Asian Markets for U.S. and Canadian LNG: The Potential of the Pacific

Canada produces roughly 6 tcf of natural gas each year, and consumes 3 tcf domestically. The difference is exported, now almost entirely to the United States where natural gas production is booming – and displacing demand for imported gas from Canada, and creating the opportunity for the United States to follow Canada’s example and become a major natural gas exporter too.

These factors set in motion a new dynamic for North American natural gas, one that will lead investors in both countries to pursue off-continent markets with LNG.

“With its deep natural gas reserves, extensive coast line, and relative proximity to Asian markets, Canada should be naturally positioned to become a leader in the global liquefied natural gas (LNG) trade.”

“With its deep natural gas reserves, extensive coast line, and relative proximity to Asian markets, Canada should be naturally positioned to become a leader in the global liquefied natural gas (LNG) trade.”

With its deep natural gas reserves, extensive coast line, and relative proximity to Asian markets, Canada should be naturally positioned to become a leader in the global liquefied natural gas (LNG) trade. During the last year, seven LNG tankers — each the length of two football fields (CFL length) end-to-end — have docked in Canadian ports1, their cargoes of LNG worth between C$25 and 34 million each at current Japanese spot prices2. But the arrival of these vessels was not to take on Canadian LNG exports bound for Asia, but for the delivery of LNG imported from Canada’s erstwhile competitors in the United States, Norway, Trinidad and Tobago, and Equatorial Guinea.

Despite enjoying the nominal backing of the federal government since 2006, Canadian LNG exports have failed to materialize while U.S. competitors have surged ahead. While firms in both countries began seriously considering the brown and green field development of LNG export facilities during the same 2012 – 2013 period when spot LNG prices in Japan reached as high as US$18.11 per MMBtu, U.S. firms have been significantly more successful in shepherding their projects to completion. In terms of sheer capacity, the United States has projects with a cumulative capacity of 447 bcm per year under consideration, compared to just 229 in Canada3.

And although it is true that only a fraction of these projects will ever reach completion, U.S. projects are also further along in their development cycles, with 11 of the country’s 41 proposed facilities actively under construction, and a further six awaiting a positive Final Investment Decision (FID) from their sponsors. Conversely, as the article was being written, of Canada’s 16 projects, none have managed to break ground, with three cancelled, four awaiting FID4, and another nine still on the drawing board.

The sector’s current woes, however, do not necessarily preclude the possibility of future success. According to the National Energy Board
(NEB), if the necessary permitting and approvals occur, then Canada should eventually export between 913 and 2,191 BCF per year of LNG by 20305, which at a forecasted 2030 price of 10 USD per MMBtu6 should yield annual revenues of between 9.13 and 21.91 billion USD.

The NEB’s relative optimism reflects three key points. First, that Canadian natural gas production has the potential for further expansion. Through both the enhancement of existing fields, as well as the discovery of newer plays in areas like the Liard Basin, Canadian natural gas reserves have risen every year for more than a decade, growing from 56.6 tcf in 2005 to 77.1 tcf in 20177. Second, Canada’s traditional outlet for this gas, the United States, is growing less attractive. With U.S. natural gas production rising as a result of the shale gas revolution, Canadian exports to the country have been — and will continue to be — displaced by domestic U.S. production, with  2016 imports from Canada down to just 77 per cent of what they were a decade ago8. And finally, the NEB considers that the only way for Canadian exports to reach non-U.S. markets — and thus provide an outlet for any new production — is via the sea, a finding reinforced by the NEB’s prediction that without LNG Canadian gas production will essentially flatline at 437 Mm3 per day, a level just 65 per cent of what it could be under the NEB’s more ambitious LNG development scenario.

Where then should Canadian exporters look? At the broadest level, the global market for natural gas revolves around the interaction of three kinds of regions.

“At the broadest level, the global market for natural gas revolves around the interaction of three kinds of regions.”

“At the broadest level, the global market for natural gas revolves around the interaction of three kinds of regions.”

In the first category are those nations that produce more gas than they consume domestically, a group that is dominated by Russia and the independent states that were once part of the Soviet Union, which together produce a surplus of 206 bcm of gas between them every year, but also includes the Middle East at 128 bcm, and North Africa at 76 bcm.

The second group consists of those regions that are largely self-sufficient and thereby of marginal importance to the global gas market, including South America with a net surplus of just 4 bcm and — at least until recently — North America at 20 bcm.

The final group consists of those regions that run gas deficits, namely the Asia Pacific at -144 bcm and Europe at -220 bcm9. Of these last two deficit regions, the focus of Canadian producers has been firmly fixed on the Asia Pacific market. While Europe’s size is attractive, it is also a hotly contested market, one that has access to supplies from neighboring FSU and Middle Eastern producers that are not only abundant, but also transported via pipeline — providing significant cost savings over Canada’s more expensive shipborne LNG.

The landed price of LNG — which includes not only the cost of gas, but also the cost of customs, taxes, insurance, handling, and transportation — is higher in Asia than in Europe. In March 2017 LNG sold for US$5.80 per MMbtu in Japan, compared to US$5.10 in the United Kingdom and US$5.30 in Spain as of March 201710. Asian markets are not, however, as attractive as they once were. Though Japanese, Korean, and to a lesser extent, Chinese markets still attract a premium compared to their peers in other regions, the gap between prices in Asia and those elsewhere has narrowed significantly, falling from more than USD 6.00 per MMBtu in late 2013 to around USD 0.50 today.

Nevertheless, Asian firms have taken a long-term perspective on Canadian LNG. Of the 15 Canadian projects under consideration, all but two are located on the coast of British Colombia, and five have at least one sponsor from an Asian market, including Idemitsu Kosan, Nexen, INPEX, Japan Petroleum Exploration,  Mitsubishi, Korean Gas, and PetroChina. Most estimates have LNG prices rising in the long-run, with Japanese landed prices rising to $10 USD per MMbtu by 2030. While it is unlikely that prices will ever return to the near-manic levels of early 2014, which saw Japanese prices reach the unprecedented level US$20.10 per MMBtu, at US$10 the price should be more than sufficient to support growth in Canadian LNG exports, given that the NEB projects that the production cost of Canadian gas by 2030 should be between US$3.38 and US$5.29 per MMBtu11.

"Of the 15 Canadian projects under consideration, all but two are located on the coast of British Colombia."

“Of the 15 Canadian projects under consideration, all but two are located on the coast of British Colombia.”

To realize this potential, Canada must develop LNG export capacity, particularly on the British Columbia coast. The slow pace of Canadian LNG development to date, with lengthy permitting processes leading to complex and contingent approvals and the pressure LNG buyers to lock in long-term contracts today, this has led some to claim that Canada has squandered — perhaps irrevocably — its ability to participate in the bourgeoning LNG trade12.

That pessimism is premature. There is a path to profitable Canadian participation in the global LNG trade. The United States started from behind in developing LNG export capacity, but is now surging ahead, and challenging Canada to keep pace.

Christopher Sands and Jesse N. Barnett collaborated on this article. Sands is a Senior Research Professor at the John Hopkins University School of Advances International Studies (SAIS) where Barnett studies energy, resources and environment.

  1. Retrieved on 4/23/2017 using NEB “Commodity Statistics – LNG – Shipment Details” from February 2016 to February 2017.
  2. Assumes a USD 7.60 per MMBTU landed price in Japan. Data from the World Bank’s Commodity Markets Review Report. Retrieved 4/23/2017.
  3. Business Monitor International Ltd. Database “Liquefied and Natural Gas Projects” Retrieved 4/24/17.
  4. For simplicities sake, PNW LNG’s announcement of a “conditional FID” is considered as tantamount to awaiting FID.
  5. Canada’s Energy Future 2016: Energy Supply and Demand Projections to 2040.
  6. Using World Bank Commodities Price Forecast (nominal US dollars) for Natural gas LNG.
  7. While only a small fraction of natural gas is priced using spot prices — with much of it remaining indexed to the price of oil or priced via long-term purchase agreements — spot markets are still reflective of underlying supply and demand fundamentals. https://www.eia.gov/beta/international/data/browser/#/?pa=000000000000000000004&c=0000001&ct=0&tl_id=3002-A&vs=INTL.3-6-CAN-TCF.A&cy=2014&vo=0&v=T&start=1980.
  8. https://www.eia.gov/dnav/ng/ng_move_impc_s1_a.htm
  9. BP Statistical Review of World Energy (June 2016).
  10. http://geckoicapital.com/global-lng-prices
  11. Figure ES.3 of Canada’s Energy Future 2016: Energy Supply and Demand Projections to 2040.
  12. http://www.lngworldshipping.com/news/view,has-canadian-lng-missed-the-boat_40871.htm, http://boereport.com/2016/10/24/the-amount-of-lng-business-canada-missed-out-on-is-nothing-short-of-depressing/.