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Competing in the global LNG market: Part One

Hydrocarbon Engineering,

A recent report by EY suggests that investment in Canada’s LNG industry will depend on whether LNG projects are competitive globally. Plentiful natural gas reserves alone will not support development. Understanding where Canada stands requires zeroing in on the factors that determine competitiveness. These include considerations such as:

  • Understanding the state of global competition and how other projects will impact the supply, demand and pricing balances.
  • Creating a framework where the various First Nations communities will support projects.
  • Addressing complex capital allocation decisions by global players, many of whom have multiple opportunities and are focused today on ensuring adequate project returns.
  • Building fiscal policy that is fair to multiple different constituents and ensuring that such fiscal policy will remain consistent over the life of the projects.
  • Developing world class competencies around people, processes and costs.

Global competition

Global powerhouses such as Australia and Qatar remain dominant threats to Canada’s LNG potential, though many face political and geographic challenges. EY highlights that emerging supply markets such as East Africa and Russia could also become competitive threats if their projects get off the ground. Meanwhile, the US continues to increase its focus on the sector. Seven projects have already received approval in the US and the Cheniere Energy Inc. project is scheduled to produce its first cargo by late 2015.

Many argue that Canada has a transportation cost advantage based on shipping distance. The West Coast provides a direct route to Asian markets that is shorter than the US and on par with Australia shipping times. To access Asia US cargoes will have to travel through the Panama Canal. While this will cut shipping times significantly, there is still much uncertainty in regards to tolls.

EY explains that LNG production faces competition from other countries but also from other energy resources. Coal and nuclear power production is on the rise in many countries.

Canada’s advantages

  • Regulatory and market support for exports.
  • Projects led by global players (operators, customers).
  • Cost advantages versus competing projects (all-in transportation, operating costs).
  • Participants hold equity interests in gas.
  • Stable legal and fiscal business environment.
  • Skilled labour market in Western Canada.

Canada’s disadvantages:

  • Infrastructure required (facilities, pipelines, production and civil).
  • Cost pressures (project construction, people shortages).
  • Global competition.
  • Evolving pricing arrangements (oil price de-linking).
  • Complex First Nation dynamics.
  • Continuing uncertainty regarding applicable fiscal regimes.

Adapted from a report by Emma McAleavey.

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