The University of Calgary's School of Public Policy has put out an important report that sheds light on an under-discussed dimension of Canada's energy export challenge: the time factor. At this point, most people (we hope) are aware that Canada faces physical bottlenecks in the transport of its energy resources to global markets. They're also aware (we hope) that Canada faces alternative transport challenges of different sorts with different levels of risk when it comes to moving oil and gas.
But in Risky Business: the Issue of Timing, Entry and Performance in the Asia-Pacific LNG Market, Michal Moore and colleagues explain that Canada's opportunity for maximizing the benefits of its natural gas resources is not unbounded. In fact, it is a window of opportunity that will be closing much faster than people may realize.
What Moore et al. point out are facts that should be but are not always obvious. First, the U.S., our historical export market for oil and natural gas, has become an unreliable market for future Canadian natural gas exports:
Canadian gas producers are facing the slow collapse of gas exports to the U.S. The primary source of the decline can be found in the increase in U.S. shale gas production, coupled with the construction of new pipelines to deliver U.S. gas to U.S. domestic buyers. Newly accessible unconventional gas reserves are found widely throughout the U.S., and current costs of production create strong incentives to build new domestic pipeline facilities to gain access to this relatively inexpensive resource. In a unique and unexpected reversal, low-cost gas from the Marcellus is now being imported into eastern Canadian markets at Niagara Falls.
With regard to finding other markets for our natural gas exports, Moore et al. point out another should-be-obvious-but-isn't concept: Canada is not running a solo race for foreign export markets. We are in a race with a broad range of competitors that are moving faster than we are and who will snap up the best long-term contracts that produce the greatest return on investment if Canada continues to dally. This discussion is daunting, detailed, and somewhat depressing from a competitive standpoint but for flavour, Moore et al. cite work by the energy-research firm PFC Energy:
LNG trade has not only grown in volume, but in geographic reach as well. In 2006, only 13 countries exported LNG...Another five countries have since brought liquefaction capacity on-stream...Further, seven countries have expanded existing liquefaction capacity...and five countries have re-exported LNG during this period.
In a nutshell, here's what Moore et al. conclude:
Producers around the world -- including in the newly gas-rich U.S. -- are racing to lock up market-share in the Asia-Pacific region, in many cases much more aggressively than Canada. While this market is robust and growing, the nature of the contracts for delivery will favour actors that are earliest in the queue; margins for those arriving late will be slimmer and less certain over time. As supply grows, so too does the likelihood of falling gas prices in the Asia-Pacific region, making later projects less lucrative. LNG projects are feasible only on the basis of long-term contracts; once a piece of market share is acquired, it could be decades before it becomes available again. Currently, there are more proposed LNG-export projects around the world than will be required to meet projected demand for the foreseeable future.
Canadians have an unprecedented opportunity to turn our natural energy resource endowment into wealth benefiting Canadian families and future generations. We have an opportunity to reap revenues that can close government debt obligations, swell Canadian public and private pension-plan holdings, and build the Canada that future generations will inherit. But that opportunity is not indefinite. Canada is in a race with other nations to lock up that opportunity, and if Canada loses that race, the opportunity may not reappear for decades, if ever. As Jeff Goldblum so famously said in Jurassic Park -- "Must go faster."