Canada’s natural gas producers may be about to take a long-range view of accessing LNG markets in response to a prediction by Moody’s Investor Service that global LNG supply will far exceed demand until well into the next decade.
Cheniere Energy, owner of the Sabine Pass LNG terminal in Louisiana, opened the door to that prospect when chief commercial officer Anatol Feygin told analysts at the end of February that his company is looking for supplies as far afield as the giant Montney shale gas play that straddles the northern British Columbia-Alberta border.
He said Cheniere has already entered a supply deal for Montney gas - the first Canadian gas to be exported as LNG if the agreement is set in motion - underscoring the sense of urgency among Canadian producers to find a way to compete with U.S. shale producers.
Madeline Jowdy, senior director of global gas and LNG at Pira Energy Group in New York, told Bloomberg there is “great potential” for Canada to take advantage of U.S. Gulf Coast export outlets.
She said the LNG projects planned for the British Columbia coast now “look like they are going to be a long time coming, if ever.”
Desperation for new markets
The desperation among Canadian producers to access new markets is reflected in the fall off in exports to Lower 48 buyers, which the U.S. Energy Information Administration said dropped by 39 percent to 7.38 billion cubic feet per day last year from its peak in 2007.
Moody’s compounded the dismal outlook with a February report that a wave of fresh LNG supply capacity is due to come online at a time when demand from the world’s largest importers is weakening.
The firm said strong LNG demand growth from China, India and new markets will not be enough to absorb the growing capacity as demand slides in the leading import countries, Japan and South Korea.
Japan’s consumption to fall
Japan, which consumers more than one-third of global LNG, will fall to 80 million metric tons per annum by 2020, down 9 percent from the 2014 record year, as nuclear power production slowly restarts.
Tomas O’Loughlin, a senior vice-president at Moody’s, said that as the LNG market rebalances investment returns for Australia’s well-advanced projects will be weak and U.S. LNG offtakers “will struggle to recover all of their liquefaction costs.”
Moody’s said global oversupply could reach 55 million metric tons per annum in 2019, forcing U.S.LNG exports to divert their sales efforts to Europe.
The prediction further undercuts Canada’s hopes of becoming an LNG player as it pays the price for lagging behind regulatory approvals for new projects in Australia, the U.S. and elsewhere.
A missed opportunity?
Mihoko Manabe, a Moody’s analyst, reinforced what others have repeatedly warned - that Canada may have missed its opportunity by getting bogged down in political squabbles and opposition from environmentalists and aboriginal communities at a time when companies were open to making major investments in gas exploration and production, pipelines and construction of LNG terminals and liquefaction facilities.
“In the last few years, I think the tide has turned (against the industry) ... and a lot of beyond the cyclical ups and downs of commodity prices,” she told the Financial Post.
Manabe said she doubted demand for large-scale LNG facilities will return to former levels, even after markets rebalance, although investors are likely to be attracted to smaller, more incremental projects that have signed contracts with buyers.
“It’s a lot more economic to expand an existing plant,” she said.
Manabe also said that floating storage gasification units, which offer cheaper, more versatile supplies of LNG, are allowing the market to diversify into untapped markets, such as the Middle East.
Jihad Traya, an analyst with Solomon Associates in Calgary, said the improving economics of renewable energy sources are also posing a challenge to LNG in “ways that weren’t necessarily conceived of or understood before.”
