ARCHIVED - Liquefied Natural Gas - A Canadian Perspective - Questions and Answers

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What is the purpose of this report and how is it relevant to Canadians?

The first Canadian liquefied natural gas (LNG) import terminal (Canaport LNG in Saint John, New Brunswick) is expected to become operational in the first part of 2009. Given that Canada is a relative newcomer in the global LNG market[1], this Energy Market Assessment provides an overview of global LNG supply and demand, trade, and a high-level perspective on LNG development and the potential effects that imported LNG may have on Canadian gas markets and energy infrastructure.

[1] Although a number of facilities have existed for many years in Quebec, Ontario, and British Columbia which liquefies pipeline natural gas, and stores the LNG for later regasification and use during peak demand periods.

What is LNG?

When natural gas is cooled to a temperature of approximately -160oC (-260oF) at atmospheric pressure, it condenses into a liquid and is reduced to about 1/600th of its volume. This allows large quantities of natural gas to be stored and transported in a more efficient and economic manner. LNG has been used as a safe, convenient and effective means to store and transport natural gas around the world for many decades.

At the receiving facilities LNG is transferred back into its gaseous state. Once regasified, LNG is natural gas and is handled the same as for any conventional natural gas. This may include any processing that may be required in order to achieve the gas quality standards of the regional pipelines and markets.

Why is LNG needed?

Global LNG trade enables the development and movement of significant natural gas resources around the world to supplement domestic production in consuming regions. Despite current economic uncertainty, the world requirement for energy and natural gas is projected to grow over the long-term. To meet this increasing demand, consuming regions (such as North America) continue to pursue options to increase and diversify sources of gas supply.

The ability to import LNG is an important option which helps to ensure that reliable and secure energy supplies are available to meet requirements. The growing requirement for natural gas and competition for LNG in international markets has stimulated growth in LNG projects worldwide.

Worldwide natural gas consumption has increased by over 40 per cent since 1990 and in 2007, LNG accounted for about 7.4 per cent of the global natural gas requirement. For comparison, LNG imports provided about three per cent of North America's natural gas requirement. Despite being the world's largest producer of natural gas, North America has historically required LNG imports to supplement its indigenous production. Canada's natural gas production and consumption in 2007 was about 175 109m³ (17 Bcf/d) and 77 109m³ (8 Bcf/d), respectively.

How does the current economic situation impact LNG trade?

The global LNG market continues to evolve with current prospects for the LNG market quite different than 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. In 2009, the demand outlook for LNG has been significantly reduced as a result of weak financial and credit markets, 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.

Despite the current economic uncertainty, the world requirement for energy and natural gas is projected to grow in the long-term. Economic recovery and environmental initiatives may result in significant demand for natural gas and LNG. The extent to which North America pursues the various alternate energy sources to natural gas will greatly influence the overall need for LNG.

What is the outlook for LNG imports to North America?

The extent to which North American LNG facilities are used and whether long-term supply is available will be largely determined by competitive factors such as market conditions, the stakeholders involved, including their respective contractual arrangements for supply and markets, and the requirement for LNG in other global regions.

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 may be quite variable and may be influenced by development of other supply options such as natural gas pipeline imports to Europe and unconventional gas production in North America.

LNG pricing in other global markets are more closely indexed to the price of crude oil or oil products, while natural gas prices in North America are more likely to be determined by price competition between various sources of natural gas. The differences in pricing provide trading opportunities between regions and will consequently affect the flow of LNG. A significant capacity for underground natural gas storage may also be utilized to import LNG to North America during periods when natural gas demand is lower in other major markets.

What is the outlook for Canadian LNG imports?

The number of LNG projects to be developed in Canada is not certain. LNG development in Canada and North America is largely dependent on the outlook for continental natural gas supply and demand. Current economic decline combined with recent increases in U.S. natural gas production from shale and other unconventional gas resources have reduced the near-term requirement for LNG imports. The potential size and extent of shale gas resources could significantly displace long-term North American and global LNG requirements.

In general, proposed and existing Canadian LNG projects are located competitively with other North American and global terminals. Eastern Canadian import terminal projects are suitably located to serve the important New England market where LNG has historically provided up to 25 per cent of the total natural gas requirement. LNG import terminals on Canada's west coast are not anticipated in the near-term due to preference by suppliers to meet Asian demand.

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