Canadian LNG on Ice?  Where Will the Puck Stop?

Canadian LNG on Ice?  Where Will the Puck Stop?

15th January 2015

"Skate to where the puck is going, not to where it has been" - Can Canadian LNG learn from Gretzky? 

For anyone who follows ice hockey, Wayne Gretzky needs no introduction.  A former Canadian professional player, head coach and legendary national hero, from 1979 to 1999, Gretzky represented four teams over 20 seasons in the National Hockey League (NHL).  When he retired in 1999 - his jersey, number 99, was retired league-wide with him - he was the holder of 61 NHL records.  Called the greatest ice hockey player ever, he was famously nicknamed "The Great One".

Maybe Canada’s LNG industry should take a page from Gretzky’s play book, taking note of his insightful quote, when he said, “Skate to where the puck is going, not to where it has been”.

American? Canadian? Eastern? Western? Who will top the LNG export league?

Ongoing rivalry in USA/Canada is notorious, with each country claiming global dominance in hockey.  During the past 3 years, we’ve seen a similar battle royal between the Lower 48 (typically Gulf Coast LNG export projects) and a similar array of would-be-exporters on the West Coast of Canada in British Columbia, each claiming to be the natural choice for Asian markets, the gateway to the Pacific for North American natural gas reserves. 

During the past year, the 15 Canadian West Coast projects (totalling in excess of 150mmtpa of exports, equivalent to more than 60% of current LNG global annual demand) have been gearing up for imminent investment decisions.  At the time of writing, only one third of these players haven’t yet taken a breather on the bench.  Is this disappointing, inevitable or just Darwin’s survival of the fittest?  Meanwhile, six LNG players in the Lower 48 Gulf Coast expect to export LNG by 2020.  During the first month of 2015, however, there is growing uncertainty in the future of the American LNG market – Excelerate Energy announced that its floating 8 million tonne per annum (mmtpa) export plant moored at Lavaca Bay, Texas has been put on hold. 

Perhaps the most dramatic hockey parallel in recent times was Canada’s Olympic Gold Medal final in Vancouver in 2010 when Sidney Crosby scored his sudden-death goal in overtime - it feels like Canadian LNG could use Crosby’s help right now...

As recently as 2008, Alaska was planning to pipe 4 Bcf per day of natural gas through Canada to the Lower 48, and as many as 50 USA LNG import projects had been identified by industry.  At this nascent stage, not many people would have expected the United States to become a significant LNG exporter by 2017/18.  The same is true of Canada, a nation looking to serve global markets now that its traditional neighbouring market has largely disappeared.  By 2020, the US Lower 48 is expected to become the third largest exporter of LNG.  If Gretzky had skated to where the puck was, his eye would have been focused on ongoing LNG investments in
traditional gas exporting regions such as Qatar, Australia, Trinidad, and maybe even Nigeria. 

In terms of LNG imports, had the industry skated to where the puck was going to be – rather than where it was – then arguably a lot of now-redundant investments in LNG regas facilities in the United States could have been avoided.  However, sometimes, not knowing where the puck is going to end up can work to your advantage.  This is the case for many of the US brown field sites for LNG liquefaction plants, which now have sunk costs and inherent competitive advantages over their green field rivals.  Can the same be said to be true of Canada’s East Coast brown field versus its West Coast green field projects?

Skate West or Skate East? Where will the Canadian puck land?

Equipped with limited knowledge and experience five years ago – and faced with numerous companies proposing LNG export facilities – the Government of British Columbia, Canada’s gateway to Asia, has had a crash course in what it takes to get a LNG project off the ground.  However, the time, patience and consistency needed to keep momentum going has been lacking with the provincial regulator, as evidenced by the vacillation and controversy around the LNG tax.  In the scheme of things, the Government of British Columbia is nearing the end of its draft in the junior leagues, and needs to graduate to the national league, if the potential of Western Canada’s huge gas resources is to be fulfilled, especially in the face of stiff global competition.

With so many competing projects around the world, LNG buyers might be forgiven for being confused about which project to back; such confusion may be one of the contributing factors for the lack of firm sale and purchase commitments compared to the United States.  Further, the fact that many LNG projects are partially back-stopped by unconventional resources in remotely-located geological basins has been an “amber” light for buyers, some of whom are smarting from surprises in Australia emerging from the cost and complexity of developing Coal Seam Gas (CSG) at the rates needed to keep a liquefaction plant working at full capacity.  Such “lacklustre demand” is hinted at by Excelerate in their decision to put on hold activity on their project for a few months. 

Given recent announcements of delays and deferrals to the Petronas (PNW LNG), BG (Prince Rupert LNG) and Chevron (Kitimat LNG) projects on Canada’s West Coast, one might be fooled into thinking that there was no good news to spread around in Canada. 

On the East Coast, however, Repsol is considering a reversal of the regasification plant in New Brunswick it owns with Irving Oil Ltd.  One factor behind this reversal may be the year-on-year growth we are still seeing from the Marcellus and Utica unconventional resources in Pennsylvania and Ohio, which has exceeded Northeast American demand and has displaced natural gas in Eastern Canada.  Together with increased coverage regarding the Goldboro LNG Project in Nova Scotia, and the adjacent Downeast LNG Project on the Canada-US border, there is definitely increased adrenalin on what – just six months ago – would have been called Canada’s ‘quieter’ LNG coast.  

Are Europeans bigger fans of the Eastern Conference than the Asians are of the Western Conference?

While Asian spectators have been slow to commit to Canada’s West Coast Canada LNG projects, European spectators have been watching the Canadian LNG game with increased interest.  One of the major incentives for European buyers is the considerably shorter shipping distance that the East Coast Canada projects can offer, as compared to those situated along the US Gulf Coast.  An illustration of this attraction was evidenced by last year’s agreement between Eon and Goldboro LNG.

The stadium spotlights have definitely been turned up a notch, given the Russia-Ukraine crisis which has accelerated the desire for European countries who – while not necessarily wishing to entirely substitute supplies – definitely are seeking alternatives to Russian gas supplies.  This sentiment has spread across Europe, with smaller countries like Lithuania, Croatia and Poland moving towards LNG optionality.  One thing is for sure: Diversification, and not just security, of supplies, is essential to purchasers.  To this end, the United Kingdom and European Union are currently working towards finalising better free trade agreements with Canada, one outcome of which could be to secure more reliable and less politically-fragile sources of supply. 

Increasing uncertainty and unease about dependence on Russian gas in Europe generally – especially in some of the North West and Northern European countries – casts Eastern Canadian LNG in a more favourable light, offering some interesting possibilities.  Accordingly, East Coast LNG is definitely a game to be watched, even if spectators choose not to fanatically support it.

$$$ Short term prices... Up a puck, or down a puck... Does it really matter?

Falling oil prices continue to send shockwaves across the globe.  Does this mean that capital will flee and that projects will be put on hold?  Or should investors take a long term view?  Most significant green field LNG projects will not come onstream until 5-10 years from now.  Given the recent de-linkage in oil and gas prices, should we be thinking, therefore, about oil at all when discussing LNG? 

So, does a six-month tumble in the oil price really matter, unless it represents a fundamental shift in global commodity prices?  Although the nice answer would be no, most companies have investors to please, and short-term cashflow and profitability to protect as well.  This investor focus on the annual – even the next quarter – rate of return may be in conflict with the long-term view. 

NHL championships are not won in one game, but rather over a long and hotly-contested season.  Gretzky did not become known as “The Great One” during one great season, but rather over 20 seasons of delivering consistently great results.  Similarly, LNG investments involve projects that will generate returns over time horizons spanning 20/30/40 years or longer.  There is no doubt, however, that the recent wake up call on oil prices has levelled the score between Asian or European destinations for North American LNG.  The 1960’s and early 1970’s in Europe was where the LNG game was originally kicked off with Algerian and Libyan exports to the UK and France.  As Asian spot and contract prices move rapidly towards European border prices (where less than 50% of gas still follows oil prices), Asian markets are arguably oversupplied in the short term.  And, as supply anxieties build in Europe, LNG flows may start gravitating back towards Europe again.  

Will winners celebrate by drinking a Crude Cocktail? Or would they prefer Happy Gas?  Or maybe a mixture might not be a bad thing?

Price is no longer the only player in town.  For many seasons, Far East buyers have had little choice over the source of the LNG supply, nor the high price they had to pay.  However, with a potential increased global supply on the verge of opening up, the skate may very well be on the other foot.  The question, now, is what would LNG buyers like their prices to be linked to?

Traditionally, LNG offtake agreements have been mostly signed on oil linked contracts.  Yet, the game changes so quickly: just a few months ago, with the oil price having spent a sustained period above $100 per barrel, those “in the know” were all skating towards gas index linked contracts.  In the space of just one quarter, the halving in the oil price has levelled the differential between indices based on oil (Japanese Crude Cocktail) and those based on gas (largely Henry Hub-based).  So, in the space of less than one NHL season, the trend has fully reversed.  For those with a long-term view, this should be sending a very clear message – the choice of one indexation philosophy over another is less important than the need for diversity and optionality – a lesson European team managers have been preaching for some time.

Where will the price preference slide to in the future, or will the emphasis be on diversification?  What will Far East buyers want and who will be best placed to serve these needs?  Can Canada offer something better than Africa or Alaska?  Given the current commodity prices, can Canadian LNG offer anything at all to the market?

So is Canadian LNG on chill on ice, or is it in Deep Freeze?

Several factors make it difficult to tell where the puck is going to stop.  But one thing is for sure: History has shown that winners are the ones who strategically embrace change, skating to where the puck is going.  Losers are the ones who stubbornly stick to old models and ideals, while skating to where the puck is right now.

“The Great One” undoubtedly had a natural talent.  However, LNG players should emulate the dedication and hard work that Gretzky put into knowing and working his teammates (JV partners, government relations, first nations, project sponsors), studying his opposition and its likely moves (competition, global economic conditions, supply-demand dynamics), assessing ice conditions (timing will be key), and, perhaps most of all, playing to his strengths (and despite the recent deferral announcements, Canada does have a lot of potential muscle in the LNG game).

Beyond the borders of North America, the price shocks of the last few months have the potential to substantially change the global LNG game.  However, if what we are seeing is more than a temporary trend, then both price and demand features may move back to Europe, where the LNG game started.  Current anxieties about natural gas supply from Russia, combined with price diversification and gas on gas competition gaining a foothold in Europe – and delivering benefits of a less volatile price – may increase a renewed momentum for this shift.  Asian buyers are currently feeling far more comfortable about their LNG pricing, and the trend of recent years towards gas indexation may be put on hold, though for longer term thinkers this should continue to be a priority.

Canada’s West and East coasts have the potential to be winners in the NHL-LNG game, providing a new vehicle for LNG to “come home” to Europe.  Canada, however, also runs the risk of landing in the penalty box and being frozen out by the global competition if it continues to travel to where the puck is or has been, rather than to where it is going to be...

If you are interested in following up on the contents of this article, or would like to discuss how it might be applied to affect your company, please contact your local GCA office, or in the UK call +44 (0)1420 525366 and ask to speak to Ryan Pereira. 

Authors

Canadian LNG on Ice?  Where Will the Puck Stop?

Ryan Pereira

Principal Commercial Manager, Global Gas and LNG - ryan.pereira@gaffney-cline.com
Canadian LNG on Ice?  Where Will the Puck Stop?

Nick Fulford

Global Head of Gas and LNG - nick.fulford@gaffney-cline.com

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