

Shipping time from the U.S. Gulf Coast to East Asia is about 20 days, according to an EIA report.

“Sailing time from Kitimat to Asia is eight to 10 days,” the LNG Canada spokesperson said.

"Obviously, there is a big benefit to being closer to Asia, but you also have to get gas to the West Coast," Benjamin Nolan, managing director at Stifel Financial Corp., said by e-mail.

According to the Institute of Energy Economics and Financial Analysis, shipping LNG from the Gulf of Mexico to East Asia costs about $2/MMBtu for feedstocks, $3/MMBtu for liquefaction, and $1/MMBtu for transportation.

LNG did not provide shipping cost projections to compare the advantage. “LNG Canada cannot comment on specific shipping costs as these are specific to each of our joint venture participants’ shipping arrangements,” the LNG Canada spokesperson said.

The possibilities of other large-scale LNG projects in Canada declined when Chevron Canada announced on Dec. 2019 that it wants to sell its 50% stake in Kitimat LNG Project, where it was supposed to be the operator.

The Chevron-led project included upstream assets in northeast British Columbia, a pipeline, and up to three LNG trains totaling 18 million tonnes per year.

Separately, Canada’s Pembina Pipeline had contemplated a 7.8 million tonnes/year LNG plant for a project in Oregon. The project includes a 229-mile pipeline.

Discussing the chances to proceed with the LNG project, Pembina said in its second quarter earnings that “the timing and ultimate approval of this project is uncertain.”

Pembina deferred a large-scale chemical project in Alberta earlier this year in which it had already announced a final investment decision. The deferment occurred amid financial and market uncertainties around the pandemic.

By Renzo Pipoli