This winter, China experienced something Canadians have rarely encountered: a shortage of natural gas. At points, the shortage was sufficiently severe that factories in the northern province of Hebei were forced to shut down for days at a time. Domestic prices for natural gas shot up and officials were left scrambling to handle supply gaps.
The immediate shortage was the result of unbridled enthusiasm for the Chinese government’s plan to reduce coal consumption in favour of natural gas—that enthusiasm overstepped existing logistical and supply constraints. China has moved to fix the problem through increased domestic production, and a surge in pipeline and LNG imports. But the shortage highlights China’s ongoing energy challenges, and Canada’s LNG opportunity.
Canada’s LNG Window
China’s natural gas shortage suggests the window of opportunity for Canada to sell natural gas into Asia may not be as closed as some fear. Concerns have been raised as other countries, including the U.S., Qatar and Australia have shifted into high gear in recent years, building new natural gas liquefaction plants to soak up global LNG market share. With Canadian LNG plant proposals stalling in approvals processes, and with high-profile cancellations like the Pacific NorthWest LNG project, some have wondered if Canada’s LNG dreams might simply be over.
“The window of opportunity is certainly there,” counters B.C. LNG Alliance president David Keane. “We see demand outstripping supply in the middle of the next decade.”
Keane explains China’s energy system needs in the next decade are going to be enormous given its economy which continues to grow in excess of six per cent a year, and its focus on meeting that demand using clean energy sources.
“Natural gas is the perfect fuel to build that system,” says Keane, who notes that natural gas produces significantly fewer GHG emissions than coal when burned to generate electricity.
China’s Pivot to Natural Gas
China’s recent winter natural gas shortage was triggered by the Chinese government’s efforts to encourage the country to switch from coal to natural gas for power generation and other industrial processes. As well, millions of homes in the country’s northern provinces are being converted to natural gas for residential heating. It’s part of the government’s long-term plan to limit the smog that has in past years choked cities, while also helping the country reduce its growth in GHG emissions.
The plan is part of China’s 13th Five Year Plan (FYP)—the government’s overarching policy document for the years 2016 to 2020. The energy-related policies within the FYP, as well as the government’s more strategic, long-term policy document Energy Production and Consumption Revolution Strategy (2016-30) envision China continuing its path toward urbanization and industrialization while moving away from coal—historically, the country’s dominant fuel source. Coal comprised 62 percent of China’s energy consumption in 2016 (BP Energy Outlook, 2017). That share, though, is in decline, already down from 74 percent in the mid-2000s.
The Chinese policies are aimed to control greenhouse gas emissions, cut air pollution and deepen environmental protections. The plans are ambitious.
Those policies, the U.S. Energy Information Administration (EIA) notes, would leave China accounting for upwards of a quarter of global natural gas consumption to 2040. The EIA says that Beijing has targeted increasing the proportion of natural gas in its energy mix from 5.9 per cent in 2015 to 10 per cent by 2020 and 15 per cent by 2030.
The combination of a growing proportion of natural gas and an overall increase in total demand for energy means that Chinese natural gas consumption will increase a staggering 222 per cent: from 18.3 billion cubic feet per day (Bcf/d) in 2016 to 58.8 Bcf/d by 2040 (IEA 2017 World Energy Outlook). To put these numbers in perspective, Canada’s total natural gas production in 2016 for both domestic production and exports to the United States (currently our only customer) totaled 15.2 Bcf/d.
And while China does have significant domestic natural gas resources and production, it still has to import around 40 per cent of its total needs, as domestic production can’t keep up with growing demand.
Indeed, Chinese imports of LNG in 2017 increased almost 50 per cent year-over-year compared with 2016. The country is now the world’s second-largest importer of LNG behind Japan. Growing demand in the region has triggered a rise in Asia’s LNG spot prices to their highest levels in three years.
China’s pipeline imports from central Asian suppliers also rose–up 5.9 per cent in the first ten months of 2017. China’s total natural gas imports (LNG plus pipeline) are expected to surpass Japan’s in 2018—making China the number one importer of natural gas in the world.
Over the short term, global LNG export production is expected to keep up with growing demand as new projects come online in Australia, Qatar and the United States. However, by 2024, the demand is expected to begin exceeding supply due to a dearth of new projects coming online at that time (Bloomberg’s Global LNG Outlook 2017).
It’s an opportunity for Canada’s LNG project proponents to make their move, many of whom have already laid the groundwork in terms of planning, design and the obtaining of export licences and approvals, but who would need several years to construct their projects once a final investment decision has been made. Projects that are closer to moving forward pending a final investment decision include LNG Canada (a partnership between Shell, PetroChina, Korea Gas and Mitsubishi) and Kitimat LNG (a partnership between Chevron and Woodside Energy International). Woodfibre LNG is a project near Squamish that plans to begin construction in 2018.
Support for Canadian LNG
According to an international survey, the Global Energy Pulse, Canada is favoured as an international supplier of oil and natural gas. We are seen as being environmentally innovative and sustainable producers, qualities that have gained importance in the post-Paris world.
And, as the world’s fifth largest producer of natural gas with approximately 1,300 trillion cubic feet of reserves, opportunities certainly exist to tap into China’s expanding natural gas import market. West Coast LNG exports would help China meet its energy security and environmental goals, while creating stable, long-term jobs and economic growth for Canadians.
That opportunity was recognized during a meeting in December 2017 between Prime Minister Justin Trudeau and Chinese Premier Li Keqiang. The two leaders agreed to greater cooperation on mitigating climate change and using cleaner forms of energy.
B.C. was ahead of the curve when it signed a memorandum of understanding with China’s National Energy Administration in 2014 to strengthen energy investment, particularly around LNG.
“The continued growth of our economies depends on foresight and partnership,” said then-B.C. premier Christy Clark.
Current premier John Horgan has signaled a similar mindset—he recently went on a 10-day Asian trade mission and met with Asian backers of two proposed LNG projects: LNG Canada and Woodfibre LNG.
“I think we have a real opportunity of perhaps landing one or two LNG facilities here in British Columbia,” Horgan told Stewart Muir, executive director of Resource Works Society, in an interview at a natural resources conference in Prince George. “That is exciting, and we are going to be talking about that in China, Korea and Japan.”
In an auspicious action that Canadian LNG supporters hope to be a moment of foreshadowing, the first LNG shipment from Canada to China departed in November, 2017. It was a pilot project to test the feasibility of cross-Pacific LNG shipments from the B.C. West Coast. The LNG was supplied by FortisBC.
Time for Action
Keane says that some of the world’s largest energy players such as Shell, Chevron, Exxon and others remain interested in Canadian LNG projects.
“We have enough natural gas supply to last 300 years,” Keane said. “We have more than enough natural gas to meet the growing Asian demand.”
The National Energy Board’s 2017 global LNG market assessment says that while Canada is a late entrant into the LNG game, it has the resources to play and could exploit abundant and relatively low-cost natural gas supplies. Other advantages include a shorter, more direct Asian transport route from the West Coast than exists for U.S. Gulf Coast suppliers, one that also avoids the logistics and expense of sending shipments through the Panama Canal.
Challenges facing Canadian projects include initial high costs to develop projects in remote locations with limited infrastructure, including pipelines needed to supply the necessary gas. With LNG at relatively low prices in recent years, the margins for such capital-intensive development projects have eroded. Increased competition internationally and concern over lengthy and uncertain regulatory review timelines has also made it difficult for Canadian projects to sign long-term supply contracts and attract investment dollars.
But, says Keane, the industry is still ready to go. The key, he notes, is the need to be globally competitive. Predictable review timelines and a competitive fiscal framework are essential in this environment. It’s a message he’s emphasized with government and Canadians.
“We’re serious about getting this done,” says Keane.
Meanwhile, Natural Resources Canada spokesperson Tania Carreira Pereira notes that there are more than 20 proposed LNG projects currently being advanced in Canada, many with Chinese investors.
“Canada welcomes Chinese investment in its LNG industry,” Pereira said. “Ongoing partnerships in projects such as LNG Canada, Woodfibre LNG and Steelhead LNG will ensure a long and prosperous LNG trading partnership between our two countries.”