Huu-ay-aht LNG project moves forward despite market uncertainty

A Vancouver Island First Nation has signed a $30-million contract with multinational engineering firm Worley Parsons for environmental and geotechnical assessments and design work on a proposed liquefied natural gas facility.

Huu-ay-aht First Nation, in partnership with Vancouver-based Steelhead LNG, signed the contract on Feb. 6. The signing came despite the recent freefall in global crude oil prices and widespread industry pessimism about LNG developments.

On Nov. 29 last year, the Huu-ay-aht People’s Assembly voted to move ahead with the project in the face of opposition from members, environmental groups and B.C. First Nations whose traditional territories are situated along the proposed pipeline route.

Huu-ay-aht First Nation is one of 14 member nations of the Nuu-chah-nulth Tribal Council.

The Huu-ay-aht/Steelhead partnership proposes to build an LNG export facility on Sarita Bay, which is situated on the West Coast of Vancouver Island. The plant would be capable of liquefying and shipping 24 million tons of LNG annually.

Since the People’s Assembly gave their approval, the world price of oil, and by extension, the prospects for LNG projects have declined sharply.

Huu-ay-aht elected Chief Councillor Jeff Cook said the partnership would continue to move forward despite the market uncertainties.

“We’re still pretty confident,” he said. “A lot of the big players, particularly up North, have shifted their thinking because they’re focused on oil. We’re focused on LNG only.”

In the 2014 B.C. budget, projected LNG revenues figured heavily in the Liberal government’s vision of prosperity for the province. On Feb. 17, however, when Finance Minister Mike de Jong rolled out the 2015 budget, LNG was hardly mentioned.

Cook said the low profile for LNG on Budget Day was not surprising.

“We know from our regular meetings with government that they are still focused on LNG projects. But they are a little slower to move ahead than they anticipated.”

Likewise, Cook said the project proponents anticipated some sort of LNG announcement by Ottawa when Prime Minister Stephen Harper came to B.C. two days later, but they had no advance knowledge of the specifics.

On Feb. 19, Harper announced a series of tax breaks for new LNG plant construction, including a 30 per cent capital cost allowance on equipment and 10 per cent on buildings.

Cook said it is uncertain whether the tax measures would be enough to move the project forward any faster.

“We’re (Huu-ay-aht) focused on our site, and I’m not sure if it would have any effect for us. I am sure it would have an effect along the pipeline route.

“It may help the overall picture, but there are so many pieces to the puzzle that we are dealing with, we haven’t analyzed that yet.”

Repeated requests for an interview were made to Steelhead LNG CEO Nigel Kuzemko, and upon Steelhead’s request, Windspeaker provided a list of detailed questions, including about his view on how the tax breaks might impact on the project timeline. There was no response from the company head by deadline.

Other questions included how the current glut of LNG project proposals might affect royalties set by government, and at what stage Steelhead would enter discussions with the province and with Ottawa.

Kuzemko was also asked about how long-term prices might be affected by the abundance of countries attempting to establish their own LNG industries.

In December, Windspeaker asked Kuzemko if the partners had taken steps to assure that the assessment process does not become a revenue-generating initiative in itself. At the time, the CEO maintained that the company was structured in such a way that there was no inventive to spin out the assessment process.

Now, with a $30-million consulting contract in place with Worley Parsons, Kuzemko was asked if there are specific safeguards in place to prevent a self-sustaining study process. That answer is still pending.

For his part, Cook said Huu-ay-aht has been actively involved in setting up the study, and have recommended field specialists with a proven track record working on resource projects for Huu-ay-aht and other First Nations. Cook stressed the amount of human capital that exists in the region, and the emphasis that the partners have placed on innovation.

“For example, we recently sat down with the Bamfield Marine Sciences Centre to see what sort of synergies we might develop,” he said.

Writing about the project on Feb. 20, Julie Gordon of Reuters pointed out that the Huu-ay-aht/Steelhead partnership was unique among Canadian First Nation initiatives in that Huu-ay-aht has been a driver in the enterprise from the outset, rather than an add-on to facilitate the approval process. Still to be determined, however, Gordon reported, was how large an equity stake Huu-ay-aht would take should the project move forward.

Currently, Steelhead LNG is financing the Worley Parsons study through its investment agreement with KERN Partners, a Calgary-based energy sector private equity firm. Cook said the financial arrangements within the partnership are still evolving.

“We still don’t know to what extent we will be involved in the capital end,” Cook said.

As one of five Maa-nulth Treaty Nations, Huu-ay-aht owns specified treaty settlement lands plus freehold title lands they have acquired over the years, plus cash settlements that derived from the treaty, which was signed in 2009.

Huu-ay-aht also possesses significant but less tangible equity capital in the form of land, forest and marine resource rights within its traditional territory. Cook said Huu-ay-aht’s equity base has yet to be fully quantified in terms of how much capital could be borrowed, and his nation is still working on how to structure their investment. He declined to speculate on the question of future royalties and pricing structures, referring the question to Steelhead LNG.

Cook said Huu-ay-aht hopes to partner with other First Nations, particularly other Nuu-chah-nulth Nations, as the project moves towards fruition.

“We haven’t reached out to the broader B.C. First Nations as yet. We’ve been informing the local First Nations and, in general, they’re pretty supportive of what we’re doing. But of course, as we’re going along, there will be a lot more comments and questions.”