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In race to tap LNG markets, Canada lags behind

A new report from Capital Economics on the global future of liquefied natural gas (LNG) contains a sobering message for Canada: We're behind the curve. And it might end up costing us.

The report, released by the London-based economic research group Tuesday, projects that the world's LNG exports are set to surge in the next few years, nearly doubling by 2020. This will be led by the boom in LNG facilities being developed in Australia, where capacity is set to quadruple in the next five years to become the world's biggest LNG producer, as well as ambitious expansion plans in Russia and the United States.

And where will Canada be by 2020? An afterthought, the report's author believes.

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"[In Canada and East Africa] the proposed projects face infrastructure challenges," Caroline Bain wrote. "As a result, we do not envisage supplies coming to market from many of these producers much before 2020, if at all in some cases."

Whereas proposed U.S. LNG projects will take advantage of existing infrastructure – pipeline networks, port facilities, even existing terminals for LNG imports that can be reconfigured for exporting – Canada's plans on the West Coast are starting more or less from scratch. Not only do plants have to be built, but ports have to be expanded and terminals need to be developed. The proposed pipelines that would deliver natural gas to these facilities haven't even been approved yet; completion would be years away. And there is a multitude of government, environmental and First Nations land-claims obstacles littering the industry's path.

When Canada finally makes its late arrival to the LNG party, the room could look uncomfortably crowded, the mood less festive and the cost of entry considerably more expensive. LNG is a pretty specialized industry; there is only so much technical expertise, materials and equipment to go around. In Australia, where LNG development is much further down the road (seven facilities are under construction), the industry is butting hard against finite supplies of equipment, materials and specialized labour; cost overruns are swelling into tens of billions of dollars. While costs are going up, the payoff is destined for the other direction; as more LNG supply comes available, the sky-high prices for LNG in the coveted Asian markets will turn downward. Prospective late entrants in Australia, looking at higher costs and Asian customers who are agitating for cheaper supply deals, are shelving their plans.

Canadian West Coast developers will probably already be looking at a lower Asian LNG pricing horizon as they ready to enter the market. At the same time, they'll be competing with more advanced projects in the United States for key materials and technical know-how, not to mention competing at home for skilled labour with anticipated further oil sands expansion and the related pipelines.

By opening North American gas supplies to overseas markets, LNG will inevitably push natural gas prices in North America higher. With healthier prices closer to home, the impetus for developing massively expensive LNG projects will fade.

All good reasons why Canada's West Coast LNG industry could end up considerably smaller than current ambitions suggest. This looks destined to turn into a high-stakes race; those who develop their projects first have a chance, but after that, many proposals might find themselves priced out of the market. LNG may indeed be the key to unlocking value in the North American natural gas market, but Canada may find itself arriving too late to fully enjoy the benefits.

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About the Author
Economics Reporter

David Parkinson has been covering business and financial markets since 1990, and has been with The Globe and Mail since 2000. A Calgary native, he received a Southam Fellowship from the University of Toronto in 1999-2000, studying international political economics. More

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