In Economics 101, you learn the difference between being a price setter and a price taker. For decades, the Canadian natural gas sector has been the textbook definition of the latter.

Despite being the world’s fourth-largest producer of natural gas, we lacked meaningful access to global markets. Without this access, our customer base was essentially limited to domestic users and the United States. This dynamic has often led to a steep discount on prices relative to international benchmarks and U.S. prices over and above differences due to transportation costs. Compounding the problem, Canadian producers have added both material gas production and reserves in advance of the LNG Canada start-up, which has led to a material local gas storage inventory build.

However, with liquified natural gas (LNG) exports growing, with one project operational and four other export facilities in the works (in addition to LNG Canada Phase 2), this dynamic may be shifting.

How did we get here?

The Canadian natural gas sector has some structural weaknesses. As mentioned, without access to global markets, the only external customer was the U.S. When U.S. shale production surged at the end of August, it displaced a large amount of Canadian gas and pushed down the realized price of our exports.  

Domestic constraints have made the discount larger. Alberta and British Columbia account for 60% and 39% of the nation’s natural gas output, respectively. Despite this lion’s share, Western Canada’s pipeline system has experienced recurring congestion, especially during maintenance periods and shoulder seasons. When gas can’t move out of the region, oversupply builds, and local prices fall (sometimes into negative territory!). For reference, we are entering this winter season with 558 billion cubic feet (Bcf) stored. That said, the Canadian benchmark price for natural gas, AECO, has rebounded from the several days of negative pricing in September to seasonal highs (still about a ~$1 discount to Henry Hub, the American natural gas pricing benchmark).

Is Canada too late to the game?

Currently the U.S., Qatar, and Australia dominate the LNG landscape, with an expected 10,594 Bcf per year of LNG export capacity (a record) set to be added by 2030, largely driven by capacity additions in the U.S. and Qatar. Given this reality, the natural question that follows is how can Canada gain market share in an industry with established market participants and expected increased supply?

Rather than be discouraged, the presence of established players underscores the need for diversification in an increasingly protectionist global economy. Canada’s distinct advantages position it to capture market share despite rising supply and competition.

What is Canada’s value proposition? 

Canada’s colder climate, which makes LNG liquefaction less energy-intensive (to liquefy natural gas it needs to be cooled to -162°C), Kitimat’s (location of LNG Canada Phase 1) average temperature of ~7°C compares favourably to the U.S. Gulf Coast (~22°C). LNG Canada’s Kitimat facility is expected to produce LNG with the least CO2 per tonne of LNG produced in the world.

Shipping logistics offer another advantage. Global demand for LNG is forecast to rise around 60% by 2040, largely driven by economic growth in Asia as countries seek to reduce their reliance on coal by switching to natural gas, the cleanest burning fossil fuel. Canada’s West Coast can deliver LNG to Asia in about 11 days, roughly half the time needed for the U.S. Gulf Coast shipments. This shorter route avoids major chokepoints such as the Panama Canal, Cape of Good Hope, Strait of Hormuz, and the Suez Canal that other LNG exporters can’t avoid.

LNG provides the opportunity for Canada to not be shackled to a single export market and slowly chip away at the structural issues in the Canadian natural gas sector. It may take time to realize the full scope of benefits that come with LNG Canada Phase 1 and the other potential projects in the country and a venture like this does not come without its own set of challenges. That said, LNG is part of the essential next step of not constraining our own potential and becoming more resilient in the face of changing times.

Answer to the previous trivia question: There is some disagreement, but a good contender for the oldest continuously operated pub in Canada is The Olde Angel Inn in Niagara-on-the-Lake, Ontario, which dates back to an inn built on the site in 1789.

Today’s trivia question: When was the first major export of a Canadian maple product?