Reversal of fortune: Canada’s new energy reality

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Theodore Michael, LNG Analyst, Genscape
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Speakers at the 2016 Canada LNG Export Conference analysed Canada’s new energy reality emphasizing the end of 20 year oil indexed contracts, the power of LNG buyers and Canada’s biggest competitor. Theodore Michael, LNG Analyst at Genscape shares the key findings below.

Canadian LNG High Cost Projects Face a New Market Paradigm: There is no market for the status quo cost structure. The old order of a 20-year term point to point is gone. In a buyer’s market, spot has replaced term as the portfolio addition of choice. Worse yet the age of $100 crude oil may well be over. Gone are the days of higher prices curing cost overruns. Gone too is the day where sellers can dictate to customers “take it or leave it”. Global LNG capacity utilisation has already dropped from the mid 90’s during the price bubble post-Fukushima and currently resides around 82%. An estimated 100 mtpa will come online by 2020 without a destination home i.e. without a capacity holder on a take or pay contract. Canadian greenfield projects must face the reality that Australia and the US can double currently projected export capacity. Adding new trains to existing brownfield projects. Low prices, even with long shipping distance from the Gulf of Mexico, look to beat high-cost Canadian projects no matter how close to Asia.

Canada and the End of 20 Year Oil Indexed Contracts: Supply comes on in large chunks. Demand, at least the planned type, comes on in increments. The US kicked off the coming LNG overhang when Cheniere Sabine shipped its first cargo on 2/24/2016. The historical US gas market adjusted to its supply overhang during the 90’s by moving to spot purchases. When price roared higher in the early decade of the century; buyers did not go back to term for supply security. They stayed buying in the spot. Canadian projects must deal with a market growing accustomed to spot buying. A global market in which term contracts may never again be the norm. Especially the 20-year oil-indexed variety with destination clauses.

Reversal of Fortune: Canada’s Biggest Competitor: Not only has Canada missed the first major export wave of LNG, her biggest and only customer the United States is now a net exporter of gas and looks to be Canada's biggest competitor across the energy slate.
Not only has the US surpassed Saudi and Russian production in oil, the US is currently on its way to being No. 3 in world LNG exports and No. 1 in the condensate, refined products and LPG. Canadians may find Alberta’s vast energy storehouse locked out of global markets awaiting future generations. Canada risks becoming the energy nation of tomorrow. Unfortunately, when tomorrow comes hydrocarbons may no longer be needed.

US Based Jordan Cove LNG: First Exporter of Alberta gas: The Coos Bay Oregon, Jordan Cove LNG project appears that may be the first to export Canadian gas as LNG. Recently, signing two Japanese customers JERA (1.5 mtpa) and Itochu (1.5 mtpa). Jordan Cove’s competitive advantage: Using brownfield feedgas infrastructure. Long haul pipelines from established production fields already exist. Allowing the Coos Bay project to import Alberta gas from the TransCanada GTN pipeline at Kingsgate near the US Alberta border. A planned connector to Kinder Morgan’s Ruby pipeline allows access to the Western Basin Rocky Mountain reserves. Now being pushed back from the East by Marcellus production.

The Canada LNG Conference & Exhibition is where the global LNG community meets to discuss and develop the future of Canada’s LNG industry. 

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Image Source: Generic image taken at Canada LNG Export 2016. It does not refer to this specific content. 

The views expressed are the author’s own, and do not reflect any position on behalf of dmg:: events Global Energy.