Growing global demand for natural gas driven by rising consumption in Asia is contributing to renewed optimism in Canada’s natural gas industry, particularly as the prospects improve for liquefied natural gas (LNG). New LNG export projects would act as a much-needed relief valve for the current oversupplied domestic market. In recent years, Canada has sat on the bench as it watched waves of investment in LNG capacity take place in competing jurisdictions like the United States and Australia.
More than 30 proposals from a range of different companies to build LNG projects on Canada’s West Coast existed as recently as five years ago. But nearly all projects were cancelled or put on hold, largely because of a range of issues from high costs to regulatory uncertainty and opposition from environmental groups.
The outlook has since shifted, as the Canadian natural gas sector got a boost in late 2018 from the decision to greenlight the first phase of the CA$40 billion LNG Canada project. The move was largely made because of a strong outlook for Asian gas demand. Other factors included significant changes to British Columbia’s fiscal framework announced earlier in 2018, an advantageous shipping distance to growing Asian markets and low gas supply costs.
There’s hope the LNG Canada project will spur further investment, creating an export hub on the West Coast. In its 2019 LNG outlook, Shell Canada’s parent company said LNG continues to be the fastest-growing gas supply source globally, with an expected compound annual growth rate of 4% between now and 2035. This creates opportunity for more Canadian exports. Those forecasts—coupled with others pointing to strong long-term demand in markets like China and India—strengthen market optimism that the second phase of LNG Canada’s project will be built, bringing capacity up to 3.5 billion cubic feet per day.
Meanwhile, the competitiveness of Canadian LNG projects in the North American market has been boosted by various unintended consequences of President Donald Trump’s protectionist trade agenda. US LNG export projects are typically well positioned competitively, given lower costs and relatively low above-ground risk.
But the Trump administration’s trade policy has created financial and commercial challenges. For one, the uncertainties surrounding a US-China trade deal have made it more difficult for US LNG producers to sign Chinese offtake agreements in the absence of a negotiated settlement between the two countries. What’s more, the Trump administration’s steel (25%) and aluminum (10%) tariffs implemented in 2018 have added costs and policy uncertainty for new projects.
That’s not to say the United States won’t stay a competitor for Canada’s natural gas sector. Significant supply growth from the United States is expected to continue eroding traditional Canadian markets in central Canada and the northeast United States, resulting in flat demand for Canadian gas in those markets. Given that outlook, LNG will continue to serve as a beacon of hope for Canadian producers. And while Canada’s LNG prospects are far better today than in years past, challenges and risks exist that should be addressed to encourage more projects on both the east and west coasts of Canada.
As with pipeline projects, Canada needs a better national strategy and regulatory certainty for its natural gas industry and LNG—one in which provinces and the federal government work to promote the sector and attract international investment. This will involve advertising the environmental benefits of low-carbon natural gas, particularly in emerging Asian economies.
Given current dynamics, it has become clear Canada’s LNG moment is now. And while the stakes are high, Canada is finally in a better position than a year ago.
Partner, National Energy and Alberta Consulting Leader, PwC Canada
Tel: +1 403 509 7397
Alberta Region and Calgary Office Managing Partner, PwC Canada
Tel: +1 403 509 7520