LNG in World Markets Featured Article

Canadian pipeline operator Pembina and the indigenous Haisla Nation are raising as much as $2.4 billion for the $4 billion project, and targeting a mid-2024 final investment decision (FID) for the proposed 3-MMt/y Cedar LNG export terminal in British Columbia. They have signed a pair of commercial agreements, issued a notice to proceed (NTP) to the project’s shipbuilder and are seeking loans from banks.

The commercial agreements, NTP and debt offerings are viewed as a de facto FID. The proposed project is a 50-50 joint venture between Pembina and the Haisla Nation that plans to use an FLNG vessel docked along the shore for all its production. If successful, Cedar could potentially become the first global LNG export project to reach FID this year. However, Middle East player ADNOC is also in contention and is said to be preparing to reach FID on its 9.6-MMt/y Ruwais LNG export project during the 1H 2024.

Cedar and six other North American LNG export projects with combined capacity of 51.8 MMt/y were expected to reach FID this year (see LNGWM, Dec ’23) but an export permit pause enacted in late January by the Biden administration put most of them on hold until after the November 2024 US presidential elections. A political compromise between the Democrat president and the Republican-led US House of Representatives could lift the pause but it is unclear how long it would take regulators to resume permitting activities. Because Cedar will use Canadian-sourced natural gas, it does not require any US permits and has now found itself as the frontrunner among North American LNG export projects.

Two commercial agreements

After more than a year of negotiations, Cedar LNG announced a 1.5-MMt/y tolling agreement with Canadian shale gas driller ARC Resources on April 4. The 20-year, take-orpay fixed toll contract calls for ARC to provide the export project with 0.2 Bcf/d of natural gas from the exploration and production company’s wells in the Montney shale of Alberta. The gas will be delivered to the plant via a lateral connection with TC Energy’s 2.1-Bcf/d Coastal GasLink pipeline, which supplies Shell’s nearby LNG Canada project.

Under its agreement with Cedar, ARC is said to be paying fixed fees for electricity, pipeline transportation and liquefaction. The deal is said to be indexed to Canada’s AECO Hub with a liquefaction fee understood to be between $3.50 and $4.00/MMBtu. Although that price is higher than current US Gulf Coast liquefaction fees of $2.40 to $2.55/MMBtu, indexed to the US benchmark Henry Hub, natural gas sold on the AECO Hub trades at a lower price. Shipping costs are also expected to be lower due to the shorter distance to Asian markets and not having to transit the drought-stricken and bottlenecked Panama Canal.

Cedar’s price formula with ARC may include four components. This includes an outright fixed cost charge, a fixed operation and maintenance charge, a variable operation and maintenance charge and a British Columbia hydro charge. The price, excluding British Columbia hydro charge, is understood to be at high-$3s to low-$4s/MMBtu.

Pembina is still said to be in negotiations with a Chinese buyer and other potential offtake customers. It signed a 1.5-MMt/y bridging agreement with Cedar to keep the export project’s FID and first LNG production timelines on schedule. Both Pembina and ARC intend to sign secondary deals with third parties for their volumes following a positive FID for the export project. Pembina is said to be seeking an equity investment as part of its offtake negotiations. ARC has already signed a non-binding heads of agreement (HOA) with a global portfolio player for all 1.5-MMt/y of its volumes – with a sales and purchase agreement (SPA) anticipated to be finalized by the end of the year. The shale driller is seeking international prices for its volumes from Cedar. The deal with Cedar marks the third LNG deal for ARC, which signed previous agreements to supply US LNG giant Cheniere Energy with 140,000 t/y at the Corpus Christi Stage 3 project under construction in Texas and another 140,000 t/y at the proposed expansion of Sabine Pass LNG in Louisiana.

Cedar LNG Export Terminal

Notice to proceed

To maintain an anticipated in-service date in late 2028, preserve a slot at the shipyard in South Korea and avoid project cost increases, Cedar issued an NTP to engineering, procurement and construction (EPC) contractors Samsung Heavy Industries and Black & Veatch. Working under a fixed-price, lumpsum agreement, Samsung plans to build the ship while Black & Veatch will install the topsides.

To that end, Black & Veatch has ordered four electric-driven main refrigeration compressors, two electric-driven boil-off gas compressors and six centrifugal pumps from LNG equipment maker Baker Hughes as well as natural gas liquefaction cold boxes and brazed aluminum heat exchangers from Chart industries. Cedar will be powered by hydroelectricity, which could make it one of the lowest carbon intensity LNG plants in the world. But with at least three other proposed LNG plants in British Columbia also seeking to use hydropower, the Canadian province will need to build out sufficient electric transmission lines, which could prove costly and experience delays in the mountainous region.

With an estimated price tag of $4 billion, approximately $2.3 billion will be used to build the 3-MMt/ FLNG, which translates roughly to $767/ton. Another $1.1 billion has been budgeted for onshore infrastructure, commissioning activities, insurance and other costs. On the financing side, interest rates will add another $600 million.
Debt offerings
Cedar plans to reach FID using a 60-40 debt-to-equity ratio. The project has tapped Japanese investment bank MUFG as its debt advisor. MUFG sent a note to banks seeking loans from them on April 5 with financial institutions in Canada said to be particularly keen on the project. Pembina and the Haisla Nation have pledged to split the remaining 40% through equity contributions. The Haisla Nation has hired financial advisory firm CIBC Indigenous Trust (a unit of Canadian Imperial Bank of Commerce) to help raise its share.
Pembina plans to fund its equity contribution through cash flows from the company’s operations. The pipeline operator has already paid $150 million toward the project and plans to spend another $75 million before the project reaches FID. To protect its EPC contractors and customers, Pembina has already secured an insurance policy and other financial assurances that will reimburse up to $200 million if the project fails to reach FID.
Once operational, Cedar is expected to generate an adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) of $200 million to $260 million for Pembina per year. The low-end of the adjusted EBITDA range represents the take-or-pay commitments, whereas the high-end includes potential contribution from incremental cargos and marketing upside.