Australia is becoming the world’s largest exporter of LNG and will be a leading natural gas exporter for decades to come. Why did Australia react so fast to the rapidly expanding global LNG business? The major reason is geographic. All of Australia’s states and territories border the oceans, coastal terrain is conducive to large, industrial projects, and there is a long history of selling commodities to Asian markets via coastline. As an example, Australia has supplied coal to Asian nations for decades. Furthermore, unlike Canada, there are no interstate borders to trade and Australia’s offshore LNG export capacity does not face the challenges (physical and societal) of traversing several mountain ranges and communities. Conversely, Canada has had to look south to the U.S. for markets.
How did Australian governments factor in decision-making? The establishment of the Standing Council on Energy which became the COAG Energy Council in 2014, combining federal, state, territorial and municipal policymakers is an effective policy lever. Any effort to harmonize energy policy, legislation and market rules and regulatory streamlining should be beneficial. Has it been effective? The council’s approach is based on several principles: promoting the interests of electricity and gas consumers; overseeing competitive electricity and gas markets and effective regulation of network monopoly infrastructure; greater productivity, energy efficiency and sustainability; industry and stakeholder participation in policy development and implementation; and regulatory and governance reform to streamline processes and decision-making and deliver outcomes more efficiently and consistently. This is certainly something Canada should explore. Siloed regions and pressure from communities, environmentalists and overarching federal policies are turning the Canadian courts into the regulator. Perhaps a national body such as Australia’s COAG Energy Council could help solve some of Canada’s infrastructure and resource development gridlock.
What did Australian natural gas developers do differently? Australian LNG development experienced several challenges. Relatively compressed timetables, cost inflation and labour shortages led to delays in almost all energy projects. Increasing labour costs, a tight labour market, a strong currency, inefficiencies, cost inflation and an increased focus on the environmental impact of projects all conspired to slow development. How should Canadian LNG developers view this historical record and what lessons can Canada learn as its burgeoning LNG business expands toward economic export of LNG?
Canadian developers are aware of the cost of raw materials, potential labour challenges and societal pressures. According to Susannah Pierce of LNG Canada, the five-member consortium is making every effort to stay ahead of these issues. The large complex modules cannot be manufactured in Canada and will be purchased offshore under fixed EPC conditions. Moreover, tariffs will not apply as the Canadian steel industry should not be affected. In fact, the Canadian steel industry should benefit as the LNG sector has the potential to help support the 120,000 direct and indirect jobs that exist today in the Canadian steel industry.
LNG developers must also be wary of the potential for labour disruption, shortages and wage escalation. LNG Canada has spent more than $2.5M to date creating a robust workforce development strategy to attract women, First Nations, and youth into the trades in order to build new capacity. This includes a commitment to having 25% apprenticeships on-site. Memoranda of Understanding (MOUs) between the joint venture partners and unions contain terms and conditions to mitigate site unrest and promote harmony on a managed open site: no strikes, no lockouts etc. Domestic supply and demand analyses by the partners, government, labour, First Nations and owners provide an advanced view of potential shortages which will trigger training programs, investments and/or sourcing plans to mitigate risk.
The LNG Canada project can provide a blueprint for other Canadian LNG projects. However, time is of the essence. The rapid build-out of LNG projects in the past decade was partly driven by the steep rise in oil prices. A variety of factors, largely driven by escalating project costs coupled with a falling gas price, moved most Canadian projects from the drawing board to the shelf. Like any commodity, the price of gas is the key. Unless LNG price driven by Asian demand returns to the $8-$12 per MMBtu range, it will be difficult for the few remaining planned LNG projects to be profitable. Moreover, projects must have requisite expansion capability.
LNG Canada stands out as its owners are heavily involved in Asia Pacific LNG trading. All of the parties are truly global. Furthermore, Shell and Petronas are among the world’s largest companies. Along with Japanese multi-conglomerate Mitsubishi Corp., the project has attracted other Japanese companies who have purchased long-term contracts for LNG Canada’s gas. Finally, China (PetroChina) and South Korea (Korea Gas) are also part of the LNG Canada project. One would have to look far and wide to find this lineup of global players.
Canada has a moral obligation to provide the rest of the world with this country’s responsibly developed energy to improve lives and preserve the environment. Furthermore, natural gas delivered as LNG to global markets will be the lowest GHG-emitting gas in the world. However, continued discord and subsequent gridlock with the build-out of large projects clearly in the long-term national interest are baffling.
Does Canada require an overarching resource policy body? Perhaps a truly national strategy to kick-start additional Canadian LNG development would help. If not, the ability to compete with other LNG export projects in the U.S. Gulf Coast, in Asia or Australia, will disappear. Canada will miss the global demand increases about to occur in the next decade and beyond.
All levels of government must coalesce to take advantage of this global opportunity so Canada can become a major LNG supplier. There are abundant, world-class reserves, drilling, completion and production technologies and operations are efficient, and environmentally the best in the world. Internally, a sophisticated delivery system is in place. When connected with West Coast and East Coast points of sale, Canada will provide market benefits. Moreover, Canadian projects need to be competitive with U.S. projects. The U.S. currently has huge advantages: year-round deep-water ports, favourable governments, tolling models, gas FOB, Henry Hub pricing, deep technical skillset on the Texas Gulf, reusable infrastructure and low construction cost. However, Canadian LNG shipped from the West Coast will have shorter shipping times and distances and is thereby much more competitive.
All levels of government and Canadians must support LNG development. Let the departure of energy majors and international companies from the oilsands be a lesson, investors have left the industry. Canada’s LNG sector needs to attract domestic and foreign investment. If not, Canada will miss a great nation-building opportunity. Is the debacle over infrastructure development the catalyst needed to make changes to Canadian federalism? An overarching strategic and pan-national resource policy arm could provide an initial step.
AN EVENT FOR THE ENTIRE CANADIAN & GLOBAL LNG VALUE CHAIN
The Canada Gas & LNG Exhibition and Conference (12-14 May 2020, Vancouver) provides a unique business opportunity for Canadian Gas & LNG stakeholders to meet the local and global energy value chain, who will be showcasing the latest Natural Gas and LNG innovative technologies, equipment, products and services. Find out more here.
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