Over the past 24 months, Canada’s LNG export future has fallen from promising to bleak. Environmentalists and large energy companies such as Petronas and Shell have gone back and forth with the British Columbia government and various First Nations groups for years. However, despite Shell receiving conditional environmental approval in June, after all this time, not one of the 19 LNG proposals for the BC coast has committed to begin construction. Meanwhile, other LNG world leaders have pushed full steam ahead, leaving Canada behind…

Canada losing LNG Export Race to U.S. & Australia

The proposed projects in BC, which are in a range from preliminary to advanced stages, are now facing a new set of headwinds: a global supply glut of natural gas, falling prices and fierce competition from rising export nations such as Australia and the United States.

For many decades, Canada’s economy has relied on exporting natural gas and oil to the United States. However, as the energy renaissance continues in the U.S., demand from our southern cousin is falling rapidly.

 

A quick glance at the chart above shows U.S. shale production exploding from about 50 billion cubic feet per day in 2007 to over 70 billion cubic feet per day in 2015. This increase is a problem for Canada for two reasons: the U.S. no longer needs Canadian nat gas; and it will have the opportunity, by the end of this year, to unseat Canada as a global natural gas export powerhouse.

U.S. set to Emerge as Top Natural Gas Exporter

On September 15th RBN Energy LLC Managing Director Rick Smead, who is known for helping quantify U.S. shale potential in 2008, spoke at the LDC Mid-Continent Gas Forum. In respect to the U.S. natural gas industry, Smead explained that, “There have been staggering increases in efficiency.” According to Natural Gas Intel he went on to cite a 630% increase in drilling rig efficiency and said the average time for completing a well has dropped from 18 to 6 days in the past year.

source: http://www.naturalgasintel.com/articles/103672-natgas-industry-healthy-despite-low-prices-analyst-says

This type of efficiency, along with the discovery of numerous shale plays, has been happening not just in the United States, but around the world over the past decade. This has led to a global supply glut in natural gas and a collapse in prices.

 

On September 16th The National Energy Board released data signaling a steady decline in natural gas exports from Canada to the United States from 2007 to 2014. The Alaskan Highway news reported that:

“Canada exported 5.05 Bcf/d of natural gas to the U.S. Midwest in 2007 and 3.89 Bcf/d in 2014. Canada exported 2.82 Bcf/d of natural gas to the East in 2007 and 0.95 Bcf/d in 2014.”

 

Over the past 7 years Canadian natural gas exports to the U.S. have been cut in half. While this underpins the fact we can no longer depend on U.S. demand for natural gas, it reveals how desperately we need to tap into new (Asian) markets. There is just one problem: The U.S. beat us to the punch.

U.S.-based Cheniere Energy is on the brink of completing the first new export site for liquefied natural gas in 46 years. Cheniere’s project is known as Sabine Pass and is nearing completion along the Louisiana-Texas border on the Gulf of Mexico. The project is expected to launch its first LNG shipments in late-2015.

When it comes to execution on domestic energy strategy, the U.S. has Canada beat. Below are some of the key dates outlining the Sabine Liquefaction Project Schedule, sourced from Cheniere’s website:

 

• July 26, 2010 – Submitted NEPA Pre-Filing Request
• August 4, 2010 – FERC Approval to use Pre-Filing Process
• January 31, 2011 – File NGA Section 3 Application
• December 28, 2011 – Issuance of Environmental Assessment / Environmental Impact Statement
• January 31, 2012 – File Initial Implementation Plan
• April 16, 2012 – Issuance of Authorization
• 3rd Q – 2012 – Commence Construction
• 4Q 2015* – Liquefaction Project In-Service

Note the timing between when Cheniere filed its initial implementation plan and began construction. It all happened in less than one year. Even the laborious environmental assessment was issued relatively quickly.

But it gets worse… for Canada.

In May of this year the US Energy Department issued final authorization for Cheniere Energy’s second project, the Corpus Christi Liquefaction Project, to export domestically produced liquefied natural gas to countries that do not have a Free Trade Agreement (FTA) with the U.S.

The company reported in May that construction for the terminal had begun and is expected to be in service by 2018. Total cost: $11.5 billion for the first two trains, two LNG storage tanks, one dock, and the natural gas supply pipeline. The project will be funded with $3.1 billion of project equity and $8.4 billion of debt.

source: http://www.prnewswire.com/news-releases/cheniere-issues-notice-to-procee…

For a quick comparison, the proposed Petronas-backed Pacific NorthWest LNG export plant would be the largest private-sector investment in B.C.’s history – valued at roughly $36 billion.

The proposed Pacific NorthWest liquefied natural gas (LNG) project requires building 3 LNG trains, each with a nameplate capacity of 6 million tonnes per annum.

source: http://www.hydrocarbons-technology.com/projects/pacific-northwest-lng-pr…

Cheniere Energy’s first project, the Sabine Pass, coming into operation this year on the Louisiana/Texas border, has 6 LNG trains with production capacity of approximately 4.5 million tons per annum.

source: http://www.cheniere.com/terminals/sabine-pass/trains-5-6/

Over the long-term Canada’s LNG projects might be cheaper to deliver, given the proximity to Asia, particularly in comparison to those liquefaction projects in the Gulf of Mexico. However, initial capital costs are anticipated to be higher. Furthermore, US companies will be exporting natural gas in the near-term, getting the jump on establishing multi-year export deals.

So, as countries such as Australia, Russia and the U.S. become successful in their race to export LNG, Canada falls by the wayside. Given the long-term nature of many natural resource distribution contracts, being first to market matters above all else.

In June of this year, the International Energy Agency (IEA) published a five-year outlook on global demand for natural gas, in which it bluntly reported:

“Prospects for [Canadian] LNG projects have deteriorated and no plant is expected to be operational over the time horizon of this report.”

source: http://business.financialpost.com/news/energy/canadian-lng-prospects-hav…

Australia to capture natural gas export market

Australia has quietly become one of the largest natural gas exporters in the world. The South Pacific nation, in close proximity to Asia, expanded its production capacity late last year, and boosted its market share to 9.9% from 9.5%, according to GIIGNL, a Paris-based lobby group.

 

Bloomberg reported that Domenico Dispenza, GIIGNL president, said in a recent report that,

“The industry is waiting for the wave of new exports from the U.S. and from Australia, who will likely top the producers’ list by 2020.”

 

Canada is not even mentioned in the Bloomberg article.

In a June article from Financial Post, authored by Yadullah Hussain, Australia’s rise to natural gas export dominance is further examined. It has been reported that the country has 72 billion cubic metres of LNG capacity under construction, and is set to overtake Qatar as the world’s largest LNG exporter. The article states:

“On average, major Asian LNG importers secured about 72 per cent of their volumes through long-term contracts in 2014. As many as 90 percent off the six Australian LNG are contracted out while 80 per cent of the four U.S. LNG projects are also underpinned by long-term off-take agreements.”

Had Canada approved one of its proposed LNG projects years ago it could be competing for these long-term contracts in Asia.

All of this new export capacity equates to one thing: rising supply.

Yadullah Hussain stated in his Financial Post article that,

“Global LNG supply is also set to rise 40 per cent during the next five years, leading to a global glut that will likely keeping[sic] prices lower for longer.”

 

Even in Papua New Guinea (PNG) natural gas exports have begun. The PNG LNG Project, led by ExxonMobil, commenced production of liquefied natural gas in April 2014 and began exporting in May of last year. According to the company’s website, the Project will provide a long-term supply of liquefied natural gas (LNG) to four major customers in the Asia region including:

• China Petroleum and Chemical Corporation (Sinopec)
• Osaka Gas Company Limited
• The Tokyo Electric Power Company Inc.
• CPC Corporation

Canada: Johnny come lately

Despite waffling back and forth for years, with no final decision and relatively small financial Canada last to natural gas export race commitments made, there is still hope for Canada’s natural gas export market. The Canadian Environmental Assessment Agency is expected to rule by early 2016 on whether to approve Pacific NorthWest LNG’s project.

As recently as July, B.C. Finance Minister Mike de Jong, was touting projections of $9 billion in government revenues generated in a decade from the Petronas-backed Pacific NorthWest LNG export plant.

Expect Further LNG Development Delays if NDP Win Election

The Globe and Mail reported that AltaCorp Capital, which focuses on key drivers of the Western Canadian economy, noted that the federal New Democratic Party has indicated its support for more extensive environmental assessments.

So, if the NDP emerges as the winner of the October 19th Canadian federal election, there could be further delays for natural gas export projects.

Canada’s LNG Bright Side

In a Financial Post article, AltaCorp Capital analyst Dana Benner explained that the collapse in crude oil prices has weakened demand for labour in Western Canada, and companies could use the slowdown as an opportunity.

The Financial Post article cited Benner:

“If oil stays at these levels, in fact, it will probably get weaker yet, in which case more people will free up, so it is actually a perfect environment for not only one but maybe a couple of these projects to go because of the talent pool.”

Whether or not energy companies, who are currently losing billions due to depressed oil and natural gas prices, see the same opportunity remains unclear. Natural gas has been losing ground to cheap coal and expanding renewable energy in many regions of the world.

We saw this race to export natural gas coming years ago; and in a Weekly Volume from May of 2013, titled The Four Nat Gas Horsemen, we wrote that:

“North America is positioned to supply this demand increase as we are awash in the commodity. The question is, will we streamline the infrastructure to get the product overseas?”

 

Regrettably, and despite having a world-leading supply of nat gas, Canada could be somewhat of a spectator in this historic and lucrative global LNG distribution battle.

All the best with your investments,

PINNACLEDIGEST.COM

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