Examining the fundamental requirements of Asian buyers - is Canada still considered a supplier of choice?

Mary Hemmingsen's picture
Mary Hemmingsen, EVP and CFO, Northwest Innovation Works
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*This article was contributed by Mary Hemmingsen when she worked at KPMG as Partner, National Sector Leader, LNG, Power and Utilities. 

The North American supply advantage has been enabled largely by advancing technologies for shale gas recovery creating surplus supply relative to domestic demand. This supply advantage, coupled with an ever increasing demand for cleaner fuels in Asian countries, has created a substantial opportunity. Canada, with massive resources relative to domestic demand, an export oriented industry mindset, and significant Asian sector investment, can present as a natural market for investors and Asian buyers.

Competitive landscape: However the supply opportunity is intensely competitive with upwards of seven times demand from several regions competing to supply Asian and other demand centres with LNG. Competitors vying to supply LNG include the US, East Africa, Australia and Russia (both LNG and piped gas) as well as some niche players, new aspirants, and most recently, Iran.

  • For Russia, it has set a new low long term price point with significant new volumes of piped gas and more volumes available from LNG.
  • For Australia, the bloom is off on expansion given the rampant cost escalation in development, with Asian buyers bearing the economic consequences as minority investors.
  • For East Africa, it must show it can develop an LNG industry from the ground up in a whole new economy.
  • For the US, the initial appeal of Henry Hub gas indexed pricing is being challenged by lower oil prices and, potentially, limits to export thresholds.

The future market opportunity is dynamic and will be limited to those who, as “table stakes”, can demonstrate cost effectiveness and meet delivery timing windows to secure offtake agreements. In Canada’s case, the opportunity is to help successfully position the merits of supply diversification in geopolitics, geography and long term investment in and access to significant resources given price competition.

Recent activities in all supply markets have been focused on chasing the Asian LNG supply gap prior to the 2020’s with the US following Australia’s lead. The drop in oil prices has since impacted the affordability and economics of projects, resulting in deferrals and likely abandonments as companies grapple with reduced CAPEX budgets. Adding to the challenge of economics, investors and Asian LNG buyers have become more cautious, price-sensitive and opportunistic buyers who are starting to assert their power in buyer consortiums. These changes create a more challenging supply environment with more discerning buyers and increased uncertainty around which projects will proceed.

In summary, Canada has an opportunity to be a world leader in global LNG supply owing to its proximity to Asia, its stable and supportive political environment, its vast reserves relative to domestic demand and its pre-existing Asian upstream investments. However, the opportunity is not without challenge. Western Canada projects that will appeal to shifting investor and Asian buyer priorities and interests will have to be cognizant of three imperatives:

  1. Clear alignment with buyers’ needs and acquisition of offtake agreements. This is arguably the largest hurdle for many of the proponents to prove to back the tens of billions of dollars of investment. For many buyers in growing Asian economies, an essential requirement is LNG delivery assurance and timing certainty to fuel existing and new power plants.
  2. Timely project development and stakeholder management. Of particular importance with Canadian projects. The stakeholder environment in British Columbia is characterized by involvement from a large number of stakeholders and First Nations, most of whom are relatively new to LNG. Canadian LNG leaders will have to demonstrate that they can successfully navigate a complex stakeholder environment.
  3. Careful cost control and optimization to help avoid the pitfalls of other jurisdictions. This has become of greatest focus during the current oil price drop where many proponents are experiencing reduced CAPEX budgets and spending, and the affordability of supporting projects has been challenged. Canada has the opportunity to show its ability to leverage the spare resource capacity in the oil sector and manage its supply chain costs and address its challenging cost environment.

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Image provided by KPMG.