Canadian LNG development: still a challenging but not impossible path

Aaron Engen's picture
Aaron Engen, Managing Director and Co-Head, Power & Energy Infrastructure, BMO Capital Markets
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The prospect of North American LNG making its way into global markets is gradually becoming a reality as several U.S. projects move to construction. While much has been made of Canada’s potential LNG projects, none have reached a final investment decision determination, much less construction. At present, over 20 Canadian projects have been announced representing, in aggregate, over 300 mmtpa of potential LNG exports. Several other, as yet formally unannounced projects, are also under consideration. Proposed Canadian LNG project economic structures include, among others, integrated greenfield developments tied to upstream assets, buyer offtake agreements based on north American natural gas index prices, and tolling agreements with buyer-supplied gas.

The domestic need for a Canadian LNG export industry is becoming increasingly obvious as more evidence arises showing Canada’s natural gas resources greatly exceed its foreseeable domestic consumption needs and as exports to the U.S. are touching 20-year lows. Ideally, the Canadian need for exports can be matched with foreign LNG import needs. To do that, Canada must rely on its core LNG competitive advantages: relative proximity to end-use markets; political stability and rule of law; more than abundant natural gas reserves and a political and legislative construct which allows foreign ownership of material natural gas assets.

Despite their competitive advantages, it has always been the case that Canadian LNG projects would only move forward if they are globally competitive relative to other projects, can produce LNG at prices that make sense in prevailing oil and LNG price environments and can be developed in the context of supportive regulatory, fiscal and “social license” regimes.

In the current environment, developers should benefit from lower labour costs as weak oil and gas prices have led to significant Canadian skilled labour layoffs. But unless those developers take a long-term view of commodity prices and conclude that oil prices and, by extension, LNG prices will recover and/or the LNG supply-demand balance will shift away from an oversupply position, Canadian LNG project development will be seriously challenged in the short term – despite relatively recent legislative action taken by the Canadian federal and B.C. provincial governments to improve LNG project fiscal certainty and economics.

Good reasons remain to support a positive outlook on Canadian LNG development, but its future is now more clouded. Still, important work continues on key projects on both the Atlantic and Pacific coasts. When that work is complete the industry will be better able to conclude what role Canada will play in the global LNG market. As a result, the pathway to establishing a Canadian LNG export sector remains a challenging, but not impossible one.

Do you agree with Aaron? Is Canadian LNG still a challenging but not impossible path? What developments do you expect this year? Leave your comments below.

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Canada LNG Export Conference & Exhibition, 10-12 May 2016 - The event where key Canadian and International industry stakeholders and market participants meet to support the development of Canada’s LNG Export ambitions.

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Image provided by BMO Capital Markets: Canadian west coast preliminary LNG liquefaction site preparation (Kitimat B.C.)