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LNG Canada shifts project risk to contractor bidders

A model at the LNG Canada offices in Kitimat, B.C., shows the proposed liquified natural gas liquification plant and marine terminal, June 26, 2014. The Rio Tinto Alcan smelter is in the background .

Robin Rowland/The Canadian Press

Four engineering groups competing to become the prime contractor for a liquefied natural gas project in British Columbia have agreed to make bids that will see them accept the risk of construction cost overruns.

Under the LNG Canada consortium's request for proposals, the four engineering groups have been asked to submit rival bids for what the industry calls a lump-sum contract, where the contractor agrees to a fixed price for materials and labour. In that scenario, the project's co-owners led by Royal Dutch Shell PLC will be left with little or no risk of incurring extra expenses beyond what has been agreed to in the contract.

LNG Canada chief executive officer Andy Calitz told employees in an internal newsletter earlier this year about the plans to seek a lump-sum contract and an industry source familiar with the bidding process confirmed that if construction expenses go over budget, the financial responsibility for overruns shifts to the winning bidder.

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Amid a supply glut of the fuel globally, LNG Canada is pondering whether to forge ahead with a project that could cost up to $40-billion. Reining in construction bills will be crucial in the Shell-led group's decision-making process because the B.C. venture needs to be globally competitive.

"If something goes wrong like the weather, or a labour strike or materials suddenly jump up in cost, the contractor can't pass on those costs back to the client when there is a lump-sum contract. It's also called a hard-dollar contract," the industry source said. "There will be a mind-bending array of engineering, procurement and construction pricing that the bidding groups will have to take into account. They will have to decide how much of the project will be procured offshore through construction modules and how much to build on the Kitimat site."

LNG prices in Asia began slumping in the spring of 2015, with a global glut of supplies growing as new terminals started exports. With prices for the fuel nose-diving over the past couple of years, it has rendered most of the LNG proposals in British Columbia uneconomic, analysts say.

Against the backdrop of Canada lagging in the LNG game, the four groups in the running to serve as LNG Canada's prime contractor are: Bechtel Canada Co. and Chiyoda Canada Ltd.; Technip FMC and KBR; Saipem SpA and Chicago Bridge & Iron Co. BV; and JGC Corp. and Fluor Canada Ltd. Bids are due by Nov. 30.

"There will be a thorough review of the submissions. We do not share commercial information publicly," an LNG Canada spokeswoman said in a statement. "As you can imagine, this is a competitive bidding process and discussing any of the details related to it is not possible."

Shell holds 50 per cent of LNG Canada. South Korea's Kogas and Japan's Mitsubishi Corp. each have a 15-per-cent stake, while PetroChina Co. Ltd. owns a 20-per-cent interest in the consortium.

In July, 2016, LNG Canada announced a delay in making its final investment decision, or FID in industry lingo. The FID is now expected by the end of 2018. Chopping costs significantly will figure prominently in whether the project is deemed attractive enough to approve, industry experts say.

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Dan Tsubouchi, chief market strategist at Stream Asset Financial Management LP, said he has been a long-time skeptic about whether any of the more than 20 LNG proposals in British Columbia over the past six years will ever reach the construction stage and launch exports to Asia.

But he now believes China's shift to boosting its consumption of natural gas will have a greater impact on global LNG demand than expected, easing the supply glut. As Royal Dutch Shell strives to diversify its portfolio, that increases the chances of the Kitimat project standing out globally within the energy giant, Mr. Tsubouchi said. "LNG Canada will need to be cost competitive," he cautioned in an interview.

BC NDP Energy Minister Michelle Mungall, who attended a public presentation by Mr. Calitz in September, points out that the Haisla Nation supports LNG Canada. "We need to respect First Nations' perspective and work with them, and that's exactly this government's approach," Ms. Mungall said.

Crystal Smith, the Haisla's elected chief councillor, said Haisla leaders opposed the now-abandoned plans by Enbridge Inc. to construct the Northern Gateway oil pipeline from Alberta to Kitimat, but they have embraced LNG as a commodity that would be safe to transport while adhering to environmental protection rules.

"LNG Canada is definitely doing its part and working very hard," Ms. Smith said from Kitamaat Village. The Haisla's traditional home is on the east side of Douglas Channel in Kitamaat Village, located near Kitimat.

The project includes an export terminal in Kitimat, related pipelines and other infrastructure. TransCanada Corp. is responsible for planning the $4.7-billion Coastal GasLink pipeline from northeastern British Columbia to Kitimat.

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About the Author

Brent Jang is a business reporter in The Globe and Mail’s Vancouver bureau. He joined the Globe in 1995. His former positions include transportation reporter in Toronto, energy correspondent in Calgary and Western columnist for Report on Business. He holds a Bachelor of Commerce degree from the University of Alberta, where he served as Editor-in-Chief of The Gateway student newspaper. Mr. More

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