Podcast #1: Mark Pinney and Canada's LNG opportunity

Has Canada missed the boat when it comes to exporting liquefied natural gas (LNG) from the B.C. West Coast to new markets in Asia? What opportunities remain? And why is this a good idea that will both create good Canadian jobs and help reduce global greenhouse gas emissions?

Energy Examined podcast host Tonya Zelinsky chats with Mark Pinney, manager of markets and transportation at the Canadian Association of Petroleum Producers, answering these questions and more in a wide ranging conversation about Canada's LNG opportunity.

Tonya: Hello and welcome to the inaugural edition of Energy Examined podcast where we discuss some of the biggest issues facing Canada’s oil and natural gas sector with industry insiders in the know.

I’m your host Tonya Zelinsky. This very exciting. I’m sitting here with my colleague Mark Pinney, manager of markets and transportation with the Canadian Association of Petroleum Producers, and we’re going to talk a little bit about liquefied natural gas and its potential here in Canada. So Mark, thank you so much for joining me today.

Mark: You’re very welcome.

Tonya: This is exciting. LNG has been a pretty hot topic here in Canada over the past few years, but it seems that since LNG Canada announced its plans to proceed with its $40 billion project, the pressure to succeed on this front is every greater. Why is LNG so important? What is the potential here for Canada?

Mark: The potential here in Canada is simply staggering. We’ve got just tremendous resources of natural gas – well over 1,000 trillion cubic feet. To put that in perspective, here in Canada, we only consume about three and a half trillion cubic feet a year, so as you can tell, these resources are well beyond what we would need here in Canada and so, you know, we’ve got this tremendous resource base and we’re very well-positioned to serve those global markets that will be relying on those types of resources in the future. And that’s the Asian Pacific market. We’ve got direct ocean access and about seven- to eleven-day sailing time depending on which Asian country you’re delivering liquefied natural gas to, so that’s why the potential for LNG here in Canada is staggering – a tremendous resource base and very well-positioned to serve those growing markets.

Tonya: So I have to ask – and this is not on script Mark – I have to ask, does this make us a little bit more competitive, than say, the U.S. because we are so much closer to market?

Mark: When you compare our competitiveness to the United States, you’re trying to deliver your natural gas to those Asian markets as cheaply as you can and hopefully cheaper than your competitor. And I think we have advantages in a couple of areas. And one of them is proximity to market with that direct shipping that I was talking about. In the United States, a lot of the liquid fracture projects have been built in the Gulf Coast and then to move that liquefied natural gas from the Gulf Coast to Asia, they have to transit the Panama Canal. Now, in recent years, the Panama Canal has been widened so that the larger LNG tankers can actually traverse the canal whereas previously they couldn’t, so, on the one hand, that’s good for the U.S., but on the other hand, it’s still an additional expense and logistically it’s not easy to get through either. You have to book your passage well in advance because there are only so many vehicles that can transit at a time and in Canada, from western Canada, you haven’t got to worry about that, so you might be taking 20 days to get to your destination from the U.S. gulf coast. You might be taking about a third of that time from Canada. It does reduce the shipping costs relative to the U.S. indeed.

Tonya: One other thing, I had thought also there was an issue with cooling temperatures – that because of Canada’s temperature versus that of the U.S. Gulf Coast, it requires less cooling to liquefy the natural gas.

Mark: Yes, that’s true. The U.S gulf coast – the ambient temperatures there are a lot warmer than in Canada, so, up here, because the ambient temperature is lower, you have to expend less energy to bring the temperature down to the critical threshold. And that critical threshold by the way, that’s minus 162 degrees. That’s colder than the polar regions on Mars. And then that’s when the physics works for you, because what happens is you cool the gas and it condenses to about one six hundredth of the size it is before cooling, so that’s like going down from a big beach ball to a ping pong ball. And by shrinking it to that low or dense a volume, that’s how we can load it on the ships and transport it to market.

Tonya: I hadn’t realized that the temperatures are so cold.

Mark: Yes.

Tonya: That’s amazing. So it sounds like there are a lot of advantages for LNG from Canada, but I know that there have been concerns raised, that are we not too late to the game? You’ve got these projects out of the U.S. that are not being built from the ground up – they’re brownfield projects, and Australia has a lot of projects, whereas here in Canada we’re starting from scratch. Is there potential for us? Can we actually make it to the market?

Mark: I believe there is potential for us. You’re correct in your observation that projects have already come on stream in the United States and in Australia, so much so, that both those countries will now be vying with Qatar to the be number one exporter of LNG in the world. Qatar currently holds that ranking, but it’s about to be taken over by Australia, perhaps as early as next year, and then depending on how rapid the U.S. grows, maybe they’ll even leapfrog those two countries. Russia also has developed a project that has recently come on stream. So, there’s lots of project globally that could compete. The global demand is expected to increase dramatically over the next few decades. The International Energy Agency’s predicting global gas demand to increase by forty-three per cent by 2040. So at that rate of growth, there’s definitely an opportunity for Canada to become a supplier to LNG markets. And the consensus view right now is that, perhaps by around the middle of the next decade, 2024-2025, the global market will grow to a point where it’s actually going to require additional liquefaction capacity beyond the capacity that we actually have in place today, and which is under construction today. So that’s going to the new window – the next window of opportunity that we’re looking to compete in Canada. We don’t want to miss that window for sure. The other thing I want to point out as well, is that in terms of this global growth in demand, you can’t underestimate how key China is going to be to that global picture. The potential for the growth in the Chinese market is actually staggering and, of course, it’s driven there by a desire to have cleaner burning sources of fuel for power generation. If China meets is objectives where it wants to increase the amount of its primary energy demand that’s met by natural gas versus coal, you can actually see the Chinese market grow from about 23 billion cubic feet a day today to about 70 billion cubic feet a day by 2040, so the size of that market is absolutely huge. It’s markets like that that Canada is looking to supply with LNG.

Tonya: You mentioned the window before. Is there a timeline on that window? When are we looking at – is this in the next couple of years or further out?

Mark: You’re looking at a gap really emerging at around 2024-2025 and that, not coincidentally, is when LNG Canada is slated to come on stream. So that’s when we really see that window emerging and that’s what we want to be ready for – that timeframe and in the years beyond.

Tonya: There have been some studies about LNG here in Canada and one of the points that seems to stand out is that there are rising greenhouse gas emissions from LNG facilities and I know that environmentalists are concerned that we are now increasing Canada’s GHGs, but what can we expect from an LNG project?

Mark: There’s no doubt that an industrial enterprise like liquefying natural gas will result in greenhouse gas emissions. A couple of things, though, to keep in mind when we’re talking about the increasing greenhouse gas emissions, LNG – by the way, LNG Canada Phase 1 – is expected to emit around just over two million tonnes per annum of CO2. So there’s no doubt that when you look at that particular site, there’s an increase in GHG emissions, but the things you have to keep in mind: first of all, LNG Canada is going to emit a lot less GHG or CO2 emissions than projects that are currently in operation today – about half of the GHG emissions that you would see from existing projects and there are very strict standards in place where, if these Canadian projects are not able to meet these standards, then they’d be obliged to purchases carbon credits, so there’s all sorts of incentives in place for these projects to be very clean in terms of their GHG emissions. The other thing to keep in mind, of course, is that globally, we all share the same atmosphere and when you look at the markets that the LNG is going to, it’s going to go to Asian markets and displace coal-fired power generation, so when you combust natural gas in a power plant, you’re emitting less than half the GHG emissions as a standard coal plant, and that’s coal plants in the United States. A lot of the small, inefficient coal plants in China are actually a lot less efficient than even the coal-fired plants in the United States. So, by burning LNG or natural gas to produce power, you’ll be emitting at least less than half the GHG emissions as you would by burning coal. And about one billion cubic feet of LNG exports displacing coal for power generation, that will reduce annual GHG emissions by about 18 million tonnes a year – and that’s equivalent to taking four million cars off the road, so it’s a tremendous net global benefit in terms of GHG emissions by building a plant here in Canada and displacing coal-fired power generation in China.

Tonya: So basically LNG out of Canada could help lower greenhouse gas emissions in other countries like China down the road because it’s replacing coal-fired generation?

Mark: Yes, significantly. So you might have an increase in GHG emissions here, like I said, Phase 1 is about 2.1 million tonnes per annum, but you’re looking at significantly more savings when you’re looking at actually burning that fossil fuel in Asia.

Tonya: Wow. That is substantial. I know that obviously that’s a huge concern, but Indigenous groups or Indigenous communities have raised concerns also about LNG, not specific to GHGs necessarily, but what are these concerns? What are some of the issues that we’re facing with Indigenous groups?

Mark: We’re actually finding, to be honest with you, that we’ve heard loud and clear and we’ve seen a lot of Indigenous opposition because of uncertainty around oil pipeline development, no doubt, we’ve seen that – actually on the natural gas, on the LNG side, I’m actually sensing a very different vibe. We’re actually seeing a lot of demonstrated support frankly, from Indigenous communities because I think they really do see the economic opportunities for their communities to benefit from this economic development. There’s a coastal gas pipeline which will be built to take gas from northeast B.C. across the Rocky Mountains to the coast where it will be liquefied at Kitimat at the LNG Canada facility. There are 20 First Nations around that natural gas pipeline route and they’ve all signed benefit agreements with the pipeline proponent because they recognize the benefits of doing so. And there are also lots of procurement opportunities. As this economic development proceeds, companies will be looking at First Nations communities for labour and all sorts of services to help these projects be developed.

Tonya: Well, there’s no doubt that LNG Canada is a massive project. In fact, I think it’s the largest LNG project that has yet to be proposed and is definitely planning to proceed. But, is it enough to create a successful LNG industry. Do we need to see other projects come along to make that so?

Mark: I’d like to think that LNG Canada is actually just the beginning. It’s the big ball that starts rolling and gives us the momentum to get a lot of other projects proceeding. We discussed earlier that Canadian gas producers are sitting on this tremendous resource base, but today we find ourselves extremely market-constrained. That’s what’s constraining our production levels. It’s not the resource base, it’s the fact we’re market-constrained. We’re seeing increased competition in our traditional U.S. export markets. Now, we’re able to partially offset that increased competition by seeing growth in growing demand in oilsands production here in western Canada. Oilsands uses natural gas in the production process to generate steam to help reduce the viscosity of bitumen so that it flow s up the well bore. Also, oilsands uses natural gas as a feedstock to upgrade bitumen to light synthetic crude oil. And also, the other western market where we’re seeing growth potential partially offsetting our loss of export demand is in power generation because we’re ending our coal-fired power generation here in Western Canada. But despite those opportunities here in Western Canada, if we’re going to see our resource base developed to its full potential, we need to see development of new markets – and not just small markets, but markets with a huge potential of large-scale opportunities. And those large-scale opportunities are just the thing that LNG exports provides us with.

Tonya: So are there any other projects currently in the queue to look forward to beyond LNG Canada?

Mark: Yes. Now, just to keep in mind, that the only thing we’ve seen sanctioned from LNG Canada is Phase 1, which is the first two trains, so that’ll be about 1.8 billion cubic feet a day. But it actually makes a lot of sense to help with competitiveness for an LNG exporter to increase its economies of scale. As it gets larger, you get better scale economies and then it improves your unit competitiveness. So LNG Canada also has scoped out a second phase, which is another two trains of about 1.8 billion cubic feet a day and we’re actually hoping that in addition to Phase 1, LNG Canada over the next year or so, might announce that it’s also sanctioning Phase 2 of the project as well. But in addition to LNG Canada, there are other initiatives where producers are equally hoping will proceed. There’s Woodside LNG and that’s a small-scale LNG facility of about a quarter of a billion cubic feet a day of exports, so it’s a lot smaller than the LNG Canada plant, but that also has got its regulatory approvals and has partially made a final investment decision. It’s unclear why, though, construction on that plant is slow to proceed, but that project is located just north of Vancouver in Squamish, and that’s a brownfield investment. It’s located on the site of an old sawmill facility. But in terms of other large-scale opportunities, again, up in Kitimat, is Kitimat LNG, and that’s a proposal that’s sponsored by Chevron and Woodside, and that is another project that has obtained all its major regulatory approvals. And again, we’re just waiting for them to line up markets so that they have sufficient purchases and sales agreements in place that will help them finance the project and announce a final investment decision. And also we’re aware that there are producers out there as well, a consortium of producers trying to give momentum to an export facility and they’re exploring whether they can sort of cobble together and come up with a combined long-term supply agreement that they would commit to and that would be able to facilitate a project becoming started because they would underpin – with their sales commitments – a new project commencing.

Tonya: What needs to happen to get these projects off the ground?

Mark: For a start, I think that we need to have a regulatory process in place that provides certainty and the prospect of timely approvals for projects that are found to be in the public interest. We talked before about whether we’d missed our window opportunity and what is that next window of opportunity. We believe that that next window is about seven years down the road. And these are large-scale projects that do require regulatory oversight, so it’s very important that you have a regulatory system in place that can give you timely approval process so that you are able to compete. If you’re competing against other countries across the globe that have extremely light-handed regulation and that can get started in a matter of a year or so, that puts our producers on the back foot when we have a regulatory approval process that has the potential to be stalled for many years. You could end up missing the boat because someone else has beaten you to the punch because they weren’t bogged down by an inefficient regulatory approval process. Bill C-69 as it currently stands does not provide us with the prospect of a fair and efficient regulatory process that will give us confidence that we can get timely approvals. The other thing that’s hanging over our heads right now are these tariffs that are in place on fabricated imported steel components. It was found a few years ago, the determination was made that imports from certain countries were found to be, perhaps, dumped in Canadian markets to create an unfair competition and so tariffs were put in place from steel imports from these countries of as much as 48 per cent. But the bind that the LNG industry finds itself in is that it needs to build its plants using modules, so imported steel modules, so these fabricated imported steel components and these are huge scale modules. Canada’s domestic industry does not at this time have the capability of producing the modules at the scale that’s required by the LNG industry, and so, having those tariffs imposed on imports of fabricated steel by as much as 48 per cent will increase our costs of developing an LNG project here versus somewhere else in the globe and that’s not helpful. So we’re asking government to take a sensible view of this and sort-of see where, if the domestic industry doesn’t have the capacity to provide the LNG industry with what it requires, to wave those tariffs in that circumstance so they don’t put the LNG industry on an uncompetitive footing.

Tonya: So it sounds like it needs support from the provincial government in British Columbia as well as the federal government here in Canada.

Mark: Yes, the tariffs would be a federal government issue. There’s a good point you make about the provincial government. They also have a role to play in their fiscal environment as well. Actually, the provincial government has made some important moves over the last year or so, which has helped. Hopefully the federal government is taking note of some of the initiatives the provincial government has taken. In B.C., the previous Liberal government had in place a LNG income tax – that has now been eliminated. Also, under the former Liberal government, there was special electricity tariffs these LNG plants consumers of electricity and there was a special LNG tariff that was higher than the standard industrial electric tariff. That higher tariff has now been removed so that LNG plants will be able to procure electricity transmission at the same rates available to other large-scale industries. And there’s some provincial sales tax relief put in place late last year by the provincial government so that the provincial sales tax is a deferred for recovery until a LNG plant is actually up and running and generating cash flow to pay for those taxes. Again, that is very helpful. And then just recently last week the provincial government confirmed that there would be corporate income tax credits for LNG facilities that could effectively reduce the corporate income tax rate down from 12 to nine per cent. So again, all those fiscal initiatives will help reduce the costs of developing LNG, and even though the LNG market is a growth market, there’s lots of supply coming on all across the globe and so we have to stand out and compete against those other suppliers, and those kinds of fiscal initiatives are extremely helpful in making sure that we are competitive.

Tonya: Thank you so much Mark for joining me here today to talk about LNG. I really appreciate it. It’s a very interesting subject. It’s a very hot topic right now in Canada’s oil and natural gas industry. And everyone for listening, thank you so much for checking out our first podcast. Please stay tuned and join us next time as we examine energy from an insider’s perspective.

This video explains what LNG could mean for the Canadian economy and global greenhouse gas reductions.

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About Context: Energy Examined magazine

This magazine website is published by the Canadian Association of Petroleum Producers as part of an ongoing dialogue with Canadians. Context: Energy Examined aims to provide an engaging insider’s perspective for the public. Articles range from features on key and timely industry issues, profiles of people working in Canada’s oil and gas sector and educational content designed to build industry knowledge. Content is edited by CAPP Communications; questions on editorial content may be referred to context@capp.ca.