Asian LNG customers are giving Canada a pass

Canada has missed the recent opportunity for Asian LNG export sales. Delays in Canadian regulatory and government approvals for major LNG development projects are producing real adverse consequences for all Canadians including:

1. Lower investment in Canada leading to reduced economic growth.
2. Lower tax revenue leading to reduced public services and higher public debt.
3. Lower employment/higher unemployment.

Recently LNG Canada CEO Andy Calitz said in a conference call that a drop in natural gas prices in Asia, as shown on the chart below, has made the project too expensive for now.

Asian LNG Price Forecast

The National Balancing Point (NBP) is a virtual trading location for UK natural gas. It is the pricing and delivery point for the Intercontinental Exchange (ICE) Futures Europe natural gas futures contract.

Asian LNG demand began to sag in late 2014, as illustrated on the price chart below, as a result of high LNG prices, mild weather, Korean nuclear unit startups and declining oil prices. Also new LNG supply from the startup of new liquefaction export projects in Papua New Guinea and Australia was added to existing LNG supplies from Qatar, Malaysia and Australia. Suddenly, the Asian LNG market became a buyer’s market, with spot prices dropping to less than $8/MMBtu. This price is below the profitable price for Canadian LNG projects.

Canada’s competitors making progress

While Canada dithers, our competitors are making real progress by pushing ahead with multi-billion dollar LNG expansions that are meeting the demand from Asian LNG customers.

The first LNG shipment from the Cheniere Energy’s Sabine Pass LNG export plant in Louisiana arrived at the newly enlarged Panama Canal on July 25, 2016 as illustrated below. This shipment is the opening salvo of the USA becoming a major LNG supplier in world markets. Real shipments and rapid, underway expansion of LNG export facilities will block Canadian ambitions.

In Australia major LNG expansion projects are under construction. While these projects are struggling with delays and cost overruns, they are likely to be completed and will be significant competitors that will block any remaining Canadian ambitions in LNG supplier in world markets. Compare the real Australian LNG plants with the Canadian proposed LNG plants on the maps below.

 

The outlook for Canadian gas exports of all forms is bleak as the US becomes a major exporter as shown on the chart below. In its Short-Term Energy Outlook, the US Energy Information Administration (EIA) stated that “With expected growth in gross exports, net imports of natural gas declined from 2.6 Bcf/d in 2015 [mostly from Canada and will further decline] to a small amount of net exports in 2017. The United States is expected to become a net exporter of natural gas during the second quarter of 2017.”

Canada’s Missed Asian LNG Opportunity

As recently as June 2015 the Canadian Energy Research Institute (CERI) confirmed an opportunity for Canadian LNG in the Asian market as shown in yellow on the chart below:

That Asian LNG opportunity has now passed us by because:

1. Canada couldn’t deliver.
2. More supply than forecast became available from other suppliers.
3. The demand forecast turned out to be overly optimistic.

Asian LNG supply clouds

A future Asian LNG opportunity may open up for Canada. The clouds on the Asian LNG supply forecast include:

1. Delay in completing Russian gas pipelines to China. Gazprom is constructing the Power of Siberia pipeline with a 2019 planned completion date. Ground has not yet been broken on the Altai pipeline.
2. Further delays in bringing Australia LNG plants online or cancellation of announced LNG plants where construction has not yet started.
3. Japanese opponents to nuclear power succeeding in delaying the restart of existing nuclear power plants.
4. Political instability and corruption in various African nations with significant LNG potential.

What should Canada do?

During this period when we can’t sell any LNG, we need to position Canada as a reliable and capable LNG exporter by:

1. Approving the required pipelines and LNG terminals that have been proposed and exhaustively studied by the appropriate regulators.
2. Reducing the cost of doing business in Canada by containing taxes and fees that undermine project economics.
3. Negotiating reasonable land claims settlements with affected aboriginal groups.
4. Loosening and clarifying foreign ownership rules for investors.

What do you think Canada should do to ensure itself a piece of a future Asian LNG market?