Liquefied Natural Gas (LNG) is about to become a “big thing” for Canada’s West Coast, and, perhaps later, for Canada’s East Coast, with one B.C. export terminal being readied for operation in 2025. A new industry will soon be born in Canada. The question is: will more siblings be born, or will the new industry slowly wither as the world becomes obsessed with “greener” fuels?
THE IMPORTANCE OF NATURAL GAS TO CANADA
Natural gas, along with other natural resources, has long been a major contributor to Canada’s prosperity, helping to fund Canada’s social welfare system. For decades, natural gas was being mostly produced as a byproduct of oil production from shallow wells, and sold for a very steady price of around US$2.00 per thousand cubic feet (MCF). Canadian gas was (and continues to be) used to generate electricity, to serve as a feedstock for various industries, and to feed furnaces and boilers for domestic, commercial and industrial heating purposes. A substantial proportion of Canadian gas was (and is) exported to the United States via pipeline. Although the international trade in liquefied natural gas (transported around the globe in specially outfitted ships) has been a very active and growing business for decades, Canada has chosen not to participate in this trade. However, by 2010, after a brief period during which wellhead natural gas prices had exceeded $10/MCF, both Australia (another country with vast natural gas reserves) and Canada, as well as the United States, decided to explore new export markets which could only be served by turning natural gas into a liquid, so it could be transported across the oceans. Although a number of East Coast sites were studied as potential LNG export sites, most potential export sites that received serious consideration were located in British Columbia, being located relatively closely to the sources of natural gas, and being closer to Asian markets which were then (and remain) the principal market for LNG. In 2013, the B.C. Minister of Natural Gas Development was quoted as saying that ten potential export terminals were in play and that, if five were built, B.C. could create 100,000 new jobs and benefit from an infusion of a trillion dollars into provincial coffers by 2046. Soon after this prediction was made, natural gas prices weakened, and project after project was cancelled until in October of 2018, LNG Canada decided to proceed with the construction of a $40 billion liquefaction terminal in Kitimat, B.C. LNG Canada is owned by Royal Dutch Shell (40%), Petronas (25%),
Petro China (15%), Mitsubishi (15%) and Korea Gas (5%). First production is expected to take place in 2025.
Canada’s oil and gas industry is exceedingly important to the financial well-being of the country. It pays by far the highest wages of any industry in Canada, and employment numbers in the industry can quickly rise rapidly when major expansion projects are implemented. In June of 2022, industry exports amounted to about 30% of all of Canada’s merchandise exports, resulting in a stellar positive balance of trade for that month. A positive balance of trade is necessary to maintain a positive balance of payments for the country, which aids our general prosperity and helps pay for all the social services we have become accustomed to.
In 2020 Canada produced 6,333 trillion cubic feet (TCF) of natural gas, of which 3,906 TCF was consumed domestically, and 2,427 TCF was exported. At an average 2022 U.S. wellhead price of about $7 per thousand cubic feet (MCF), this represents an annual value of some $44 billion, which is a relatively small number, but could be expanded significantly if more LNG export terminals were constructed. It is worth noting that LNG is sold in global markets for multiples of the wellhead price of gas. For example, while wellhead prices have hovered around $2/MCF for lengthy periods of time during the past decades, international contract prices for LNG have rarely fallen below $10 during that time. In fact, after Russia’s invasion of Ukraine, European LNG prices shot up to over $50/MCF.
The U.S. currently exports just over 10 billion cubic feet (BCF) of liquified gas per day, mostly from facilities in Louisiana and Texas and has recently become, or is about to become, the world’s largest LNG exporter. Facilities in Texas are being expanded and undoubtedly additional facilities will be built. Two of Canada’s largest gas producers, Tourmaline Oil and ARC Energy, have recently signed deals with U.S. Cheniere Energy to export gas to Corpus Christi, Texas for liquefaction and export by Cheniere, starting in January of 2023 (Tourmaline) and January of 2024 (ARC).
When it comes on stream in 2025, phase I of LNG Canada’s plant will consume about 2 BCF of gas per day, and a planned phase II might eventually take that to 4 BCF.
While Canada’s natural gas industry is small, compared to its oil industry, Canada’s vast resources of natural gas, together with increasing global demand, offer plenty of value- added commercial opportunities that will aid regional economies, First Nations peoples, and federal and provincial Treasuries.
WHAT IS LNG?
LNG is natural gas that has been purified of water and other components that would freeze, so it consists almost entirely of methane, and liquefied at cryogenic temperatures (minus 163 degrees C) at a liquefaction terminal. Liquified at cryogenic temperatures, LNG occupies only 0.165% of the volume of natural gas at atmospheric conditions. It is stored and transported across oceans in specially constructed vessels at cryogenic temperatures to a receiving terminal that will store the liquid LNG in heavily insulated tanks from where it is released into regasifiers that turn the liquid back into gas, to enable its transportation to end users through pipelines. Natural gas liquefaction makes it possible to transport the gas where the absence of pipelines would make transportation otherwise impossible.
WHERE IS LNG PRODUCED?
LNG is produced in countries that are rich in natural gas deposits, but which cannot be connected to their clients via pipelines. Major producers include Australia, Qatar, the United States, Russia, Indonesia, Nigeria, Malaysia, Nigeria, Algeria, Norway and others. Current global liquefaction capacity of about 450 million metric tonnes is expected to rise to about 670 million metric tonnes by 2025.
The Russian Federation possesses by far the largest proven reserves of natural gas in the world, accounting for about 30% of proven reserves. Iran is in second place (16%), with Qatar in third (15%). The United States is home to about 3% of the world’s proven deposits, while Canada is host to about 1%. Despite its relatively small proportion of global reserves, Canada’s reserves are thought to represent a minimum of 200 years of current production.
WHERE IS LNG CONSUMED?
Worldwide, consumption of natural gas is expected to increase from about 360 million metric tonnes in 2019 to about 700 million tonnes in 2040, remaining the world’s third most important fuel, after oil and coal. Areas of the world where demand is expected to show the strongest growth are China and India. Historically, about 70% of LNG consumption has occurred in the three economic powerhouses of Southeast Asian countries without significant domestic sources of energy, namely Japan, Taiwan and South Korea. In addition to those countries, while various Western European countries have had access to sources of domestic natural gas, virtually all have supplemented these sources through gas imported from Russia via pipeline and/or through importation of LNG supplies from various sources. More recently, China and India have joined the group of LNG-importing nations.
EAST COAST TERMINALS
Among past proposed Canadian LNG liquefaction projects that were considered, a few remain on the table, and one new proposal has recently emerged to liquefy gas that is produced as a by-product of oil production from a number of offshore drilling rigs in the Jeanne d’Arc Basin, some 600 kilometers East of Newfoundland. LNG Newfoundland and Labrador proposes to construct a floating liquefaction facility that will collect gas through a pipeline from the drilling platforms. Targeted production capacity is 2.5 million tonnes per annum, starting in 2030. However, numerous obstacles will need to be overcome, including environmental approvals and securing financing (US$5.5 billion).
CANADIAN RECEIVING TERMINALS
Until a few years ago, Canada did not have any liquefaction or regasification plants, and there was little interest in building such facilities. Even today, there is little interest in building liquefaction infrastructure since gas produced in Canada is either consumed in Canada, or exported to the U.S. via pipeline.
However, about 15 years ago interest in receiving terminals, both on the West coast and the East coast, was strong, with many projects then planned. In the end, all were scuttled, because of technical, commercial or political reasons, except the Canaport facility in Saint John, N.B.
Gas from the Canaport facility, now owned by Repsol, connected to the Brunswick Pipeline to serve markets in Atlantic Canada, and to the Maritimes & Northeast Pipeline system to serve markets in the U.S. Northeast. The Canaport facility was eventually completed and commenced commercial operations, but never achieved “steady-state” operations. It continues to receive and offload occasional shipments. Its owners have considered alternative options for the facility, including converting it to a liquefaction and export facility.
WHAT ARE THE ECONOMICS OF LNG?
In most producing countries, the cost of accessing and recovering the natural gas resource is small. This is because commercial pools of gas tend to be extremely large, and access to these pools has historically been easy. However, what was once true may not necessarily continue be true in the future. New fields have been discovered in deep waters requiring expensive and technologically advanced drilling and production platforms, or worse, offshore within the Arctic Circle, such as the Shtokman discovery in the Barentz Sea.
In very rough numbers, construction of an LNG “train” carries a cost of $2 to $6 billion. However, trains currently being brought onstream at Sakhalin Island and the Norwegian Barentz Sea have reportedly cost significantly more. In addition, LNG carriers cost about $500 million, and receiving terminals cost in the order of $1-2 billion. Thus, it is evident that to be a player in the LNG industry, one needs to have the financial and engineering resources of the large multinational or national oil companies.
Average wellhead prices for natural gas have remained well below $3/Mcf during all of the eighties and nineties, and most of the time during the past twenty years. However, during the past fifteen years, the U.S. has seen sharp swings in the natural gas wellhead prices, which may have dampened the enthusiasm that many potential LNG producers had displayed. On the other hand, demand in Asia appeared to be insatiable, and contract prices were firm and attractive, causing international majors like Royal Dutch Shell to take the plunge and become leading LNG producers. The 2011 nuclear disaster at Fukushima Daiichi in Japan helped cement demand for LNG in Japan, and helped cause Germany to decide to phase out its nuclear power capacity. Recently, Russia’s invasion of Ukraine has made European countries much more aware of their reliance on politically unstable supplies from Russia, which is likely to underpin strong future demand growth from Western Europe. European demand for LNG after Russia’s invasion has caused major price increases for LNG, and caused strong competition for available supplies. While politics are fickle, and could change on a dime, it appears that with or without Russia turning off gas supplies to Europe, European countries have suddenly become aware that relying on the continued supply of essential commodities from a potential adversary is not a good idea. For that reason, global suppliers of LNG will likely find themselves in the sweet spot of demand exceeding supply for years to come, amid high selling prices. Producers of natural gas, of which Canada has many, will benefit from continued high selling prices and low finding costs.
WHAT IS NATURAL GAS (AND LNG) USED FOR?
In the United States, the single largest use of natural gas is electric power generation (about 37% of consumption), followed by industrial uses (27%) and residential heating (16%). In its energy outlook to 2030, the U.S. Energy Information Agency (EIA) forecasts that natural gas supply and consumption will continue to rise modestly, and it expects no major changes in consumption patterns.
EIA also expects slow but steady increases in global demand for natural gas between now and 2030, which bodes well for producers of natural gas and LNG.
IS HANDLING OF LNG SAFE?
The record has been remarkably good. In fact, while there have been minor incidents involving LNG carriers since 1964, there have been no major accidents. To be sure, there have been serious accidents involving significant loss of life, but these did not involve LNG carriers. One of the most serious incidents occurred in 1944 in Cleveland, Ohio, when an LNG storage tank shattered: LNG spilled over the containment dikes, into the streets, and into the sewer system, where it vaporized and ignited. A large area of Cleveland was destroyed, and 133 people died. One disturbing statistic about this incident is that it involved a small storage tank with a capacity of only 5,000 cubic meters
– one can only imagine what might have happened if the tank had been of modern-day size, i.e. 160,000 cubic meters!
Another significant accident occurred in Algeria when an explosion tore through an LNG liquefaction plant in Skikda in 2004, killing 27 people, and destroying more than $1 billion of property.
Natural gas remains an inherently dangerous fuel that must be treated with the greatest of care. However, we have become accustomed to the dangers of modern life, and few of us would refuse to fly even though we know that flying is subject to danger. Coastal communities across North America are deciding where the inherent risks of an LNG are acceptable, and where they are not.
WHAT ABOUT LNG’S ENVIRONMENTAL ASPECTS?
There are a number of super- committed environmentalists who believe that production of ALL fossil fuels must be banned sooner rather than later. Most citizens take a more balanced approach to the need to reduce carbon emissions.
Of the three principal fossil fuels, natural gas is clearly the most benign. Accordingly, it is not unreasonable to see natural gas as a “bridge” fuel, to get us from where we are today to a future with more abundant resources of zero-emission fuels.
Natural gas production does release substantial volumes of carbon, particularly when the natural gas is produced in its own right, as opposed to being produced as a by-product of oil production. In the latter case, capture of the gas for commercial purposes should be considered a harm reduction strategy, since gas produced as a by-product of oil production might otherwise result in flaring the “waste product”.
Natural gas, and LNG, are global commodities, and we should therefore consider their environmental footprints on a global basis, rather than merely considering the emissions associated with domestic production. If we have accepted the idea that we can go on an international flight and “offset” our fuel-burning emissions by paying for some trees to be planted in Brazil, what is so difficult about accepting that domestic gas production emissions can be more than “offset” by substituting relatively clean natural gas in export markets for the burning of much more polluting coal or oil. For economies that can afford to buy the product, LNG is a responsible environmental substitute. Increasing consumption of LNG in Europe, China and affluent parts of Asia will displace the burning of coal and oil, which will help those countries meet their environmental commitments.
WHERE IS CANADA’S INDUSTRY HEADED?
The industry is anxiously awaiting completion of the liquefaction terminal being constructed by LNG Canada in Kitimat, B.C., with first production expected in 2025. At this time, global demand for LNG is increasing strongly and, if those conditions continue, it may be expected that LNG Canada may embark on expanding the facility sooner rather than later. Still, we know that natural gas is a sunset industry. While markets are strong today, how long will they continue to be strong?
International competitors have announced LNG expansion projects to take advantage of strong prices. However, this is a very capital- intensive industry, and the industry must therefore be careful to avoid creating capacity for which there may be insufficient future demand. On the other hand, as is typical in this industry, risk is shared through sharing investment capital among multiple global corporations and, in addition, construction of such facilities is underpinned by multi-year take- off contracts with multiple national utilities.
At this point, it is unrealistic to expect that Canada will ever be more than a relatively small player in the international LNG trade. We had an opportunity to become world leaders in LNG production a decade ago, but blew it. That said, the federal government seems to have reluctantly come around to the recognition that Canada’s oil and gas industry is the country’s number one export industry, and could make the difference between a country that is just “getting by”, or that will enjoy prosperity in the face of growing global challenges.