LNG exports from Canada a distant prospect, analyst says

The ship has already sailed in the global race to export liquefied natural gas to Asia, according to U.S. energy economist Kenneth Medlock and Canada has missed it.

Medlock was a keynote speaker at the Canadian Energy Research Institute'sannual conference on natural gas. This year the conference was called LNG: Canada's Last Window of Opportunity.

That title reflects the simmering anxiety among natural gas producers in Western Canada that the opportunity to sell their natural gas to Asia is slipping away

The anxiety is well-founded, according to Medlock.

LNG Asian exports a distant prospect

"We don't see any LNG exports from Canada until almost 2040," he saidin an interview.

Medlockexpects almost all new LNG supply to come from the United States or Australia.

The largest issue is cost.Canadian projects are greenfield, meaning theyare being built from scratch.

In the U.S., multiple projects are conversions of existing LNG import terminalsthat already have ports built and pipelines attached. They simply need to be converted so they can export instead of import.

"The fixed cost to get them finished is relatively low," said Medlock. "That serves a distinct advantage."

Medlock expects four of those terminals, including Maryland's Diamond Cove, pictured above, to come online soon, as well as several Australian projects.

"Thats going to cause a lot of softness in the market and cause a lot of developers to put the brakes on things.

"That's the capacity thats coming its already steel on the ground, so its happening and the market is just not going to be substantial enough to absorb it all in a very short period of time. It's a classic boom-bust cycle."

Once that capacity comes online, Medlock expects, Asian LNG prices will drop to the point where Canadian facilities are no longer viable.

Because international prices for LNG are linked to the price of oil, they have come down considerablysince August. The Japanese benchmark was trading close to $15 US per million British thermal units (MBTUs) to under $7 US. That's not enough to make shipping LNG from North America profitable for anyone right now.

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2 projects viable in short term

Peter Howard,president emeritusofthe Canadian Energy Research Institute,saidhe's done the same math as Medlockbut come to a different conclusion,aslong as oil prices recover to $70 US per barrel.

"We took into account theQatarigas and all the Australianprojects that are under construction orcompleted construction," said Howard.

"We added into thatthe Gulf of Mexico and that left room in2020-23for two additionalprojects, which we think are the West Coast projects."

Howard saidthat also assumesthat Japan would bring most of its nuclear power industry back online soon, something that he said seems increasingly unlikely. Most of Japan's nuclear plants havebeen disabled since the Fukushima reactor meltdown in 2011. If they remain out of commission, Japan will depend more on fossil fuels such as natural gas.

Setbacks in B.C.

According to the B.C. government, there are 19 proposed LNG projects. Many have been granted exportlicences, but none have made thefinal investment decision.

That comes from the board of directors of each company, a decision to spend tens of billions of dollars on a project. It's not an easy decision to make, especially with oil prices on the skids.

Malaysia'sPetronas has delayed its final investment decision on its $36-billion project. Chevron has slowed spending on its project inKitimat. Shell is hoping to have a decision this summer on its $40-billion Kitimat project.

In mid-February, the federal government helped things along, by announcinga tax break for the proposed LNG facilities, allowing them to write down theirmultibillion-dollar investments more quickly. That was a key piece of the investment puzzle.

Oil prices need to recover

The other piece of the puzzle is the price of oil, which is expected to start recovering later this year, according to Judith Dwarkin, chief energy economist at ITG Investment Research in Calgary.

Dwarkinagreedwith Medlock's general argument that Canadian projects faceheadwinds, particularly around how much they cost. But she said the projects shouldn't be counted out.

"I would hesitate dismissing completely the possibility of any Canadian LNG plying the waves in the next 25 years," said Dwarkin.

"There are price scenarios and tolling agreements that conceivably could make sense. And Asian buyers supposedly value diversity of supply, a box Canadian LNG checks off."