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Assessing the Economic Viability of an LNG Terminal in Newfoundland: With Export to European Markets

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In this paper I analyze the economic viability of a liquefied natural gas (LNG) terminal in Newfoundland, with export to European markets. Natural gas is extracted offshore Newfoundland & Labrador and transported via pipeline to shore. The natural gas liquids (NGLs) and impurities are then separated from the pure methane. The NGLs are processed at an NGL processing plant and sold on their respective markets. The impurities are discarded and the natural gas is then liquefied and loaded onto double hulled tankers, which will transport the LNG to European markets. Capital and operating expenditures are calculated, with a 20 year production profile. Royalties are analyzed and compared using the Nova Scotia and Newfoundland royalty systems. Provincial and Federal corporate income taxes are also included in the analysis. The pipeline and LNG transport will be contracted out to outside parties. The producer will operate the production facility, as well as the LNG and NGL stations. Three reserve scenarios are analyzed (4-6 trillion cubic feet) and an internal rate of return (IRR) on the project is determined for the producer until different price scenarios, which range from $6 CDN/MMBtu to $16 CDN/MMBtu. The project is considered to be economically viable if the IRR is at least 15%, according to industry standards set by Husky Energy, operating from St. John’s, Newfoundland. Given that the price of natural gas in Europe is expected to increase to nearly $14 CDN/MMBtu in 2016, the project is deemed to be economically viable under all reserve scenarios.
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