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Home > Speeches and Presentations > Speeches and Presentations 2009 > Liquefied Natural Gas "A Canadian Perspective"

Liquefied Natural Gas "A Canadian Perspective"

Presented by
Georgette Habib
Member
National Energy Board

CERI 2009 Natural Gas Conference
Calgary, Alberta

24 February 2008

Liquefied Natural Gas "A Canadian Perspective"

Good morning.

Thank you very much Frank for this kind introduction. I wish to thank CERI and Carmen for the invitation to participate in this conference to speak about Liquefied Natural Gas from a Canadian perspective. It gives me a great pleasure to be here representing the NEB a public institution that is celebrating its 50th anniversary this year

The timing of this discussion is an opportune one for us as it coincides with the scheduled release date for our latest Energy Market Assessment, which just happens to be about LNG and where it's at in terms of Canadian development. The timing is also fitting, with Canada's first LNG import and regasification terminal (Canaport LNG in Saint John, New Brunswick) scheduled to come into service very shortly.

Before I get into more specifics on LNG, I thought that I would first give a bit of background on the National Energy Board.

The NEB's role pursuant to the National Energy Board Act

The NEB is an independent federal agency that regulates aspects of the energy industry under its jurisdiction.

The Board's corporate purpose is to promote safety and security, environmental responsibility, and efficiency of energy infrastructure and markets in the Canadian public interest within the mandate set by Parliament in the regulation of pipelines, energy development and trade.

The Board's main responsibilities include regulating the construction and operation of interprovincial and international oil and gas pipelines. Furthermore, the Board regulates the tolls and tariffs for the pipelines under its jurisdiction. With respect to the specific energy commodities, the Board regulates the export of natural gas, oil, natural gas liquids and electricity and the import of natural gas. Additionally, the Board regulates oil and gas exploration and development on frontier and offshore areas not covered by provincial or federal management agreements

Relevant to our discussion on LNG, I would like to point out that the NEB regulates the import and export of natural gas into and out of Canada. This includes the importation of LNG, subsequent export of any regasified LNG, and the potential export of LNG.

In addition, related specifically to the Canaport LNG facility (Canada's only facility to-date), the NEB regulates the Brunswick Pipeline which delivers the output from the Canaport facility to potential markets via the Maritimes & Northeast Pipeline.

The NEB also has a monitoring function, where we provide advice and information on the outlook of energy supply and demand in Canada - this is where our latest report on LNG fits into the picture. Given that Canada is a relative new comer in the global LNG trade, some Canadian natural gas consumers had sought an analysis from the NEB that would help them better understand the global natural gas and LNG market dynamics and how the Canadian natural gas market may change as a result of LNG.

Scope of the LNG Report

Back in 2007, in the Board's Canada's Energy Future: Reference Case and Scenarios to 2030, the Board said that LNG may play an important role in the future energy supply available to Canadians. Market and commodities pricing situation now and at least over the short term seem quite different from then. The current prospects for LNG are quite different from what was anticipated only a couple of years ago when North American natural gas prices were high relative to the rest of the world and LNG was viewed as a critical incremental source of fuel to other parts of North America, including Canada. Today, the demand outlook for LNG has been reduced as a result of slower economic growth, volatile energy prices, and the potential for development of other supply options such as pipeline gas imports to Europe and increasing unconventional gas production in North America.

Given that Canada is a relative newcomer in the global LNG market, this Energy Market Assessment provides an overview of global LNG supply, demand, and trade. How LNG has historically developed and how LNG may potentially affect Canadian markets and infrastructure in the coming years.

The scope of the EMA included the following:

a review of LNG development and trade around the world;
a perspective on how Canada and North America fits into the global market; and from that
a perspective on potential LNG development and possible implications in Canada.

Key Observations from the Report

The key observations are:

Despite the current economic uncertainty, the world requirement for energy and natural gas is projected to grow in the long-term. To meet this demand, consuming regions continue to pursue options to increase gas supply which has stimulated the growth in LNG projects worldwide. The importation of LNG enables the use of significant natural gas resources around the world to supplement domestic production and helps to ensure that reliable and secure energy supplies are available to meet requirements in consuming regions. In the longer term, economic recovery and environmental initiatives may also increase the demand for natural gas and LNG.

North America has historically required LNG imports to supplement its indigenous natural gas production, and LNG imports are likely to continue - particularly in parts of the continent where gas production or pipeline infrastructure are more limited. Recent projections by the EIA (U.S. Energy Information Administration) suggest that LNG may provide over 5 per cent of North American natural gas requirements by 2015^[1].

[1] International projections on gas production and consumption are based on the EIA International Energy Outlook (September 2008), with adjustments to U.S. projections based on the more recent EIA Annual Energy Outlook 2009 (early release - Dec. 2008]

In general, North America operates as a swing market for global LNG and utilizes its significant capacity for underground natural gas storage to import LNG during periods when natural gas demand is lower in other global markets. In the future, the extent to which LNG will be imported into Canada and North America will likely continue to be determined largely by market conditions and the stakeholders involved, including their respective contractual arrangements and the requirement for LNG in other global regions.

In general, from a transportation perspective, Canadian LNG projects are located competitively with other North American and global terminals.

World Natural Gas Production and Consumption (2007)

This chart illustrates the major consuming regions of natural gas. It also shows the major producing regions.

East-Asia, Europe and North America consumed in 2007 about 55 Tcf of gas which is over 50% of total world production.
Newer LNG markets are also beginning to develop (e.g. South America, other countries of Asia and Europe).
In terms of future potential, Russia & FSU and the Middle East hold the vast majority (70%) of natural gas reserves estimated at 6300 Tcf. They are expected to be the key growth areas for natural gas and LNG production

North American Natural Gas Consumption & LNG Imports

Until very recently, North American natural gas production was struggling to offset declines, and there was a push for LNG import and regasification capacity to meet the expected demand growth.

Recent U.S. production growth from the Barnett Shale in Texas has created optimism that other shale resources in U.S. and Canada can be developed.

Current projections by the EIA still suggest that the gap between natural gas consumption and production will grow and by 2015, LNG may account for over 5% of North America's natural gas requirement.

In the shorter-term there is more uncertainty as growing US production and lower natural gas demand resulting from a slower economy has reduced some of the immediate requirement for LNG.

World LNG Liquefaction & Regasification Capacity

Looking at current and projected capacity for LNG liquefaction and regasification around the world, the report notes that:

Regasification capacity is being added at a much faster rate than liquefaction (or LNG production). By 2015 regasification capacity will almost double what exists today. Most of the new regasification capacity is being added in the Atlantic Basin (North America and Europe).
In general, having more regasification capacity serving multiple markets allow LNG suppliers to utilize their more expensive liquefaction facilities at a higher level, and maximize returns by serving those markets which provide the best netback.
The majority of new LNG production being added is in the Middle East. World liquefaction however, takes much longer to develop and is expected to increase by about 5 bcf/d during the same period. Relatively little is being added in the Atlantic Basin which would serve eastern North America. The new LNG supply in the Middle East is suitably located to serve markets in both the Atlantic and Asia-Pacific Basin.
The large amount of regasification will maintain a competitive market for LNG. It will allow for short term LNG trade and greater market liquidity.

North American LNG Imports & Atlantic Basin Competition

Given the relatively small size of North American imports and significant differences in pricing between North America and other markets, globalization and convergence of world LNG prices is not expected anytime soon. LNG pricing in the other major global markets is more closely linked to the price of crude oil or oil products, while the natural gas price in North America is determined by price competition amongst the various sources of gas supply. The differences in pricing provide trading opportunities between regions and will affect the flow of LNG. A significant capacity for underground natural gas storage also enables North America to import LNG during periods (summer) when demand and prices are lower in other markets and allows North America to acts as a swing market for global LNG.

Using the National Balancing Point (U.K.) to represent European prices and the Henry Hub for North America, this chart shows how North American LNG imports can be influenced by global markets. The influence was particularly evident during the summer of 2007 when mild weather and low demand resulted in low LNG prices in Europe, while gas demand and prices were high in North America. Consequently, North American LNG imports reached record high levels. In 2008, LNG demand and prices in Asia and Europe were higher than in North America, which reduced the amount of LNG directed to North America as suppliers could obtain better returns by serving those markets.

Illustrative LNG Transportation Costs - Atlantic

LNG regasification terminals in eastern Canada are located competitively with other terminals in North America.

Transportation costs are lower to Eastern Canada from most major supply sources than to other terminals in North America.
Eastern Canadian terminals may also serve markets in the northeast U.S. In particular, the New England region relies on LNG for a significant part (25%) of its gas supply. They could also serve markets in Eastern Canada. Prices in the New England region and eastern Canada are historically higher than other markets in North America.

Illustrative LNG Transportation Costs: Asia-Pacific

LNG import and regasification terminals on Canada's west coast are located competitively with other terminals in North America.

Transportation costs are lower to Canada's west coast from most major supply sources than to other terminals in North America or western Mexico.
But still prices in North America will have to be high to justify the higher transportation costs. LNG supply in the Asian Pacific basin is much closer to large LNG markets in East-Asia.
Western Canadian terminals would likely be an alternate or swing market, but also face other challenges to connect with major markets.

Regarding the potential export of LNG from western Canada:

Could benefit from having a relatively short distance and low shipping cost to markets in East-Asia and to the west coast of the US and Mexico.
Higher priced Asian market may appeal to western producers.
The full extent of shale development in Canada is still uncertain.

Conclusions and Observations

The large amount of new regasification capacity being added in North America, Europe and East-Asia is likely to maintain a competitive market for global LNG supply.

However, the amount of LNG required in each region is uncertain, given the potential for greater development of other supply options such as natural gas pipeline imports to Europe and unconventional gas production in North America.

Recent volatile energy prices and financial markets may have profound consequences for future LNG development and financing. Greater financial obligations on proponents could limit the participation of newer, less established developers who have been instrumental in a number of recent LNG projects in North America.

The North American market will continue to operate as a swing market for global LNG utilizing its significant capacity for underground natural gas storage in order to import LNG during periods when natural gas demand is lower in other major markets.

Although greater international trade of LNG may increase the availability of supply to North America, full globalization and price convergence in the LNG market by 2015 is not expected.

From a transportation cost perspective, Canadian LNG projects are well located and should be competitive with other North American Projects.