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Dealing with LNG

Canada’s grand plans

An artist’s rendering of the proposed LNG processing units, storage tanks, rail yard, and water treatment facility for the LNG Canada site in Kitimat, BC.

There is more proof, especially in contemporary business, that life is what happens when you’re busy making plans.

Some 10 positive and exciting years ago, liquefied natural gas (LNG) was the natural resource darling of Canada’s energy sector. It was natural gas converted to liquid form for ease and safety of non-pressurized storage and transport. The gush of positivity was spiked by forecasts about decreasing conventional supplies of domestic natural gas which caused bullish predictions about future North American LNG demand. Among other grand plans, it resulted in an investment boom to build new LNG import facilities.

Then, something happened. Lots happened. Things changed. Plans changed.

There was a surge in American unconventional natural gas production, primarily from shale gas. Suddenly the LNG import forecasts started to change. Natural gas production was boosted. Prices dropped, as did the need for imported LNG.

But, as it turned out, flag-waving only goes so far. Some industry analysts candidly suggest that, for numerous industry and economy reasons, when it comes to LNG, Canada is disadvantaged as Americans have always had an LNG edge.

“Compared to the U.S., Canada has been slow with more complex projects,” explains industry expert Jackie Forrest who tracks emerging and strategic energy trends as director of research at the ARC Energy Research Institute. “In Canada, we need to build upstream wells, pipelines that are 700-900 kilometres long, and liquefaction facilities in remote locations on our West Coast.

“And Canada has a much different regulatory process. U.S. projects are more simple, building on mostly brownfield sites with access to gas at liquid trading hubs that are in close proximity. The U.S. also introduced a new commercial structure that gained traction with Asian buyers and helped accelerate their projects.”

There are various other aspects to the American edge. “Canada was late to the international LNG export scene,” says Susannah Pierce, director of external relations for LNG Canada, the joint venture organization comprised of four global energy companies. “Prior to the shale gas revolution, Canada, like the U.S., was siting and permitting LNG import facilities on both coasts. With the advent of commercially- and technically- feasible hydraulic fracturing, the golden age of unconventional gas quickly took hold in the country.

“The U.S. was experiencing the same shale gas revolution, so Canada started losing its most important and only natural gas customer.” The stats, trends and projections don’t lie. The U.S. is becoming increasingly LNG self-sufficient and pipeline exports from Canada to the U.S. are drying up.

Some energy sector insiders warn that natural gas demand is relatively stagnant in Canada, even as the oilsands expand and Alberta transitions from coal power plants in favour of natural gas-fired electricity.

The U.S. is increasing how much natural gas is exported from LNG terminals and some Canadian producers are struggling to move gas out of Alberta as pipelines reach capacity.

But according to industry analysts, the forecasts for Canada do show some momentum and even cautious optimism. “The opportunity for Canada to be part of the supply to meet the next forecasted wave of LNG demand is real,” Pierce notes. “As long as LNG projects can be competitive with other choices to supply LNG.”

In addition, the energy sector – with ample unconventional resources – is shifting its focus from importing LNG into North America to exporting LNG from North America. And it is this shift that could eventually boost Canadian natural gas production growth and result in significant investment, jobs and economic growth.

“Before new technology that unlocked all this gas was developed,” Forrest points out, “the expectation was that North America would require imports from other places, as we did not have enough supply to meet that demand. So the technology has totally transformed the outlook for natural gas on the continent.

“A key reason why we are shifting to being LNG exporters is because we have a low-cost abundant supply. By most estimates, shale gas resources could last 100 years at current consumption levels. A little known fact is that the production growth from Western Canada’s natural gas shale plays is comparable to that of the oilsands.

“Between 2009 and 2014, western Canadian shale gas and associated liquids grew by about 700,000 barrels of oil (equivalent) per day, while the oilsands grew by 800,000 barrels per day. Much of the shale gas expansion is unfolding in Grande Prairie, Alberta’s lesser-known energy boom town.”

As with so many aspects of business, price continues to be a crucial factor in the LNG world, and very much a factor for Canada’s success as an LNG exporter.

“The U.S. will have 10 Bcf/d (cubic feet per day, the unit used to measure the daily volume of gas produced, stored, transported or consumed) of export capacity by end of 2020, and is already exporting in the range of 2.5 Bcf/d, with more growth expected this year.

“When it comes to price, Canada is currently at about 50 per cent discount to U.S. pricing. I think prices will be more challenged the next few years as supply is high with limited new demand and pipeline exports. However, by 2020, low prices, new demand and exports should help constrain supply.”

LNG Canada’s Susannah Pierce underscores the challenging relevance of price. “The cost of natural gas (at AECO) compared to other locations around the world is one of the factors that underlies competitiveness, in addition to the two days shorter shipping distance from British Columbia to Asia.

“On the downside, the level of capital investment required, without existing LNG terminals or pipelines in place to connect western sedimentary gas to the coast, is what works against LNG Canada.”

As detailed in EY’s recent Competing in The Global LNG Market report, “The global LNG industry is dealing with … a growing demand and an ever‑increasing amount of new capacity proposed around the world.” EY calculates that it could be as much as 350 million metric tonnes per year (mtpa), which, if all were built, would more than double current capacity by 2025.

EY also underscores the need for a surge in LNG investment to make it happen. “Investment in Canada’s LNG industry will depend on whether LNG projects are competitive globally. Plentiful natural gas reserves alone will not support development. Understanding where Canada stands requires zeroing in on the factors that determine competitiveness.”

According to the report, 15 Canadian LNG export projects have been proposed and nine have already received export permits with the expectation that many more will be approved (with a view that ultimately the market, and not the National Energy Board, will determine which projects are viable).

Natural Resources Canada (NRC) cautions there may be a short window of opportunity for Canada to capitalize on its LNG export potential. With intense competition around the world for LNG investments, NRC cites various examples how the federal government is working closely with several provinces to create conditions to support the development of an LNG industry in Canada.

Despite Canada dealing with some LNG speed bumps, the ARC Energy Research Institute’s Jackie Forrest is professionally upbeat and positive. “Canadian projects are still progressing: LNG Canada is expected to make a [final investment] decision this year [and] smaller projects, including Woodfibre LNG, are progressing. I still see a large opportunity for Canadian LNG based on our low gas prices, close distance to Asian markets and high prices in Asia.”