Structural advantages have helped the US steal Canada’s spot in the LNG party
The fact that the US has managed to become an LNG winner ahead of longtime industry aspirant Canada can teach us one thing: pre-laid infrastructure, policy advantages, and low upstream costs can go a long way.
The US was actually a dark horse in the LNG race. “A decade ago we thought we were going to be the world’s largest LNG importer,” Chris Pedersen, an analyst at S&P Global Platts in Houston, told the Financial Post. But by 2008, new technologies like fracking had unlocked massive reserves of oil and natural gas within the country.
Demand for the supercooled gas subsequently soared in Asia, setting off a sudden race among countries like Australia, Qatar, Russia, and Mozambique. The US was one of the biggest winners; Canada, despite its experience in the energy industry, was not so fortunate.
How did this happen? For one thing, the US had a massive network of existing natural gas pipelines and regasification plants in Texas and Louisiana. An RBC Capital Markets report from 2014 compared five countries and found construction costs in the US Gulf Coast to be the lowest; Canada was among the lowest-cost jurisdictions.
With a distribution infrastructure laid out, would-be LNG exporters — many of which were originally meant to convert imported LNG into gas for domestic energy consumption — had a guaranteed and flexible gas supply. By dealing with third-party gas producers and shippers, many of them were able to focus on finding buyers overseas. One example: US exporter Freeport LNG operates as a terminal, liquefying domestic gas and loading the product onto supertankers for buyers in Japan, South Korea, and Great Britain.
LNG hopefuls in BC, meanwhile, have more hurdles to deal with. Canadian proposals are typically more inflexible, with just one fully integrated company handling everything from upstream gas production to overseas transportation. Moreover, the four proposed pipelines to connect northern BC gas fields to export facilities on the coast — which have to be built from scratch — would go through large areas of undeveloped and contested First Nations territories.
Government support also played a role. Many have criticized the BC government’s 2014 move to float a two-tier tax system that targeted LNG development. “I think there was an arrogant belief that B.C.’s proximity to Asia and its accessibility was enough to mitigate [cost competition from other countries],” one unnamed industry expert, who consulted with the BC government at the time, told the Post.
Things were smoother south of the border. In 2011, Freeport notified federal regulators of its intention to file an environmental assessment. By the end of 2014, the company had gotten the necessary environmental permits, export licences, and other legal documentation needed to proceed with their facility’s construction. Part of this could also be because Texas homeowners, compared to First Nations, were less attached to their land; Freeport was able to appease 50-odd locals affected by their project by simply buying their homes at a premium.
Compare this with the Pacific NorthWest LNG project proposed for Prince Rupert, BC, which began feasibility studies at roughly the same time as Freeport, but only got conditional approval from the federal government in September 2016.
With a new US senate bill requiring the Department of Energy to decide on US LNG projects within 45 days of an environmental assessment, the country is starting to look like a juggernaut in the space.
The question is whether other countries will actually want to challenge them as a deep supply glut has made gas prices plummet since the initial LNG frenzy. In 2015, a report from global intelligence firm IHS Markit Ltd. estimated that only five of the 90 global LNG proposals at the time would be needed to meet demand until 2020.
“Whether [Canada] missed the boat or dodged a bullet is kind of a tough call right now,” said Ian Archer, an analyst at the firm.
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The US was actually a dark horse in the LNG race. “A decade ago we thought we were going to be the world’s largest LNG importer,” Chris Pedersen, an analyst at S&P Global Platts in Houston, told the Financial Post. But by 2008, new technologies like fracking had unlocked massive reserves of oil and natural gas within the country.
Demand for the supercooled gas subsequently soared in Asia, setting off a sudden race among countries like Australia, Qatar, Russia, and Mozambique. The US was one of the biggest winners; Canada, despite its experience in the energy industry, was not so fortunate.
How did this happen? For one thing, the US had a massive network of existing natural gas pipelines and regasification plants in Texas and Louisiana. An RBC Capital Markets report from 2014 compared five countries and found construction costs in the US Gulf Coast to be the lowest; Canada was among the lowest-cost jurisdictions.
With a distribution infrastructure laid out, would-be LNG exporters — many of which were originally meant to convert imported LNG into gas for domestic energy consumption — had a guaranteed and flexible gas supply. By dealing with third-party gas producers and shippers, many of them were able to focus on finding buyers overseas. One example: US exporter Freeport LNG operates as a terminal, liquefying domestic gas and loading the product onto supertankers for buyers in Japan, South Korea, and Great Britain.
LNG hopefuls in BC, meanwhile, have more hurdles to deal with. Canadian proposals are typically more inflexible, with just one fully integrated company handling everything from upstream gas production to overseas transportation. Moreover, the four proposed pipelines to connect northern BC gas fields to export facilities on the coast — which have to be built from scratch — would go through large areas of undeveloped and contested First Nations territories.
Government support also played a role. Many have criticized the BC government’s 2014 move to float a two-tier tax system that targeted LNG development. “I think there was an arrogant belief that B.C.’s proximity to Asia and its accessibility was enough to mitigate [cost competition from other countries],” one unnamed industry expert, who consulted with the BC government at the time, told the Post.
Things were smoother south of the border. In 2011, Freeport notified federal regulators of its intention to file an environmental assessment. By the end of 2014, the company had gotten the necessary environmental permits, export licences, and other legal documentation needed to proceed with their facility’s construction. Part of this could also be because Texas homeowners, compared to First Nations, were less attached to their land; Freeport was able to appease 50-odd locals affected by their project by simply buying their homes at a premium.
Compare this with the Pacific NorthWest LNG project proposed for Prince Rupert, BC, which began feasibility studies at roughly the same time as Freeport, but only got conditional approval from the federal government in September 2016.
With a new US senate bill requiring the Department of Energy to decide on US LNG projects within 45 days of an environmental assessment, the country is starting to look like a juggernaut in the space.
The question is whether other countries will actually want to challenge them as a deep supply glut has made gas prices plummet since the initial LNG frenzy. In 2015, a report from global intelligence firm IHS Markit Ltd. estimated that only five of the 90 global LNG proposals at the time would be needed to meet demand until 2020.
“Whether [Canada] missed the boat or dodged a bullet is kind of a tough call right now,” said Ian Archer, an analyst at the firm.
For more of Wealth Professional's latest industry news, click here.
Related stories:
New private equity platform launched
Foreign oil players bet on locals’ resilience
