Canadian LNG: Global Opportunity, Global Competition
The march towards building a significant liquefied natural gas sector in Canada continues to see challenges, but proponents maintain that the country’s core advantages — large untapped gas reserves, competitive supply costs, close proximity to markets, and the ability to produce some of the cleanest LNG — will help it become a major world supplier in the years ahead even as competition rises.
Setbacks happen, though, as happened last week with the news that Chevron Canada Limited plans to exit its entire 50 per cent working interest in the Kitimat LNG project in British Columbia, including the proposed plans to build a plant at Bish Cove near Kitimat and construct the Pacific Trail Pipeline (PTP).
“The Kitimat LNG project decision is part of Chevron’s global portfolio optimization effort focused on improving returns and driving value,” the company said.
Although Kitimat LNG is a globally competitive LNG project, the super-major added, the strength of its global portfolio of investment opportunities is such that the Kitimat LNG project “will not be funded by Chevron and may be of higher value to another company.”
Chevron is not stopping the project, however, and has committed to fund select activity to advance Kitimat LNG even as it begins to solicit expressions of interest for its share in the project, which it owns with joint venture partner Woodside Petroleum Limited (50 per cent, although that company indicated in September it was seeking to reduce its stakes in the project).
In a sense, the faltering advance of Canada’s LNG sector is nothing new.
In the early 2010s, there were more than 20 proposed projects for Canada’s West Coast. A great number of those proposals fell off the table after oil prices tumbled and cash flow levels slumped five years ago.
For instance, Malaysian energy giant PETRONAS cancelled its Pacific NorthWest LNG project in 2017 and later joined the Royal Dutch Shell plc-led LNG Canada project, which remains the only project under construction.
Still, the Kitimat LNG project had been touted as the next world-class project to be sanctioned in Canada.
LNG Canada project
Despite the setback, and although many U.S., Australian and other LNG export plants have jumped ahead of Canadian projects, once seen as a likely leader in the growth of the industry, a spokesperson for LNG Canada says she’s convinced there will eventually be several such projects built in this country.
“I believe there is a lot of room for Canadian LNG in the world,” said Susannah Pierce, director of Corporate Affairs with LNG Canada, now developing the first phase of its $40-billion project near Kitimat, B.C. “I think we ought to play a bigger role.”
She said Canada, with large shale gas-sourced natural gas reserves in B.C.’s Montney play and elsewhere, has the resources to take advantage of the gas export opportunity, strong environmental standards, closer access to Asian markets than U.S. Gulf Coast developers and other advantages.
“I think Canada should take the lead in development beyond the mid part of [the next] decade.”
However, she said that certainly can’t be taken for granted, given the need for developers to secure First Nations support (which LNG Canada has), to comply with environmental and other regulatory requirements (which it also has done), while remaining competitive with U.S. and other developers.
“I think it’s very important for us to keep our eyes on the ball because this is a very competitive sector,” she said. “We need a regulatory process that is clear and resilient so there is investor certainty and Canadian LNG plants can be cost competitive.”
Pierce said one of the reasons a handful of large LNG export projects have gone ahead on the U.S. Gulf Coast is “because they have regulatory clarity.”
She said coping with the provincial and federal regulatory process in Canada “can be a problem.”
There’s no “cookie-cutter” model to build the plants, since they are very costly, while developers need to be respectful of Indigenous concerns and to respond to environmental issues, she said.
Despite those concerns, the consortium involved in LNG Canada is forging ahead with the project, with construction well underway.
Before last week’s announcement by Chevron, a spokesperson for the company’s Canadian affiliate, Leif Sollid, said his company agreed with the LNG Canada assessment that there is room for multiple projects in Canada.
“We share the view that Canada has an outstanding opportunity to meet increasing global demand for affordable, reliable, ever-cleaner energy, while reducing global emissions at a large scale, partnering with First Nations, and creating prosperity for Canada,” he wrote in an email, alluding to the lower carbon footprint of gas, compared to coal-fired power. “Establishing a competitive LNG industry in Canada is critical to the viability of Canada’s natural gas industry.”
Sollid said the company agrees with the LNG Canada view that the country’s LNG sector must be competitive, particularly with U.S. LNG developers.
“Kitimat LNG has incorporated partner global learnings into project design and execution plans, which have been adapted for the unique British Columbia environment,” he wrote. “Since 2015, Chevron and Woodside have made significant progress in enhancing Kitimat LNG competitiveness, reducing LNG unit costs by over 45 per cent and incorporating a new all-electric LNG plant design.”
Canada entering crowded LNG market
Global LNG competition is already fierce with 20 exporting countries at the end of 2018 and further export capacity growth in 2019, Mark Young, senior oil and gas analyst at Evaluate Energy, said at an event last month in London, U.K., centred on Canada’s LNG growth opportunity. (The event was organized on behalf of the government of Alberta by Glacier Media, the parent company of the Daily Oil Bulletin and Evaluate Energy, and the Canadian Society for Unconventional Resources.)
Heading into the next decade, Young highlighted a selection of projects around the world that are scheduled to begin exporting before 2030 along with Canada’s proposed facilities, according to public disclosures.
Source: Evaluate Energy
These projects, as well as other expansions and new projects scheduled for commercial operations in the 2020s, will form major competition in the ideal Asian and European markets for potential Canadian LNG exports.
The table clearly identifies the U.S. as a key competitor and there are many more U.S. projects of varying sizes in play on top of the 10 projects included above as the country looks set to build on its remarkable early growth.
“In just its second full year of exports from the east and Gulf coasts, the U.S. shot to the fourth largest exporter of LNG worldwide in 2018 and also exported to more individual importing nations (29) than any other exporter,” said Young.
The early success and the ability to send its cargoes to so many of the world’s importing countries has been based on selling LNG on short-term or spot deals.
“No country in the top 10 global LNG exporters used the short-term market to such a high degree as the U.S. with 65 per cent of its exports sold on short-term deals.”
Australia saw a greater overall volume exported this way, but it was relatively minor compared to its long-term contracted volumes sold over the same period.
The U.S.’s proximity to a greater number of importing countries plays a role in all of this. But gaining access to these markets and these short-term deals was made possible because of destination-free contracts with buyers and the fact that its buyers include global LNG traders. These traders involved in U.S. deals, of which LNG Canada’s Royal Dutch Shell is a good example, sign agreements to take a large contracted volume of LNG from a specific terminal into their global portfolios over a number of years and sell them on.
For Canada, this is an important point according to Young and should provide some encouragement for the country’s prospects of finding buyers in an increasingly crowded marketplace. “If we look at the example of LNG Canada, we can see that Shell and PETRONAS are owners and will be marketing their own proportionate volumes from the project. Both have large portfolios of LNG that is traded around the world.”
Bill Gwozd, a founding member of the Centre for Gas and Liquids Monetization and the former vice-president of gas services with Ziff Energy Group, says the future for Canadian LNG plant developers is bright.
He also believes Canadian projects will have a distinct advantage over U.S.-based and Australian projects into the next decade.
He said the drivers of more LNG demand worldwide are well known, including a shift from higher GHG-emitting coal for power generation and the closure of nuclear plants.
“Demand has been growing by about one bcf/d and that growth will continue,” he said.
Canada has significant gas supplies, while countries such as Indonesia, which has been a gas exporter in the past, face a future of declining production, he said.
“Of the two dozen (Canadian) LNG projects that filed for LNG exports, those analyses showed that Canada has a huge resource which would underpin exports for a minimum of the 40-year licence, though depending on the amount of annual export, even a lot more years could be available,” he said.
The sheer scale of population growth worldwide, with more people entering the middle class, means gas demand will grow, he said.
Canadian gas and LNG producers have a distinct advantage over both U.S. Gulf Coast and Australian competitors, he believes.
In the case of the U.S. suppliers, the Gulf Coast is subject to hurricanes and other serious storms. In addition, tankers need to move through the Panama Canal, which adds to costs and time (shipments from the B.C. coast are several days less).
He said the proximity to Asia means shipping costs for Canadian LNG would be lower on a permanent basis.
Gwozd added that “geopolitical issues arising in some world exporting countries,” a possible allusion to the trade wars created by U.S. President Donald Trump, also makes Canada a more reliable LNG supplier.
He believes gas importing countries will consider the political happenings in the U.S., where several candidates for the Democratic Party nomination for president have taken an anti fossil fuels stance, even suggesting gas exports should not be allowed.
Canadian LNG can compete in Asia against other energy-producing regions not only in terms of price, but also in terms of how this country’s natural gas is produced, Maria van der Hoeven, former executive director of the International Energy Agency, told a recent event in Calgary.
These markets want energy that helps to meet their carbon-reduction commitments, and Canadian LNG helps achieve this, she said. (Read how Canada could produce the “cleanest” LNG in the newly released report, Canada’s Green LNG Advantage: Extensive electrification offers critical low-emissions advantage in the global pursuit of clean growth.)
“If you really want to phase out all this coal in the world that’s still in production, then that’s a huge window of opportunity where gas can play an increasing [role] next to renewables,” she said.
Canadian LNG can be very useful in terms of an energy transition, and she believes the onus is on those opposed to Canada developing its natural gas resources for export to prove why it is bad for the environment when countries are trying to transition off coal and combat global emissions.
“What I do know is that if Canada is really going to produce this low-carbon, low-price LNG for other parts of the world, like the Asian market, then it would be very helpful.”
Van der Hoeven acknowledged developing natural gas exports is hard in Canada, thanks to regulations, First Nations concerns and environmental requirements.
Overall, though, when it comes to appealing to overseas markets, the retired Dutch politician sees Canada’s stringent regulatory environment as a positive differentiator against the competition. “If you look at regulations with Canada and you compare them with other countries, then I think you are really [the] top pick.”