A critical juncture for Canada’s natural gas industry

By Jay Roberge

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Credit: Romain Chauny/Flickr

The spot price of North American natural gas recently hit a 10-year low at $1.95 and many were asking what’s next for Canada’s natural gas industry? It is quite possible we may see natural gas prices at $1.50 before we see sustained prices above $2. but despite low prices, the opportunity, and perhaps necessity for Canada, is to invest in connecting their vast natural gas resources into an international distribution network has never been greater.

The key point is that natural gas is going global. And unless Canada is connected into the global natural gas market with east-west pipelines and Liquid Natural Gas (LNG) export facilities, it simply will not be able to compete in the global natural gas business and may in fact be putting the industry at risk.

Historically, natural gas was distributed primarily through pipelines. Canada was fortunate to share borders with the U.S. which was the largest customer for Canadian natural gas exports. The pipelines provided a long-term low-cost distribution channel that made Canada’s natural gas the most cost effective for U.S. consumers. However, a global LNG distribution network is emerging and growing. Other natural gas producing countries have invested heavily in pipeline infrastructure and LNG export facilities to allow natural gas to become a portable, mobile commodity that can be shipped anywhere in the world, which is an advantage that oil has had over natural gas for years.

Over the last five years the abundance of shale gas in the U.S. (and Canada) has fundamentally changed the North American gas market, and then in 2009 the U.S. surpassed Russia to become the largest producer of natural gas in the world. America is now moving forward with becoming an exporter of natural gas with the approval of Cheniere Energy Inc.’s Sabine Pass LNG export terminal in Louisiana. There are another seven such facilities under review according to the Department of Energy. Not all are expected to get approved.

Like many natural resources, the Asian market is the target customer. The basic economics are simple. While spot prices for North American natural gas are at 10-year lows, the same gas can be sold in Japan for $19. Japan, the world’s largest importer of LNG at approximately 71 million tons (8.52 bcf/d), is nearly 31 per cent of all global LNG imports. Second is South Korea at 34.5 million tons (4.14 bcf/d), nearly 15 per cent of global imports, followed by Spain. While the North American market seems low, the international – or more specifically – Asian market is growing and shows no signs of slowing down.

With the U.S. flush in natural gas and becoming an exporter, Canada loses a major customer and makes it a necessity for Canada to have alternative supply channels to the international marketplace. The opportunity is a more robust distributed industry that creates jobs for Canadians, provides best pricing by connecting to a competitive global marketplace, and generates wealth in the country.

At present, Canaport LNG’s receiving and re-gasification terminal at Saint John, New Brunswick is Canada’s only operational LNG terminal. The Kitimat LNG project is a three-way joint venture between U.S. energy companies Apache Corp. and EOG Resources Inc., along with Canadian gas giant Encana Corp.

The Kitimat LNG facility is still pending final approval on construction, but site clearing has been completed. The company is targeting 2015 as its first LNG shipment, with a per annum capacity of five million metric tons of LNG. The other two proposed LNG facilities for the B.C. coast (Westpac LNG; Teekay Merrill Lynch Export) have been cancelled, leaving Kitimat LNG as the only Canadian-based west coast option on the table, which is a critical link to an international market.

The urgency here is real. Export completion is not just from the U.S., but also Australia where there are plans for investing $200 billion of plans to build numerous LNG export plants that would triple Australia’s exports to the same customers Canada is targeting. but according to industry officials, Canada has an advantage because shipping times from Kitimat to buyers in Japan, South Korea, and Northern China are shorter, and provide a cost advantage with lower transportation costs.

Every country in the world has recognized the full value of natural resources and the opportunity in taking these raw materials downstream into value-added products creating new jobs and wealth. Having a LNG export facility in place is part of this process of value added and a necessary part of connecting into the international marketplace. If Canada misses this opportunity, LNG capacity will be built in the U.S., and Canadian natural gas will be sold to American LNG facilities for processing and shipping to Japan for $19.

Granted these LNG facilities are expensive (Kitimat LNG is estimated at C$5 billion), but the long-term implications would dictate that it is in Canada’s best strategic interest to make this investment. The final decision to go forward with construction of the Kitimat LNG facility is still pending. A decision is expected by its ownership group sometime soon and will not necessarily be in the best strategic interest of Canada, but the economic interest of the partnership group.

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