12th April 2016
15 months ago we examined the Canadian LNG sector in the context of emerging global gas dynamics. Has anything changed?
Quite definitely the puck has, and continues to move in terms of LNG supply, LNG demand, pricing, market development and industry trends. However on the face of it there has been limited progress made in realising Canada’s LNG export potential.
This short piece will look back at some of our comments from 15 months ago as well as looking forward to what is to come for Canadian and global LNG.
Reflecting on the points we raised 15 months ago…
Has the USA taken the lead?
As we envisaged last year team USA has opened the scoring against Canada, with the first LNG exports starting at the end of February 2016. However the first exports are taking place in a time of low, and arguably sub-economic, price environments of around $5/MMBTU. Yes, the USA has been successful in getting their projects away, but there is a question as to whether this is really creating value for stakeholders. Supporters of Canadian LNG may view the American advantage in the first period of play as an “own goal”.
Canadian East Coast vs Canadian West Coast
The less spoken about East Coast projects have quietly moved forward, with Goldboro and Bear Head making progress with land purchase, environmental and regulatory approvals.
Meanwhile the West Coast has faced further postponements (Pacific North West and LNG Canada being two of the most spoken about) or cancellations (Altagas’ Douglas Channel project). From a total of around 20 proposed projects, there now appear to be as few as 3 serious challengers for the title of first Western Canadian exporter.
However, on both East and West coasts, not one project in Canada has yet reached Final Investment Decision (FID), and it is questionable, given current weakness in LNG prices, whether any affirmative FID decisions will be made in 2016. Arguably those who are brave enough to take a longer term view and make the commitment in 2016 could steal a march on competitors by targeting first cargoes just as the oversupply may start to disappear and prices start to firm up again. Given project development timelines, and our own internal global supply and demand analysis, FID decisions in Canada would need to be made within the next 12 months to capture a supply-demand flip as early as 2020.
Increased pressure on the Canadian regulatory front – closer collaboration needed
It could be said that the Government of British Columbia has made progress in climbing a steep LNG learning curve. Initial uncertainties around the controversial LNG taxes were resolved but the province is still challenged with issues involving First Nations, pipeline routes, permitting and environmental assessments.
Within the last month, Japanese and Malaysian stakeholders, both key potential anchor buyers, have voiced their concern that regulatory and governmental delays could cost Canada dearly and lead to a closing of the narrowing window of opportunity.
The horn has heralded the end of the first period in the North American game, with Canada falling behind to the USA. If Canada is to celebrate when the horn sounds at the end of the second and third period then there needs to be much clearer leadership and collaboration. The Province of BC cannot do it alone and needs support from the new Federal government as well as greater collective support from municipalities and First Nations.
There is not much more SPACE for delay for all involved. OPPORTUNITY IS NOW HERE… could quickly become OPPORTUNITY IS NOWHERE.
What price Canadian LNG?
Since we commented 15 months ago, LNG prices (both oil indexed and spot) have continued to fall further. Our analysis suggests that the sub $5/MMBTU deliveries into Asia may be here to stay for the next couple of years. With concerns over stagnating growth rates in mature Asian LNG importing countries (albeit being offset by rapid growth amongst a host of South East Asian economies with a ready demand for plentiful and cheap gas) and with European prices now showing signs of parity and in some cases premium to Asian prices, we expect LNG flows into Europe to more than double from current levels of just above 30 MMTPA within the next 2 years.
The UK’s National Balancing Point (NBP) is rapidly converging on a Henry Hub (HH) plus around $1.75 to $2 price, with signs of an Atlantic basis differential here to stay. This supports our recent views that we are moving towards a global gas market, where regional differences largely reflect transportation differentials. Give it a few more years and perhaps in less time than many are expecting, we may have something approaching a properly interconnected market, with regional hubs.
No doubt Canadian LNG, no different to any other greenfield LNG development, will struggle to reach FID at $5/MMBTU price levels. However, this is the short term. Our longer term analysis suggests only a marginal oversupply in 2021 and 2022. We expect the market to largely be in balance before then, possibly by 2020, at which point we see an emerging supply-demand deficit and prices firming up.
Our analysis also foresees a moderate under supply emerging at the time when Canadian LNG could start to arrive in the market. There is an argument that with lower development costs (perhaps as much as 40%), good project discipline, and a positive economic LNG pricing outlook post 2020, taking FID in Canada within the next year even at current lower prices may be wiser than many might anticipate.
15 months on… do we reach the same conclusions?
We finished last time pondering over whether Canadian LNG was on ice, about to enter, or was already in deep freeze. Looking back at our conclusions many of the thoughts we raised have actually materialised.
As for Canadian LNG, now more than ever before, there is a risk that with an abundance of gas resources found around the world, Canadian gas might remain in deep freeze, especially if the USA continues to build on its lead. If Africa realises its potential and Iran follows through on plans to bring LNG to market in a 3-5 year time frame, this will only add to Canada’s current woes.
Although much has changed over the past 15 months, we conclude in exactly the same way “Canada, runs the risk of landing in the penalty box and being frozen out by global competition if it continues to travel to where the puck is or has been, instead of where it is going to be…”
Here at GCA, our advisors have worked on the end to end gas value chain in North America from the subsurface to the burner tip. To find out more about our proprietary LNG supply-demand and pricing views, and how we can assist you to unlock value in your projects, including potential merger and acquisitions support in the upstream, midstream or downstream gas value chain, please contact Nick Fulford or Ryan Pereira.
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