Canada is known to punch above its weight in sports, entertainment, and most notably resources. If you’re Canadian, rest assured you’re aware that the great outdoors represents a bed of riches. Which brings us to recent controversies surrounding Liquified Natural Gas (LNG).
For a primer on the LNG market read this. We’ve discussed LNG in prior articles, as Germany and the rest of the EU struggle to replace their Russian energy supplies. Europe is eager to diversify and increase consumption – currently 70% of its natural gas comes from only 3 nations.
German Chancellor Scholz would really like Canada to export more LNG to Europe and called Canada their “partner of choice” during the energy crisis, hoping that Canadian LNG will play a major role. Most of Canada’s gas is used domestically, with the remainder shipped to the US. As Canada is the world’s fifth largest producer of natural gas the potential relationship appears to be a no-brainer.
Canadian Prime Minister Justin Trudeau quickly crushed Germany’s LNG dreams, stating that there has “never been a strong business case” for exporting LNG to his NATO allies.
Why, Justin?!
Trudeau has said that other countries ship their LNG from sources that are near to their terminals. So, it may not be economical to ship LNG across the country from the West Coast to the Maritimes to send to Europe. As with other NATO members, his administration foresees a future where renewables and energy with low carbon emissions play a larger role in the mix. He is very gun shy about spending billions to support an LNG supply chain that may not be viable for the long term. The value-chain for LNG boils down to huge upfront costs, followed by marginal operating costs. Justin is hard pressed to justify (sorry – we couldn’t help ourselves) the massive initial investment to develop the industry.
Instead, Trudeau promoted and struck long term deals for hydrogen, announcing that the two countries will build a “Trans-Atlantic supply corridor” and begin exports by 2025 – perturbing many. A company called World Energy GH2 has proposed to produce hydrogen in Newfoundland and Labrador, building 164 wind turbines to power a plant to make green hydrogen from water. Construction for the turbines has yet to begin, and the company needs approval from 24 separate government agencies…so 2025 seems like a fantasy.
To be fair, Germany is hungry for hydrogen tech – the have a National Hydrogen strategy, building infrastructure for domestic use. Canadian involvement seems far off. It’s been pointed out by investors and analysts that LNG from one Canadian port can be worth 9 figures per day. So, what’s the problem? Let’s look at Canada’s current LNG projects, infrastructure, and capabilities.
Natural Resources Canada tells us that there’s 18 proposals for LNG export projects. 15 are in BC, five are on the East Coast. There are currently no LNG export terminals in operation in Canada, yet. The Canadian Minister of the Environment stated in June, that the East Coast only has enough natural gas supply to accommodate one new LNG export facility. The fastest one to possibly come online would be the Repsol project (REP.MC) known as The Saint John LNG Terminal in New Brunswick. If started today, the Saint John Terminal would take years to get online.
Surprisingly, there had been plans to convert the terminal for export (it is now an import terminal), but Repsol cancelled their plans in 2016 due to lack of investors. This seems counter-intuitive but obviously in 2016, the world was a different place.
LNG? NIMBY!
Canadian LNG projects have their detractors. The construction of the pipelines necessary to transport would take years to build. Historically these projects have received strong opposition from environmental and indigenous groups in Canada, and fostered political rivalries amongst the provinces. So the current government has nothing to gain politically from a strong move towards an energy source perceived as a “dirty fossil fuel” like LNG.
The Land of the Free and the Home of LNG
By contrast, the U.S. is making bank with LNG. In 2019, they became the world’s third largest LNG exporter, behind Australia and Qatar. There are 2 LNG liquefaction units (“trains”) planned to come online by the end of this year. Once these trains at Sabine Pass and Calcasieu Pass in Louisiana get rolling, the US will have the world’s largest LNG export capacity.
9 Points to Take Away
To recap, Canada is a challenging political/economic environment for a potential functioning LNG industry. The challenges include:
• Infrastructure gap (LNG terminals) of a least 3 to 4 years
• Infrastructure gap (gas pipeline) of 3+ years
• Regulatory hurdles and unfriendly policy direction of Canada’s federal government
• No clear political gain in making a large federal investment
• Regulatory hurdles due to pressure from special interests
• Lack of commercial investment
• German infrastructure gap of at least 6 months to receive LNG imports
• German NetZero goals may halt LNG long-term business
• US-owned market, no clear competitive advantages for Canada to enter
The glimmer of hope for LNG in Canada is the continued dialogue and relationship with the Germans, strengthened in light of the energy crisis fomented by the Russian-Ukraine conflict. Long-term commitments and mutual investment are key here, or the bulk of the market share of LNG will continue to be the domain of the U.S.
We have yet to see conclusive numbers. We need to see that LNG, sourced from one side of Canada and transported via pipeline to the east coast for shipment to Germany, can be sold at a price that’s competitive with a brownfield or greenfield project sponsored by the United States Geological Survey or a US corporation. This is key to future developments for LNG in Canada. Until there’s access to deeper project-by-project analysis, stakeholders in Canada will continue to sit on the sidelines and argue about their potential stats in a game they’ve barely started playing.
