Canada’s Trapped Natural Gas: Will the country overcome self-inflicted damage and instill regulatory certainty to become a globally competitive LNG player and an exemplar of environmental stewardship?
Earlier this decade, the future for Canadian LNG looked rather bright. The global demand outlook from burgeoning Asian economies was auspicious, LNG prices were underpinned by sustained high global crude prices, and continued amelioration of shale gas drilling techniques unlocked bountiful reserves of economic natural gas in Canada and the US. Over 20 liquefaction projects were proposed on Canada’s west coast in the province of British Columbia, involving the majority of supermajors, North American midstream operators, Asian national oil companies, and Asian consumers.
Then, the 2014 rout of crude oil prices caused a lockstep collapse of global LNG prices, all with a glut of new supply hitting the market. Proposed LNG projects were postponed around the world, with proponents waiting for the next window of unmet demand. Canadian projects were further hampered by burdensome environmental regulation, tepid political support, vehement activism, and unmet demands from multitudinous indigenous groups — additional headwinds that likely scuppered Petronas’s world-scale Pacific Northwest LNG project in 2017. To-date, only one world-scale project (Shell-led LNG Canada) has received a positive final investment decision, and most of the remaining 20 projects have been shelved or cancelled.
Canada offers many of the capabilities that incited the US shale revolution: attractive geology, producers with a strong appetite for risk, healthy capital markets, sparse population near producing basins, and a surfeit of fresh water. The overlapping Montney and Duvernay basins alone in Western Canada have over 500 tcf (14 tcm) of marketable reserves and Western Canada — roughly double the economic gas reserves in the Permian basin. The Montney geology is producing gas, natural gas liquids and light tight oil with highly competitive well economics. Due to the US becoming energy independent with regards to natural gas, Canada exports less and less gas to its traditional trading partner south of the border. The result is some of the lowest priced natural gas in the world (not to mention NGLs for petrochemical production): natural gas at the Montney’s trading hub Station 2 averaged below USD$1 per mmbtu for 2018 and at times traded at a negative price, a deep discount from Henry Hub. Furthermore, Station 2 is only a few hundred kilometres away from the Pacific coast, where sailing times to Asian markets are 8-11 days, less than that from the US Gulf Coast and less than most global LNG competitors.
However, not unlike Canada’s stifled oil sands production, choked from world markets by political inability to build pipelines, Canada’s natural gas vast potential continues to be unrealized and new projects face major headwinds (outside of LNG Canada’s proposed brownfield expansion). Challenging geography, regulatory uncertainty, lack of political will and understanding of global energy and carbon markets, balkanized indigenous groups, and environmental activism increase the risk burden on project proponents. To counteract this, numerous industry groups, investors, and pro-energy political parties are increasingly collaborating to surmount these challenges. This research will examine if and how Canada could become a relevant global LNG player. It will also incorporate the intertwined dynamics of petrochemical growth, natural gas and condensate demand from Canada’s oil sands, liquid petroleum gas exports, and regional gas demand.