Is Canada A Competitive LNG Supplier for Europe?

Beaver cutting down tree holding LNG leaf

Is Canada A Competitive LNG Supplier for Europe?

Is Canada really a plausible supplier of liquefied natural gas (LNG) to European markets? Here’s my report card on Canada’s competitiveness in that market.


I spent four years working on the Australian LNG export businesses, and wrote 200+ articles about the global LNG trade, how it works, what’s needed for success, and how to be competitive. An LNG supply window has just opened but how well is Canada equipped to supply?

Why LNG, Why Now?

The Russian invasion of Ukraine has upended global gas markets. Europe had been lulled into a false sense of partnership with Russia as its principal supplier of energy, and supported the construction of a big pipeline network to bring Russia’s gas to the EU. Germany, in particular, a global manufacturing powerhouse (chemicals, industrial machinery, auto making, and much else) sourced gas in the amount of 56.3 billion cubic meters in 2020 from Russia, according to BP’s energy statistics. The EU is not likely to return to its Russian supplier even after the war comes to a conclusion, fearing that Russia will simply carry on invading its former satellite neighbors, paid for by EU purchases of energy.

After shunning that gas as part of sanctions on Russia for the invasion, Europe is frantically buying up whatever gas it can get its hands on for the coming winter. Of course, there isn’t another gas supplier with an existing pipeline to the EU to take the place of the Russian gas, so the EU is turning to LNG. This is hard to do quickly because, unlike crude oil which has a highly liquid spot market, LNG is usually pre-purchased on long contracts by gas and power utilities.

To make sure that contracted LNG does not get onto the spot market, LNG contracts often stipulate DES (or destination ex ship) delivery terms, meaning the LNG supplier delivers the gas to the customer’s pier (unlike FOB terms, where the customer takes title at the shipper’s pier).

Russian pipeline gas that formerly flowed to the EU has nowhere to go either. Building new pipelines to markets in Asia takes time too, and Asian customers are now going to be more circumspect about committing themselves to long term supply deals with Russia. Pipeline gas isn’t easily rerouted to LNG plants either as those plants are already supplied with gas. Building new LNG export plants also takes time.

For the EU, not buying gas isn’t plausible in the short term. Once gas distribution is in place (pipes under city streets, into homes and buildings) to supply all the burner tips, it becomes very challenging to remove. Not many homeowners, for example, will happily pull out their furnaces, disconnect all their gas meters, and rip out the air ducts to be replaced with electric baseboard heating.

Hydrogen is a plausible alternative fuel which can largely use the existing gas infrastructure but will take time to get to scale.

For LNG to work, the pipeline infrastructure will need to be rejigged from moving gas principally in an east-west flow (Russia to the EU) to something more north-south, or west-east, or south-north. This will take time.

Beyond the immediate problem of the war, today’s tight LNG market had been forecasted for some time. The market has been growing steadily and reliably for the past decade because natural gas is such a fantastic fuel — clean (relative to coal), with precise heat qualities, and well understood handling.

New LNG manufacturing plants take almost a decade to bring on stream from concept to first delivery, and the supply is lumpy—a single new plant is usually 8-9 million tons annually. LNG receiving terminals are more quickly put in place but still take a few years.

Global markets are now rebalancing with a huge supply of gas being more or less instantly and permanently taken off market, and a huge demand that has no viable short term supply substitutes or supply. It’s ugly.

Winning at LNG

Ugly is also opportunity. To get LNG on the water, an LNG project needs to align a broad group of elements and stakeholders:

  • A large market of burner tips (perhaps a big power utility switching from coal, a manufacturing base, or a city gas utility), willing to sign up to a long supply contract (usually a 20-25 year commitment).
  • Proximity to the consuming market to keep shipping costs low.
  • A large source of competitive gas that otherwise has no better market (in other words, it’s viewed as stranded). Eight million tons of LNG per year translates to 11 billion cubic meters of gas per year, which over 25 years is about 10 trillion cubic feet (tcf).
  • A pipeline to move gas from its production location to the LNG manufacturing plant.
  • A sizable acreage of industrial land close to a tidal coastline for year round shipping access on which the LNG plant will be built.
  • Multiple large engineering contracts to produce the gas, build the pipeline, and construct the LNG plant.
  • A source of capital to deploy $8-10 billion for 2-3 decades.
  • Land owners (First Nations, local communities, provinces) willing to allow the gas to be produced, host gas pipelines across their territory to bring the gas to the manufacturing facility, and permit a gigantic industrial facility on a coastline.
  • A source of power to run the LNG plant. 100+ megawatts of power (equivalent to small city).
  • A fleet of 10 cryogenic LNG carriers to ferry the LNG to market. Only a few shipyards make these vessels and their order books are full.
  • Off site services, including jetties to receive all the parts, lay down yards, roads, stand-by emergency services, temporary housing for construction
  • A commercial model that works for all parties (the pricing formula for the gas, the royalty agreement with the gas supplier, the tariffs and tolls for land access, the debt repayment schedule, the EPC contracts).

LNG projects get tripped up by things like labour shortages that inflate construction cost, geologic uncertainty about true gas availability, community opposition to energy infrastructure in general and oil and gas in particular, fluctuating interest rates, fluctuating currency values (LNG plants are built in local currency, but gas is priced in USD), and volatile commodity prices (oil, cement, steel, specialty metals).

All of these risks are manifest in Canada. Labour shortages plague the Canadian economy. Recent community opposition to Canada’s only gas pipeline project to the coast includes a level of violence unheard of here. Interest rates are on the rise. Commodity prices, particularly oil, have been on a tear reflecting short supply and limited inventories.

Players in LNG need to be very clear eyed on just how competitive they are.

What Would It Take?

Let’s be clear — the EU is a highly attractive, grade A gas market—stable economies, rule of law prevails, big modern cities, large installed base of hard-to-move burner tips, gilt-edge consumers. Here’s my candid assessment of how well positioned Canadian gas players find themselves in light of the opportunity.

  • World class means highly competitive.
  • Industrial standard means we can deliver, but not with any enduring advantage.
  • High risk means we are not competitive.

Canadian proximity: world class

Canada’s east coast has a permanent geologic shipping advantage—no canal tolls, a short sailing distance, cold weather (helps keep the cargo cold).

Canadian gas supply: world class

We have the gas, hundreds of years supply that we can’t realistically consume. Unfortunately, it’s in the wrong place (Western Canada), which is just a pipeline away.

Pipeline access: high risk

Canada’s track record at building pipelines in the past decade has been an abysmal fail. Transmountain is hopelessly over budget. Armed gangs are attacking gas pipeline projects. Some provinces east of BC are deeply opposed to western gas. Quebec in particular merchants in a cleaner energy from its abundant hydro power resources, which has a near unlimited growth market both in the US and domestically as the economy electrifies. It is competitively not in their interest to either promote or prolong the use of hydrocarbons and politically problematic to sanction a pipeline across their territory.

Land access: Industrial standard

A few communities in Atlantic Canada have set aside land for industrial use, but these are mostly virgin spaces with little to no infrastructure, which adds to cost.

Engineering knowhow: world class

Multiple large engineering companies in Canada are skilled at building large scale facilities such as oil sands plants. A large LNG plant is being built in Kitimat, BC.

Capital access: high risk

Capital markets are reluctant to fund large long term projects with so much uncertainty. The Canadian federal government had to purchase the troubled Transmountain Pipeline to get it built.

Social support: high risk

Canada entertains all manner of objections to large scale infrastructure and our regulatory processes struggle to balance intractable positions. Teck abandoned its oil sands project after a decade of opposition.

Power supply: industrial standard

Canada’s east coast projects will need to stand up new power production infrastructure. Newfoundland’s catastrophic Muskrat Falls power project serves as a cautionary tale about building new power in the region.

Ships: Industrial standard

Canadian LNG projects have no practical experience in managing the order for a fleet of carriers. This could be outsourced.

Off site services: Industrial standard

Canada is at a disadvantage relative to the US Gulf Coast, because we have to stand this up from scratch.

Commercial model: High risk

BC failed to land a viable commercial model for its projects starting in 2011 in arguably simpler circumstances (no other provinces involved). BC’s market message to secure community support for the projects (a $1b royalty prize to the province) only succeeded in bolstering the negotiating position of every land owner from the interior to the coast, slowing down the projects, and eroding the value to the community.

Improving Competitiveness

Speed is of the essence here. Europe is resolute to get off its Russian gas diet quickly and Canada has a once-in-a-century opportunity to step up. Here’s what needs to happen to improve competitiveness.

  1. Ontario and Quebec need to strongly signal their support for EU values and energy security. They need to launch a public marketing campaign of support with tangible market messaging with the purpose to sway public opinion in favour of closer Canadian ties to Europe through energy security.
  2. There needs to be tangible presence from real gas buyers in Europe (gas utilities, industrial customers, chemical plants) in meetings with gas companies in Canada keen to sell gas. The buyers need to bring the money with them (financiers, bankers), not just the burner tips.
  3. The Canadian regulatory process needs to accelerate approvals for these projects. Speedy approvals send a strong signal to Europe that Canada has heard the plea for help and will act with haste.
  4. Projects need to leverage existing gas royalty structures rather than inventing a totally new royalty regime. The existing rules are transparent, widely understood, market acceptable, and predictable.

Conclusions

The enthusiasm for Canada to step up and become a viable and globally relevant LNG supplier to one of the world’s most important markets is laudable. But the country must be absolutely clear eyed and sober about our true competitiveness and how we are going to improve. It will take something Canada is just not good at, which is to move quickly and decisively. And now the world is watching.


Check out my latest book, ‘Carbon, Capital, and the Cloud: A Playbook for Digital Oil and Gas’, available on Amazon and other on-line bookshops.

You might also like my first book, Bits, Bytes, and Barrels: The Digital Transformation of Oil and Gas’, also available on Amazon.

Take Digital Oil and Gas, the one-day on-line digital oil and gas awareness course on Udemy.

Mobile: ☎️ +1(587)830-6900
email: 📧 geoff@geoffreycann.com
website: 🖥 geoffreycann.com
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