Insights

Canada prepares to profit from LNG supply advantages

| By Tom Young

Rising demand from countries in Asia for LNG represents a significant opportunity for Canadian export projects with lower shipping costs and potentially lower emissions relative to US exporters.

Although the global LNG market is currently balanced, new Asian importers and accelerated coal-to-gas switching in China are expected to create more demand in the second half of the decade.

Projects on the west coast of Canada benefit from shipping routes to Asian markets that are about 50% shorter than projects on the US Gulf Coast, and are also able to avoid Panama Canal fees.

Shipping costs from west coast Canada to Japan at US$1-$1.09/MMbtu. Costs from the Gulf of Mexico to Japan are estimated at US$2.40-$2.45/MMbtu, according to the Canadian Energy Centre. The AECO-C price discount to the Henry Hub — which averaged US$1.43/MMbtu in 2023 — could also offer a competitive advantage to Canadian export projects.

The Japan Korean Marker (JKM) — the Platts assessment of delivered spot LNG prices to Northeast Asia — averaged US$14/MMbtu last year. Canadian projects could have a significant advantage over US Gulf Coast projects at this price level.

And the lower the JKM price, the more competitive Canadian LNG becomes. Buying interest from Asian emerging markets tends to emerge at under US$10/MMbtu, according to analysts, a price point LNG exporters from US Gulf coast projects may struggle to deliver at.

Canadian Project Updates

As a result of these factors, a number of projects on the west coast of Canada are already underway.

Source: Birchcliff Energy Presentation, March 2024. Available via Evaluate Energy Documents.

LNG Canada is Canada’s largest, and most advanced, project, with the first phase of the facility in Kitimat nearing completion. Equipment will be tested over the course of this year and commercial operations are set to begin by the middle of 2025, with capacity eventually reaching 14 million tons per annum (mtpa).

Construction has begun on the 2.1 mtpa Woodfibre LNG terminal near Squamish. The project has contracted 1.95 mtpa of offtake from the terminal, following a deal with BP in September last year. The project is expected to start up production in 2027.

The 3 mtpa Cedar LNG project is also preparing to begin construction, and is due to take FID in the next few months, with an anticipated start-up date in late 2028.

Overview of Cedar LNG in Canada. Source: Cedar LNG

Source: Cedar LNG Website, May 2024

The project recently signed a 20-year take-or-pay fixed toll contract with ARC Resources for 1.5 mtpa of the project’s capacity. ARC will also be supplying gas to Shell for LNG Canada.

ARC Resources long term gas supply agreements as of May 2024

Source: ARC Resources, Investor Presentation, May 2024. Available via Evaluate Energy Documents.

The 12 mtpa Ksi Lisims LNG project also recently signed its first sale and purchase agreement with Shell. The project has not taken FID, but filed an application with the provincial government for an environmental certificate in October last year.

Tilbury LNG — an existing facility — is also proposing to increase LNG production capacity by 2.5 mtpa.

Low emissions LNG

The business case for these projects, as well as further approvals, has been furthered in recent months by an additional factor — the low production emissions of Canadian LNG.

The pause on US exports put in place by the Biden administration earlier this year while the Department of Energy (DoE) re-assesses their CO₂ impact shows that this is becoming an increasing focus for the industry.

A study by Robert Howarth and other researchers at Cornell University — which has been published in an initial version but is still under peer review — suggests that US LNG used for coal-to-gas switching in Asian countries may create more emissions than if those countries burned coal domestically, once upstream and midstream emissions associated with shale gas production are taken into account.

If verified, the study would undermine the case for US projects in the context of the broader energy transition.

The study did not evaluate Canadian LNG projects, but most have well-documented advantages over their US counterparts in this regard.

Unlike US projects, Canadian projects can use clean hydro to power liquefaction processes. LNG Canada says its Kitimat operation will have 35% fewer greenhouse gas (GHG) emissions than the best performing facility anywhere in the world, and the operators of Cedar LNG say it will outperform even LNG Canada on this metric when it becomes operational.

Cooler temperatures in Canada also mean less energy is required to liquify LNG than for US projects, reducing liquefaction costs. LNG Canada can liquify gas for CAD$1/ton of LNG, compared to an average of CAD$1.35/ton of LNG for US Gulf Coast Projects, according to a study by the Institute for Energy Economics and Financial Analysis (IEEFA).

Although Canadian projects also use gas from shale fields, those that ship gas produced in Canada are likely to have lower upstream emissions than US projects, due to Canada’s methane regulations.

Upstream methane emissions currently account for the biggest share of the well-to-tank emissions intensity of gas production, according to the IEA.

The average methane intensity of US oil and gas production (0.2 kg methane / GJ) was twice that of Canada (0.1 kg methane / GJ) in 2023, according to the recently published IEA Global Methane Tracker.

Last year both the US and Canada issued new rules on methane emissions. Canada has set a target to reduce methane emissions in the oil and gas sector by at least 75% below 2012 levels by 2030. The US has a target that will reduce emissions by 80% against business-as-usual levels by 2030.

CCS

Canada is also planning more widespread use of carbon capture and storage (CCS) technology to cut the emissions of oil and gas production.

The nation has five oil and gas CCS projects operational already, and a consortium of the six largest producers called the ‘Pathways Alliance’ is proposing a carbon capture and storage (CCS) project in Alberta that could reduce net CO₂ emissions from oil sands operations by approximately 10-12 mtpa by 2030, with an FID due next year.

Although this would primarily cut the emissions of oil production, rather than natural gas production, the development of a central storage site near Cold Lake, Alberta, could be the catalyst for further CCS projects to reduce emissions in upstream natural gas.

“Deploying CCS to lower the carbon intensity of oil and gas production could further improve the competitiveness of Canadian LNG in the energy transition,” said Bruce Hancock, director of geoLOGIC’s Technical Advisory Group.

Given the advantages of Canadian LNG, pressure to develop export capacity is growing in the nation’s political sphere, with the opposition Conservative Party calling for more project approvals.

Opposition leader Pierre Poilievre has vowed to overhaul the C-69 act that governs the review and approval process for major infrastructure projects, including LNG projects.

Canada is due to hold its federal election next year, with opinion polls placing the Conservatives ahead of the incumbent Liberals.

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