It’s Not Looking Good For Canadian LNG

As the Keystone XL saga made clear, Alberta has had trouble getting its oil and gas to markets outside of the province. That trouble continues for Canada’s oil industry.

The 1.1 million barrel-per-day Energy East Pipeline, for example, would take Alberta crude to Canada’s Atlantic coast, but it has been slowed and delayed by regulatory reviews. The CEO of TransCanada, Russ Girling, said that the failure to build new pipelines is costing the industry dearly. "The delay is already costing our economy billions of dollars. Those are the kinds of numbers that have already come out of the economy because we haven't gotten these things done over the last few years," Girling lamented. He said that he hopes that Canadian regulators complete the environmental review by 2018. Several oil pipelines to the Pacific face similar hurdles.

Canada’s natural gas sector faces a different problem: its market in the U.S. is shrinking. Canada’s natural gas exports to the United States have been declining pretty much without interruption for the past decade. That is largely due to the boom in shale gas production in places like Pennsylvania and Texas, making Canadian gas less needed. The U.S. Energy Information Administration sees Canadian pipeline gas exports to the U.S. continuing to decline at a gradual pace from here on out, falling to “a negligible volume by 2040.

(Click to enlarge)

That has created a bit of urgency for Canada’s natural gas producers. Canada’s natural gas production occurs mostly in Alberta alongside its large oil sector. But production has fallen in lock step with the declines in exports to the U.S. – a declining customer base means there is little reason to produce. Related: Shell’s Profits Plunge 83%

The only option is to export the gas to Asia. But that presents another problem – LNG export terminals must be constructed on the Pacific Coast, and pipelines must be constructed to connect Alberta gas to the coast. This is no small feat.

Getting the LNG export terminals online is pivotal; without them, upstream drillers will be trapped without an outlet, forcing them to scale back production. Canada’s National Energy Board (NEB) published a study in January 2016 in which it looked at two scenarios for Canada’s gas production. In the first example, the “high-LNG case,” LNG exports rise to 4 billion cubic feet per day (Bcf/d) by 2023 and 6 Bcf/d by 2030. If this occurs, and gas flows through the newly constructed LNG export terminals, upstream gas production in Alberta can rise from 15 Bcf/d in 2015 to 22 Bcf/d in 2040.

On the other hand, if LNG terminals are blocked by the government, or if companies like Petronas or Shell decide not to follow through on development and no LNG terminals are constructed, the NEB expects natural gas production to remain unchanged in Canada at 15 Bcf/d through 2040, basically keeping steady to serve domestic consumption.

Building the pipelines and export terminals won’t be easy. Canadian Prime Minister Justin Trudeau said in January that all new pipelines and major pieces of infrastructure have to meet environmental standards that encompass greenhouse gas emissions, a higher bar than under his predecessor. Related: The Shale Sector Just Got Two Critical Wins – In Two Different States

Malaysia’s state-owned Petronas, which has backed a $36 billion LNG export terminal on British Columbia’s Pacific Coast, threatened to walk away from its project in March because of the new rules. The Pacific NorthWest LNG project is one of the top contenders to become Canada’s first LNG export terminal. The company said that it would make a final investment decision within the next few months. "Depending on the timing of the CEAA (Canadian Environmental Assessment Agency) decision, we would hope that by late summer or early fall we would be in a position to follow up on (a final investment decision)," Michael Culbert, president of Pacific NorthWest LNG, told Reuters in late April.

Separately, Shell suggested that it could back away from its own proposed LNG export terminal in British Columbia. Shell executives said that the LNG terminal was competing with several other company projects in the U.S., and the LNG project was not the first in line. “It’s highly unlikely that more than I would say two, maybe only one,… will actually go ahead in that timeframe,” Shell’s CFO Cimon Henry said this week. “…The chemicals plant is probably the first one because of the timing of certain commitments that are already in place,” Henry added, referring to a chemicals plant in Pennsylvania that Shell will build. He seemed doubtful that the company would move forward with a final investment decision on its LNG project in British Columbia this year.

If Petronas and Shell do not move forward, it is hard to see any others making progress in the short run. There are almost two dozen proposed projects but none have received final investment decisions. Related: Why Oil Prices Will Likely Drop Below $40 Soon

It isn’t just the Pacific Coast LNG projects that have a lot riding on the Canadian government’s environmental reviews. Many others in the industry are holding their breath. “This is going to be widely watched as a barometer on the government’s interest in supporting what is the driver of the Canadian economy, which is energy,” John Stephenson, CEO of the Toronto-based investment firm Stephenson & Co., said in an interview Bloomberg in March.

The regulatory delay might have done Petronas a favor – LNG prices have crashed since 2014, and Petronas recently said that it needs to cut $12 billion in spending because of low oil and gas prices. The viability of Canadian LNG is questionable, given the cheaper alternatives elsewhere in the world. A wave of LNG export terminals are under construction and are coming online in the next few years, and the proposed projects in Canada have not yet even broken ground. Despite all the excitement, Canadian LNG is late to the game.

By Nick Cunningham of Oilprice.com

More Top Reads From Oilprice.com:

• Low Oil Prices Hitting Real Estate in UAE
• As Oil Markets Tighten, Geopolitical Events Matter Again
• 50,000 Laid Off In Saudi Arabia As Oil Crisis Bites Deeper