Risky Business: The Issue of Timing, Entry and Performance in the Asia-Pacific LNG Market

Abstract

Canada's federal government has championed the prospect of exporting liquefied natural gas (LNG) to overseas markets. The government of British Columbia is aggressively planning to turn itself into a global LNG-export hub, and the prospect for Canadian LNG exports is positive. However, there are market and political uncertainties that must be overcome in a relatively short period of time if Canada is to become a natural gas exporter to a country other than the United States. This report assesses the feasibility of Canadian exports and examines the policy challenges involved in making the opportunity a reality. Demand for natural gas in the Asia-Pacific region is forecast to grow over 60 per cent by 2025. LNG trade is expected to make up nearly two-thirds of global natural gas trade by 2035. Supply in the Asia-Pacific region is limited, requiring significant LNG imports with corresponding infrastructure investment. This results in substantial price differentials between North America and the Asia-Pacific countries, creating a potentially lucrative opportunity for Canada. The lower North American prices are a reflection of the fact that there is a surplus of gas on this continent. Canada's shipments to its sole export market, the United States, are shrinking in the face of vast increases in American production of shale and tight gas. Canada has a surplus of natural gas and there is growing demand in the Asia-Pacific region. Proponents argue that all Canada needs to do is build and supply facilities to liquefy gas and ship it across the Pacific; the reality is not so simple. Timing is one of the key challenges Canada faces. Producers around the world — including in the newly gas-rich U.S. — are racing to lock up market-share in the Asia-Pacific region, in many cases much more aggressively than Canada. While this market is robust and growing, the nature of the contracts for delivery will favour actors that are earliest in the queue; margins for those arriving late will be slimmer and less certain over time. As supply grows, so too does the likelihood of falling gas prices in the Asia-Pacific region, making later projects less lucrative. LNG projects are feasible only on the basis of long-term contracts; once a piece of market share is acquired, it could be decades before it becomes available again. Currently, there are more proposed LNG-export projects around the world than will be required to meet projected demand for the foreseeable future. Delays beyond 2024 risk complete competitive loss of market entry for Canadian companies. B.C. is behind schedule on the government's goal of having a single terminal operational by 2015. Of equal concern is the lack of policy and regulatory co-ordination, with disagreements between governments over standards, process and compensation for those stakeholders involved in the potential LNG industry. Issues as basic as taxing and royalty charges for gas shipments between provinces and locating facilities and marine-safety standards remain unsettled in Canada. The B.C. government has announced plans to levy special taxes on LNG, a policy that could render many current proposals uncompetitive. The LNG market is much more complicated than current discussions suggest; this report delves into every aspect relevant for Canada as a potential exporter. The prospect for Canada expanding into the Asia-Pacific market is entirely viable. Canada has almost everything going for it: political stability, free-market principles, immense resources, extensive infrastructure and industry experience. Everything, that is, except a co-ordinated regulatory and policy regime. Without that, Canada could be shut out, stuck relying on a single U.S. gas-export market that, increasingly, does not need us.