From the BOE REPORT
Terry Etam
LNG Canada to boost and stabilize Canadian natural gas prices? Not so fast…
There was a worthwhile read here last week in the BOE Report entitled “Canadian natural gas firms eager for LNG boom swamp market with excess supply”, which sums up the current situation quite well. It is astonishing that over the summer, the lowest-priced thing I can think of – candy, a stamp, anything – was a gigajoule of natural gas, and ten of those can look after a modest home for a month. What a world.
There was one potential caveat in the article, however – speculation that LNG Canada’s activity is expected to “reduce volatility in the AECO market.” Hmm…not so sure about that.
The premise is that new LNG exports will provide added demand via a brand new outlet for natural gas. LNG Canada will certainly do that, but it will also introduce a wildcard into the equation.
Presently, the existing system is remarkably stable on a day to day basis, with any significant outages generally planned and announced well in advance. But LNG terminals are not like that.
There are many events that can occur in very short order that can shut down an LNG terminal, because these terminals do not have significant (or any) gas storage accompanying them (or LNG Canada doesn’t anyway) that can act as a buffer in the even of a power outage, bad weather, an equipment failure, an accident…the list is lengthy, and each can bring the LNG off take to a standstill, quickly, with significant impacts.
Such speculation is not without precedent. Two years ago, a single US LNG export facility went out of service after a relatively minor explosion, and it had a negative impact on US natural gas prices for 8 months.
Consider also that the US natural gas market is what Nassim Taleb would call “robust” in one sense; the country is laced with major NG pipeline systems, and gas can often flow bidirectionally. Thus, the US market – which is also huge – was able to absorb the 2 bcf/d that was pushed back into the market, with a discernible but not devastating price impact.
The US natural gas system in another sense would earn Taleb’s classification of “antifragile” – that which grows stronger through stresses – because it is continuously strengthened by such stressors, new pipe is built as required to enable new production and connect to new markets – to the extent that regulations and enemies will allow (which, for now, pretty much means “only build in Texas” but that could change depending on which butt lands in the White House).
Canada’s natural gas market, on the other hand, is considerably more fragile in the sense of becoming dysfunctional at even a relatively minor whim or nature or incident. Recall a few years ago when an Enbridge gas line blew up outside of Prince George in northern BC – one of two that brings gas to the lower mainland. The other line was shut down for two days for inspections, and as a result of the reduced flow some schools in Vancouver turned off heat in buildings and reduced temperatures in classrooms.
If a natural gas system is extensive and web-like, it can maintain resilience, stability, and function well even if one part of it suffers a failure of some kind. If a system is constrained and highly dependent on a limited number of access points, both for supply and offtake, the risk of volatility increases significantly, and the risk to consumers grows to unhealthy levels. Everyone should be thankful those chilly gas-deprived Vancouver students in a coastal October were not Winnipeg students in ears-fall-off January.29dk2902lhttps://boereport.com/29dk2902l.html
On the other hand, LNG usage is soaring and Canada might catch the wave yet despite our habits
Dan Yergin, the senior oil patch observer and author of the legendary book The Prize, recently wrote an article for S&P Global called “The return of energy security”. It’s chock full of good information about how the world is recognizing that an energy transition may be an admirable goal but that there is no doubt it is going to take a back seat to energy security. Much of the world is not as cavalier as we are, but then much of the world does not have the, ahem, phenomenally skilled oil and gas workforce that we do here in North America.
Yergin notes, “The biggest emphasis on the need for reliable and affordable energy is in the developing world, where 80% of the world’s population lives… Attaining energy security is basic to making progress out of poverty in general and remedying the lack of access to commercial energy and electricity… Natural gas is a particular focus for promoting economic development — and for reducing emissions.”
He’s not whistling Dixie. Much of the world is stampeding to secure LNG supplies. Per the above article, India earlier this year announced a $67 billion investment plan to expand India’s natural gas infrastructure. Colombia, which has vast natural gas reserves of its own, is looking to increase its LNG import capacity. Malaysia, one of the world’s top exporters of LNG, is looking to increase imports of LNG to meet soaring consumption.
Other countries are racing to meet the new demand. The US has, in one measly decade, become the world’s largest LNG exporter, including by using some basic infrastructure developments started 25 years ago when the US was planning to import LNG to meet its needs (the US shale boom was something else, adding about 20 percent to world supplies in 15 years). Even Saudi Arabia announced plans to become a major LNG player, signing a 20 year offtake agreement from a new US LNG terminal.
Overall, the Gas Exporting Countries Forum, a group of guess-what’s comprised of 12 member countries and 7 observer countries (observing gas? The ultimate government job), expects global natural gas demand to increase from 4,015 billion cubic meters in 2022 to 5,360 bcm by 2050, a 34 percent increase, and with no peak in site. Because the LNG trade is anchored by multi-billion dollar terminals, which often require multi-decade contracts in order to obtain financing, much of this demand/trade is being baked into the system for decades to come, so even if the GECF is talking it’s book, they have very good reason to be believed.
In front of this global steamroller of natural gas development, Canada stands alone, with our leadership turning away an LNG-begging Germany with admonishments to get serious about climate change and just sit back and wait for Canada’s green hydrogen economy to develop (haha) and you’ll get the first boatload (or whatever it arrives in once we determine how in the heck to build such a castle in the sky) (German leaders then flew to Senegal, looking to trump Canada’s leadership’s peculiar stance, encouraging the Senegalese to develop their reserves and ship to Europe; ultimately the Germans simply signed a long term LNG deal with the US, who by some unbelievable skillset found the ‘business case’ that Canada found lacking).
And don’t even get me started on data center demand, which is getting more crazy by the hour it seems. The biggest AI players have now all raced to lock up existing or nearly-existing nuclear power (Amazon, Google, Microsoft) because it is the only emissions-free 24/7 baseload power available. Everyone else will be scrambling for whatever 24/7 baseload they can get, and, as with the newly rediscovered importance of energy security, these firms will place AI development over any qualms about what sort of energy they are sourcing. Natural gas is the best choice because of its availability, speed of development, and relatively clean burning. So look to AI data centers to pop up wherever there are natural gas supplies – it will shave years off the process if the data center developers can build a power source independent of the electrical grid (which is to development plans what quicksand is to humans).
Five years old, and the future painted within is turning out pretty much exactly as expected (ok, I missed the nuclear renaissance, sue me). Pick up The End of Fossil Fuel Insanity, where energy is actually entertaining. Available at Amazon.ca, Indigo.ca, or Amazon.com.
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