In recent years, a number of Asian companies have been betting that Canada will be able to export cheap liquefied natural gas (LNG) from its west coast. These big international players include PetroChina (PTR) Mitsubishi (MTU), CNOOC (CEO), and, until December 3, Malaysian state-owned Petronas.
However, that initial interest is decidedly on the wane. In fact, while the British Columbia LNG Alliance is still hopeful that some of the 18 LNG projects that have been proposed will be realized, it's now looking less and less likely that any of these Canadian LNG consortia will ever make a final investment decision to forge ahead.
That's thanks to the Colder War—as I explain in detail in my new book of the same name—and the impetus it's given Vladimir Putin to open up new markets in Asia.
The huge gas export deals that Russia struck with China in May and October—with an agreed-upon price ranging from $8-10 per million British thermal units (mmBtu)—has likely capped investors' expectations of Chinese natural gas prices at around $10-11 per mmBtu, a level which would make shipping natural gas from Canada to Asia uneconomic.
At these prices, not even British Columbia's new Liquefied Natural Gas income Tax Act—which has halved the post-payout tax rate to 3.5% and proposes reducing corporate income tax to 8% from 11%—can make Canadian natural gas globally competitive.
These tax credits are too little, too late, because Canada is years behind Australia, Russia, and Qatar's gas projects. This means there's just too much uncertainty about future profit margins to commit the vast amount of capital that will be needed to make Canadian LNG a reality.
Sure, there are huge proven reserves of natural gas in Canada. It's just been determined that Canada's Northwest Territories hold 16.4 trillion cubic feet of natural gas reserves, 40% more than previous estimates.
But the fact is that Canada will remain a high-cost producer of LNG, and its shipping costs to Asia will be much higher than Russia's, Australia's, and Qatar's. So unless potential buyers in Asia are confident that Henry Hub gas prices will stay below $5, they're unlikely to commit to long-term contracts for Canadian LNG—or US gas for that matter—because compression and shipping add at least another $6 to the price.
