Southern Discomfort: How the U.S. helped quash Canada’s ambitions to become an LNG superpower

Southern Discomfort: How the U.S. helped quash Canada’s ambitions to become an LNG superpower
FREEPORT, TEX. Tucked behind a row of stilted houses in the grassy marshland of south Texas, a product of the U.S. rush intoliquefied natural gasis taking form. A cluster of cranes stand high above the construction site of Freeport LNG, their arms swivelling back and forth in wide, slow arcs, while heavy trucks kick up dust into the humid March air.

Once completed in late 2018, the US$13-billion facility will liquefy 2.1 billion cubic feet of gas per day, which will be transported onto supertankers and shipped to overseas markets. Like other projects in the region, Freeport was initially built as a regasification plant to do just the opposite: convert imported LNG into gas for domestic use.

Then the world just slowly flipped on us, said Sigmund Cornelius, president and chief operating officer of Freeport LNG, who was involved in the original construction of the facility led by ConocoPhillips Co.

By the time that project was completed in 2008, new drilling technologies such as fracking had unlocked massive volumes of oil and natural gas in the U.S., turning global energy markets upside down.

What followed was a frenzied jockeying for position in the fast-emerging LNG space, as Asian demand for the supercooled gas soared. Public and private investors began pouring billions into capital-intensive LNG export facilities in Australia, Qatar, Russia and Mozambique, but one of the biggest winners was the U.S.

U.S. companies will bring online 5.5 bcf/d of new export capacity between 2016 and 2020, accounting for roughly 10 per cent of the global supply. Cheniere Energy Inc.s Sabine Pass facility shipped its first gas in February 2016, while four other projects are currently under development.

Cheniere in April also announced it would be the first U.S. company to ship LNG to a former Soviet bloc country as Europe seeks to cut its dependence on fuel from Russia. Polands state-owned PGNiG SAwill take delivery in June.

The rapid expansion down south will eventually make the U.S. the third-largest exporter of LNG, behind Qatar and Australia, according to analysts at Columbia Universitys Center on Global Energy Policy.

Notably absent from the list of important players is Canada, despite its longstanding ambition to be an LNG superpower. Of the 20-odd LNG facilities proposed in B.C. alone, only the modest 0.3 bcf/d Woodfibre LNG project appears to be moving ahead. Other larger approved projects are delaying final investment decisions.

Today, any talk of LNG in Canada more or less involves political hand-wringing, while its southern neighbour is realizing its LNG ambitions.

The surge in LNG export capacity comes as global natural gas markets undergo radical change, with the U.S. asserting itself as the dominant player.

A decade ago we thought we were going to be the worlds largest LNG importer, said Chris Pedersen, an analyst at S&P Global Platts in Houston. Now, the U.S. is expected to be a net energy exporter by 2026, according to the Energy Information Administration.

Pedersen and other expertspoint to a variety of factors that made the U.S. a hotbed for LNG development, including public policy advantages, existing infrastructureand low upstream costs.

Perhaps the most obvious U.S. advantage is the vast network of existing natural gas pipelines and regasification plants in Texas and Louisiana, which gave project proponents a leg-up in terms of costs.A report by RBC Capital Markets report in 2014 found that construction costs in the U.S. Gulf Coast were the lowest among five competing countries (Canada was among the lowest-cost jurisdictions in upstream development).

Existing infrastructure in the U.S. provided would-be LNG exporters with a guaranteed and versatile gas supply, allowing them to focus solely on securing overseas buyers.

Freeport LNG, for its part, operates strictly under a terminal model, whereby the company liquefies domestic gas and then loads it onto supertankers. Third-party companies are responsible for the production of the gas, as well as the transportation of LNG to overseas buyers.

That simplicity allowed Freeport to focus specifically on securing long-term contracts, Cornelius said, and the company has signed buyers based in Japan, South Korea and Great Britain.

Moreover, it entered its search for buyers at a time when the world was aggressively looking to shift away from coal and nuclear energy sources in favour of natural gas. We were very lucky with our timing, he said.

Project proponents in B.C., meanwhile, are dealing with far more complicated developments. Canadian proposals typically involve companies that are fully integrated from the upstream gas development to the overseas transportation.

Moreover, the four proposed pipelines that would connect gas fields in northern B.C. to export facilities on the coast would need to be built from scratch, and cut through large swathes of undeveloped and contested First Nations lands.

Critics say the B.C. government, for its part, scared away investors when it floated a two-tier tax system in early 2014 applicable solely to LNG development. One industry expert who consulted directly with the B.C. government said there was a lack of awareness around the level of cost competitiveness posed by other countries.

I think there was an arrogant belief that B.C.s proximity to Asia and its accessibility was enough to mitigate that competing factor, said the person who asked not to be named. And that wasnt enough.

A comparably relaxed regulatory system in the U.S. also allows projects to move ahead quicker.

Freeport first applied to federal regulators with a notice of intention to file an environmental assessment in 2011. By the end of 2014, it had secured its necessary environmental permits, export licences and other legal documentation, and was moving ahead with construction.

This was perhaps due partly to the more easy-going attitude of Texas locals, who do not carry the same historical grievances as Canadian First Nations: to circumvent opposition to the project, Freeport simply bought the homes of some 50-odd locals at a premium.

The Pacific NorthWest LNG project proposed for Prince Rupert, B.C., began its feasibility studies at roughly the same time Freeport did, and only received conditional approval from the federal government in September 2016.

Decisions on U.S. LNG projects should now come even faster since the Senate passed a bill in April 2016 compelling the Department of Energy to make decisions on such projects within 45 days of an environmental assessment.

Even so, the question today is instead whether there will ever be adequate space for new entrants into the LNG market. The global LNG race kicked off such a frenzied expansion in capacity that prices have since plummeted amid a deep supply glut.

Whether [Canada] missed the boat or dodged a bullet is kind of a tough call right now, said Ian Archer, an analyst at IHS Markit Ltd.

So much LNG is currently sloshing around the globe that operators now say thriftier buyers have begun seeking re-negotiated contracts at lower prices. In 2015, IHS released a report estimating that only five of the 90 global LNG proposals on the go would be required to meet demand until at least 2020.

Further muddying the outlook for LNG is that costs for renewable sources of electricity such as wind and solar fell far more sharply than analysts predicted only a few years ago. Sluggish economic growth projections in some developing countries also caused LNG demand expectations to taper off.

Yetmany analysts now predict that LNG markets could balance in coming years, potentially cracking open another opportunity in the mid-2020s.

The global growth story for gas is still positive, its just at a slower trajectory than perhaps people were saying five years ago, Archer said.

Canadian producers have begun moving on. Many have been forced to enter alternative markets, and some are beginning to export gas to overseas markets via U.S. LNG terminals. For example, Calgarys Seven Generations Energy Ltd. has signed a supply contract with Cheniere Energy, according to news reports.

The growth of U.S. LNG is unlikely to end any time soon. McKinsey& Co. analyst Peter Lambert said in a 2015 research note that expansions to existing brownfield projects ones already in progress in the coming years could push out other LNG projects in the U.S., Canada, or elsewhere in the world.

The preparations for such expansions are already taking place in flat marshland of the U.S. Gulf Coast.

At the Freeport LNG construction site, there is a yet-untouched patch of concrete where the company plans to construct its fourth liquefaction facility, or train, to boost its capacity. It plans to apply soon to federal regulators for the roughly US$3-billion expansion.
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