Ottawa, October 13, 2016—Even though liquefied natural gas (LNG) prices are expected to remain weak until the end of the decade, demand is anticipated to expand in the long term. With the current liquefaction investment cycle winding down, new projects will be needed in the coming years to meet future demand, according to The Conference Board of Canada’s Canadian Industrial Outlook: Canada’s Gas Extraction Industry.
“While low prices will challenge the economics of new Canadian LNG projects, the news is not all bad for Canada’s gas extraction industry. New investment will still be needed to meet the world’s long-term demand for natural gas,” said Carlos A. Murillo, Economist, The Conference Board of Canada. “However, this opportunity cannot be taken for granted. Cost competitiveness and time of entry must be kept top of mind in order for Canada to succeed in the growing global LNG market. Given the current speed of project approval and development, that is not a concern to be taken lightly.”
“Conditional approval of the Pacific Northwest LNG project by the Government of Canada is a positive development for the industry. But, any significant anticipated surge in industry output stemming from this decision is still years away,” added Mr. Murillo.
- Low commodity prices will challenge the economics of new LNG projects, including those proposed in Canada.
- Given that the current LNG investment cycle is winding down, new projects will be needed in the coming years to supply growing demand.
- Following pre-tax losses exceeding $1.7 billion in 2015, Canada’s gas extraction industry will be in the red again this year, with a loss of a similar magnitude—primarily the result of persistently low natural gas prices in North America.
The current wind down in LNG investment and the long-term capital required to meet future demand growth over the coming decades create an opportunity for Canada’s industry.
After growing at a pace of 11 per cent per year over the last decade and reaching a cumulative US$200 billion (in 2015 terms), global investment in LNG liquefaction is expected to decrease at an annual pace of close to 40 per cent through 2020, reaching a rock-bottom US$4 billion. This slowdown in investment will create a gap in the coming years. Meanwhile, global demand for LNG is projected to continue to grow. According to the International Energy Agency’s latest World Energy Outlook, demand for LNG is forecast to increase by an average annual rate of more than 3 per cent over the next two decades—double the pace of global natural gas demand. In turn, about US$15 billion in annual investments in new LNG facilities would be required over the next two decades to meet rising LNG levels.
But until LNG exports become a reality in Canada, the industry will continue to contend with declining exports and rising transportation costs. An issue for which a potential collaborative solution is currently in the works.
This year, Canada’s gas extraction industry is expected to post a pre-tax loss of $1.6 billion, as the industry continues to deal with the repercussions of persistently low commodity prices. The industry’s fortunes are expected to turn around starting next year, with profits approaching $1 billion by the end of the decade.