Competing in the global LNG market: Evolving Canada's opportunity into reality

Global competition

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Canada’s extensive reserves, stable and reputable political environment, and transportation cost advantages won’t be enough to attract the attention of investors and secure long-term supply contracts in today’s competitive LNG market. Capital will always flow to the most economically viable project.

Global powerhouses including Australia and Qatar remain dominant threats to Canada’s LNG potential, though many face political and geographic challenges. Emerging supply markets such as East Africa and Russia currently operate below the radar, but could become future competitive threats if their projects get off the ground. And, closer to home, the US continues to increase its focus on the sector. Seven projects have already received approval in the US and the Cheniere Energy Inc. project is scheduled to produce its first cargo by late 2015. Where does Canada stand against US exports? Many argue that Canada has a transportation cost advantage based on shipping distance. The West Coast provides a direct route to Asian markets that’s shorter than the US and on par with Australia shipping times. To access Asia, the world’s premium priced LNG market, US cargos will have to travel through the Panama Canal. And, while the expanded canal will cut shipping times significantly, there is still much uncertainty around tolls.

Canadian LNG production not only faces competition from other countries but from other energy resources. Coal and nuclear power production is on the rise in many countries. Japan’s Prime Minister Shinzo Abe has suggested that the country may restart a significant portion of its nuclear reactors. And although Germany has taken strides to shutter all of its nuclear plants, we’ve seen a significant increase in German coal fired power generation — in part made possible by access to relatively inexpensive (certainly compared to LNG cargos) US coal supplies that have been pushed out of the US because of regulatory and market pressures.

While much of the current demand for LNG originates from Japan and Korea, it may be China that represents the largest potential buyer of future LNG. The Chinese government has already declared its desire to significantly ramp up its use of natural gas, and reduce it’s over reliance on coal, which has caused very significant air quality concerns. In time, China expects to feed significant demand with its own shale gas resources but until that resource is developed, it is likely that Chinese demand for LNG will grow. Demand for natural gas in China could reach as much as 43 bcf/d by 2030.

Russian pipelines to China, LNG opportunities from Mozambique and buyers’ efforts to break the long‑standing oil‑indexed linked pricing mechanism also all contribute to fierce competition at the global level.

Canada’s Advantages

  • Regulatory and market support for exports
  • Projects led by global players (operators, customers)
  • Cost advantages vs. competing projects (all-in transportation, operating costs)
  • Participants hold equity interests in gas
  • Stable legal and fiscal business environment
  • Skilled local labor market in Western Canada

Canada’s Disadvantages

  • Infrastructure required (facilities, pipelines, production and civil)
  • Cost pressures (project construction, people shortages)
  • Global competition
  • Evolving pricing arrangements(oil price de-linking)
  • Complex First Nations dynamics
  • Continuing uncertainty regarding applicable fiscal regimes