Canada’s Devastating Financial Defeat


Why Canada’s LNG Ship May Have Sailed graced the front page of the Financial Post on May 6th, 2017. Sadly, there is no ‘may’ about it as the United States and now Australia are positioned for LNG export dominance. We called this back in September of 2015, in a Weekly Volume titled Canada Missed the Boat. We have been warning time would run out for LNG Canada, for almost half a decade; and, now, it finally has…

Canada loses LNG race
Financial Post reported earlier this month how Canada has lost the lucrative global LNG race. It’s time for Canada to toughen up and compete. With Trump running America, Canada needs to adjust its export and geopolitical strategy.

 

A year before the Financial Post article, back in May of 2016, we wrote,

 

“Over the past 24 months, Canada’s LNG export future has fallen from promising to bleak. Environmentalists and large energy companies such as Petronas and Shell have gone back and forth with the British Columbia government and various First Nations groups for years.”

 

We knew the race was over then, not that it ‘may’ be over now…

 

Canada’s Natural Gas and LNG Export Dreams | A Story of Missed Opportunity for a Great Nation

 

As is the case in business, goods sell or they simply don’t. Market share is secured, or it isn’t. Those who sell product, grow. Those who do not, dissolve. Competition and free markets don’t care about domestic growing pains or Canada’s goodwill to the world…

In May of 2013, we explained the intense competition among natural gas producers to beat one another to market. The Weekly Volume, titled The Four Nat Gas Horsemen, touched on domestic policy processes and timelines associated.

The four horsemen in our story were Russia, the United States, Australia and Canada. We knew policy makers had to act fast to entice investment and green light construction, or miss out. Summing up the crux of the opportunity, we stated:

 

“The Canadian Environmental Assessment Agency estimates global LNG (Liquefied Natural Gas) demand will rise 50% from 2009 levels to 280 million tonnes per year by 2015; and that the growth will be concentrated primarily in Japan, Korea, China and India.

North America is positioned to supply this demand increase as we are awash in the commodity. The question is, will we streamline the infrastructure to get the product overseas?”

 

The agency’s prediction was slightly aggressive as global demand has yet to hit 280 million tonnes, reaching 265 million tonnes in 2016. One-third of new LNG supply is already online and capacity additions are set to reach 100% by 2020.

Natural Gas Supply
Copyright of Royal Dutch Shell plc

US LNG Exports Prepare to Soar After 11 Approvals

 

The Canadian horse is still in its racing stall, tied up in red tape and waiting to be released. Unfortunately, by 2020 supply will outpace demand and much of this race will have ended. The opportunity cost of inaction is great. While Canada fought internally over its energy policy, the US surged ahead, approving 11 LNG export terminals.

Achieving approval is only half the battle; enticing long-term investment is the X factor. The US has a whopping seven LNG facilities under construction. A few have just come online, while others will complete in the coming quarters. Russia is doing just fine, with land access to Europe and China. The Kremlin continues to be the world’s top producer and exporter of natural gas. Australia was Canada’s second closest competitor, given its proximity to Asia…

 

Australia Set to Increase Natural Gas Production and LNG Export Volumes

 

According to Australia’s Department of Industry, Innovation and Science, LNG export volumes are expected to increase by 40% year over year to 51 million tonnes in fiscal 2016-17. This dramatic increase is a result of Chevron’s Gorgon project in Western Australia coming online; in addition to, the second train at the ConocoPhillips-operated Australia Pacific LNG project in Queensland, according to LNG World News.

LNG World News reported that,

“Increased exports to Japan, South Korea and China are expected to drive the rise in Australia’s LNG export volumes.”

LNG contracts tend to be longer term in nature and historically average between 15 and 20 years. According to a white paper authored by Peter R. Hartley of Rice University,

“Contracts related to investments in specific projects are also significantly longer than other more general contracts.”

Long-term contracts do not bode well for late comers, namely Canada. Especially late comers to a marketplace that is expected to be in a supply glut, due to a dozen or more LNG export facilities coming online. Mega gas exporters know this and are already pulling the plug on Canada. Despite three approvals on the West Coast and one in Nova Scotia, construction has yet to begin on a single one.

Way back in May of 2013, the Financial Post reported that,

 

“BG’s $16-billion proposal to export up to 3.3 billion cubic feet of gas per day from a new terminal on B.C.’s Ridley Island, at Prince Rupert, brings to 10 the number of projects in varying stages of development. Five of them plan to export a combined 9.6 billion cubic feet of gas per day beginning in the second-quarter of 2015, according to numbers compiled by AltaCorp. Capital Inc.”

BC’s Unjustified LNG Optimism Receives Harsh Dose of Reality

 

Even if construction had begun the day AltaCorp had made that bold prediction, chances are LNG would not have been exporting by Q2 2015. Instead, on March 10th, 2017, BG International Limited, a member of the Shell Group, confirmed it would be discontinuing development of the proposed Prince Rupert Liquefied National Gas project.

There are 19 liquefied natural gas (LNG) export proposals in British Columbia. Why are these energy goliaths not moving forward? The short answer is that the political climate in the province that founded Green Peace is not ready for LNG. Natural gas from B.C. may end up making it to Asian markets, but not from a Canadian-based LNG export facility. Excluding Australia, where energy behemoths have put up billions to build LNG export facilities, there is a threat much closer to home.

British Columbia’s complex political landscape has hurt Canada’s LNG export dreams.

 

Pembina Pipeline and Veresen Combination to Result in West Coast LNG Export Facility

 

On May 1st it was announced that Pembina Pipeline Corp. (TSX: PPL)(NYSE: PBA) and Veresen Inc. (TSX: VSN) had entered into an arrangement agreement to create one of the largest energy infrastructure companies in Canada with a proforma enterprise value of approximately $33 billion.

Veresen’s proposed Jordan Cove LNG export facility is located in Coos Bay, Oregon. We warned about what an ultimate approval could mean for Canada in a May 22nd, 2016 Volume titled, How The US Crushed Canada’s Energy Industry. We explained,

“The company’s goal is to meet the growing global demand for LNG by providing direct access to abundant Canadian and U.S. Rockies natural gas supply sources, primarily through existing pipeline and gas gathering networks.”

 

Pembina Pipeline, already one of North America’s largest energy infrastructure companies, talked about their commitment to Jordan Cove in its May 1st, 2017 press release,

 

“The combined entity will continue to build upon the momentum of the Jordan Cove liquefied natural gas (“LNG”) development project as it progresses toward key regulatory and commercial milestones. Jordan Cove is the most advanced LNG export project on the west coast of North America and can compete with LNG from brownfield expansion in the Gulf of Mexico on a delivered to Tokyo basis.”

 

Jordan Cove LNG Export Project Will Deal Death Blow to Canada LNG

 

Canada’s LNG export opportunity has faded. If the Jordan Cove LNG export project gets approved for construction, there will be no need for a West Coast Canadian LNG export facility. The Liberals, NDP or whoever is in power in BC will be happy to let the Americans take the risk (and profit) of exporting. However, Pembina and Veresen have deep ties into the Montney Formation in northeast BC and plan to run pipelines from BC and Alberta to the Oregon coast, bypassing any need for a pipeline on Canada’s Pacific coast.

gas conditioning models at Jordan Cove
The above is a rendering of the Jordan Cove LNG project in Coos Bay, Oregon.

 

 

On December 9th, Veresen announced that it had received notice from the Federal Energy Regulatory Commission, denying the company’s request for a rehearing submitted on April 8, 2016, by Jordan Cove Energy Project, L.P. and Pacific Connector Gas Pipeline, LP. The request was related to their applications for authorization to construct and operate a liquefied natural gas export terminal and natural gas pipeline.

Don Althoff, President and CEO of Veresen, noted,

“Veresen remains committed to this important energy infrastructure project.”

Click here to read Veresen Comments on FERC Decision to Deny Request for Rehearing of the Applications of Jordan Cove LNG and Pacific Connector Gas Pipeline.

Is the timing of the business combination of Pembina Pipelines and Veresen purely coincidental? Or may it have something to do with renewed optimism that a Trump administration may approve such a project?

 

Trump Energy Policy Could End Canada LNG Dream

 

A December article published on Forbes, explains Trump’s likely policy towards natural gas,

“The Obama administration has blocked the construction of natural gas export terminals that would allow American energy companies to deliver natural gas to countries that need it. Expect the Trump administration to reverse course on this short-sighted policy. More natural gas exports will bring environmental and strategic political relief to countries abroad, while simultaneously providing America economic and strategic political benefits.”

 

Energy policy in the U.S.
Trump and Obama: A tale of opposites when it comes to energy policy

 

Following Trump’s election to the highest office, he has already fast-tracked, by way of Executive Order, two pipelines. Will the Jordan Cove LNG export facility be next?

Mr. Stephen Mulherin, Veresen’s Chairman of the Board of Directors, commented,

“Furthermore, we believe combining these two organizations augments our ability to compete for future investment opportunities and execute on a larger, more complex suite of opportunities than each company on a standalone basis.”

Click here to read his entire quote in “Pembina and Veresen to Create Leading North American Energy Infrastructure Company.”

If there is one thing we all know about Trump it’s that he likes ‘winning.’ Followed closely by job creation in the energy sector (US shale oil production is approaching its all-time high). We are predicting the Jordan Cove project to gain approval during Trump’s first term. If this is the case, it will deal a true death blow to Canada’s overseas LNG export dreams.

 

Global and LNG Canada Market

 

The 2016 World LNG Report, produced by the International Gas Union, highlights disturbing trends that further illuminate how behind Canada is:

“Over the last several years, proposed liquefaction capacity has expanded dramatically and totalled 890 MTPA by January 2016. Only some of these projects will come to fruition as market demand expectations are much lower than that volume. Activity has already slowed considerably in 2015 as a result of market oversupply and demand uncertainty in key import markets.”

 

While the above expansion includes emerging regions such as Canada and the US Gulf Coast, it has been Australia and the United States who have been first to break ground. Canada is soon going to find out that what’s left of the LNG export market is relatively minuscule.

According to the IGU World LNG Report:

“Natural gas accounts for roughly a quarter of global energy demand, of which 9.8% is supplied as LNG. Although LNG supply has grown faster than any other supply source – averaging 6% per annum from 2000 to 2014 – its market share growth has stalled since 2010 as growth in domestic production has accelerated.”

 

BC LNG | Becomes Dream that Never Was

 

Whether the Liberal government of BC will rule as a majority or minority, may not matter. For Americans and Canadians outside of BC, the province’s recent election was the closest in decades and a recount is taking place to decide the final results. If the Liberals (centrist party) lose, we won’t even have to read about the LNG dream that never was…

Remember, if the supply exceeding demand projection comes to fruition in 2025, BC’s heel dragging will be a moot point. Also, Australia and the US will have locked up 20-year contracts with Asian countries. Perhaps in 50 to 100 years, when resources are somewhat depleted, Canada may finally get a piece of the pie… in other words, don’t hold your breath.

The holy grail of LNG exporting countries has always been China. While Japan is currently the world’s largest importer of LNG, this will change in the coming 5-10 years.

The IGU World LNG Report confirmed,

“As of January 2016, 15 new terminals were reported to be under construction, 8 of which are located in China, for an increase in total global capacity of 73 MTPA expected online by 2019.”

Note: These are LNG facilities designed to receive exports.

 

Russia, Australia and the U.S. Steal LNG Market Share from Canada

 

In October of last year we published, Destroying Canadian Energy from Within. This Weekly Volume detailed Russia and Australia’s rise to power. We opened that report with this ominous warning,

 

“With the U.S., Russia and Australia having already built natural gas pipelines to LNG terminals ready to transport natural gas around the world, Canada’s race to be first to market is long over… in fact, there may not be much of an export market left for Canada if/when it finally gets prepared to ship LNG abroad…”

 

It appears some writers and investors are just waking up to this reality now. If Canada was only losing the opportunity of new markets that would be one thing. But Canada needed this win, as we explained last year,

 

“Canada’s long-trusted ally and importer of natural gas and oil, the United States, has become the world’s largest energy producer. This is the greatest threat to Canada’s economy in the last 50 years…”

 

With exports to the U.S. drying up, Canada is going to have to break from its dependence on natural resources. Innovation in the technology, manufacturing and engineering sectors will have to make up more of our GDP… but, in typical Canadian fashion, that could take time.

Canada LNG export
source: U.S. Energy Information Administration, based on Canada’s National Energy Board, Canada’s Energy Future 2016: Energy Supply and Demand Projections to 2040

 

Note the dramatic decline in net exports to the United States in the chart above. Canada’s good old days of selling everything to America are over; but, missing out on exporting LNG to China and the rest of Asia makes for some serious salt in the wound.

All the best with your investments,

 

PINNACLEDIGEST.COM

 

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