By Ng Weng Hoong, August 13, 2019
Word count minus headline and footnotes: 2,008

British Columbia (BC)’s emerging liquefied natural gas (LNG) industry may have just shone a small light into the long dark tunnel enveloping the bilateral relations between Canada and China.

Amid the continuing outpouring of bad news and bad blood between the two countries, BC-based utility firm FortisBC announced (1) that it had secured Canada’s first term deal to supply LNG to China. It is also Canada’s first to Asia.

Starting mid-2021, FortisBC said it will supply China’s Top Speed Energy Corp a total of 106,000 tonnes of LNG from its Tilsbury, Delta plant over a two-year term.

“This is the first agreement of its kind that will see Canadian LNG shipped regularly to China,” said Douglas Stout, FortisBC vice-president of market development and external relations.

While the total volume is small, worth around US$30 million at current spot prices, the deal is hugely significant on a number of fronts.

First, it is a watershed event following decades of industry disappointment and unfulfilled expectations that LNG from western Canada’s vast resource base might one day be regularly shipped to Asia. Japanese firms had first explored the possibility of developing and exporting LNG from northern BC to Asia in the 1960s.

With China hungry for clean-burning fuel as it looks to natural gas to replace coal for power generation, Mr Stout said he expects to secure a few more term and spot contracts.

“We are working with a number of customers interested in shipping Canadian LNG to Asia as demand is expected to continue to grow. There is capacity at our facility for additional export shipments,” he said in a follow-up email. The company announced its term deal on July 16 shortly after completing a C$400-million expansion that lifted the annual production capacity of its Tilsbury plant from 35,000 tonnes to 250,000 tonnes. (US$1=C$1.31).

The deal builds on the success of adhoc spot cargo shipments that started in November 2017 when FortisBC made a first trial sale of about 19 tonnes to China through Vancouver’s True North Energy Corporation and China’s CIMC Enric Holdings Ltd.

Second, FortisBC’s breakthrough deal augurs well for bigger players that are in the midst of launching BC’s new multi-billion-dollar LNG-exporting industry.

Singapore’s Pacific Oil & Gas Limited is expected to soon approve subsidiary Woodfibre LNG Private Limited’s plan to construct a 2.1-million tonnes/year export terminal near Squamish city located north of Vancouver. The case for a final investment decision (FID), delayed for years by poor market conditions and local environmental opposition, was strengthened by June’s announcement that Woodfibre had secured a binding LNG sales and purchase agreement (2) with BP Gas Marketing Limited (BP), a wholly-owned subsidiary of the UK major. BP has committed itself as Woodfibre’s foundational customer by agreeing to the annual purchase of 750,000 tonnes of LNG for 15 years starting 2023.

The big daddy is LNG Canada, the Royal Dutch Shell-led C$40-billion project (3) in northern BC that won FID approval last October. Shell has a 40% stake in the LNG Canada consortium that has already started construction of the 14-million-tonne/year processing plant and export terminal in Kitimat. With four Asian companies — Malaysia’s Petronas (25%), PetroChina (15%), Japan’s Mitsubishi Corp (15%), and Korea Gas Corp (5%) — as the other shareholders, the plant will export the bulk of its output to markets across the Pacific Ocean. (US$1=C$1.3).

Consulting firm Wood Mackenzie said it expects a “significant portion” of LNG Canada’s output to flow to China when production starts up in 2024.

“We also expect Woodfibre to reach FID this year,” said Dulles Wang, Wood Mackenzie’s gas research director for North America. If so, the C$1.6-billion plant could start operating from late 2023.

By 2024, BC would have a combined annual LNG capacity of over 16.5 million tonnes from its three operators.

Third, these three projects prove that Canada’s LNG exports to Asia can compete against those from the new energy superpower that is emerging in the United States. According to the Energy Information Administration, US LNG exports, mostly to Asia and Europe, are expected to surge by 63% to 43.8 million tonnes in 2019 and to over 63 million tonnes in 2020 as new processing plants start up.

Mr Wang said western Canada’s Montney geological formation “has some of the cheapest gas supply in North America” where a number of Asian companies have already invested in reserves and producing fields.

“The economics of Canadian LNG projects look comparable to some of the US greenfield projects mainly due to the resource cost advantage and shorter shipping distance to Asia,” he said. Canada has the added advantage of its cold climate to boost the efficiency of the gas liquefaction process, thus reducing operating costs.

Fourth, LNG has found rare broad support across ideological lines in Canada’s two main political parties, the Liberals and the Conservatives, as well as BC’s provincial New Democrats, Indigenous and local groups. This is not to be under-estimated as many natural resource projects in Canada have been sunk or delayed by opposition from environmental, indigenous and political groups. The success of the three BC projects will likely attract more investments including an expected doubling of the LNG Canada plant capacity to 28 million tonnes and a likely FID approval by US major Chevron and Australia’s Woodside Petroleum (4) for a jointly-owned 18-million-tonne facility, also in Kitimat. By the end of the next decade, British Columbia could have at least 40 million tonnes of LNG capacity. To put this in perspective, Australia currently has the world’s largest LNG capacity of more than 80 million tonnes.

LNG’s geopolitical value: Canada’s reminder to China
Importantly, BC’s LNG industry may have more to offer Canada than economic benefits. As Ottawa struggles to deal (5) with a powerful China that seems to hold all the cards in an unbalanced relationship, the FortisBC deal offers hope that Canada might have an ace in its hand.

Canada’s China ties were already faltering when Ottawa, acting on behalf of the US government, arrested Meng Wanzhou, Huawei’s politically connected top executive, in Vancouver last December. China’s response was swift and furious, sending bilateral ties into a steep dive. Within weeks, the government of President Xi Jinping had begun blocking or slowing down the import of Canadian meat (6) and crops (7), and arrested a number of Canadians including two on alleged espionage activities (8) in China. In 2017, food and agricultural products  accounted for nearly 60% (9) of Canada’s C$24.94 billion total merchandise exports to China.

More damage awaits as China’s foreign direct investment into Canada could fall further after plunging 47% to C$4.43 billion in 2018, the lowest in four years, according to the University of Alberta’s China Institute (10).

Yet, China’s message that it can do without Canada’s resources or goodwill has limits.

Chinese state planners are worried that the country’s rapidly declining energy self-sufficiency could put a limit not only on Mr Xi’s global ambitions, but the economy’s long-term growth prospects. Without a secure supply of energy and other natural resources to feed an insatiable appetite, China can forget about becoming a superpower.

Despite making record investments in domestic exploration and production, and extensive efforts to boost the role of renewable resources and energy conservation, China is increasingly reliant on imported fuel. It recently became the world’s largest importer of crude oil and gas to add to its 2010 “achievement” as the world’s largest energy consumer. Last year, its crude oil import surged 11% to yet another record of 440 million metric tons that pushed its import dependence to a new high of nearly 70% (11). According to BP, China’s oil consumption rose 5.3% to more than 13.5 million barrels per day (b/d) to account for nearly 14% of the world’s total. A decade ago, China accounted for 9% of global consumption.

Meanwhile, its proved oil reserves have barely grown the last five years. With 18% of the world’s population and an economy still growing at a six percent rate, China has only 1.5% of its oil reserves.

Of immediate concern is President Xi’s policy goal to increase the role of cleaner-burning natural gas in China’s energy mix based on his promise to clean up the country’s notoriously polluted environment. But that goal is under threat as domestic gas production growth has badly lagged behind consumption increases for years. The gap widened further last year with Chinese gas production growing by 8.3% while demand surged 17.7%. With only three percent of the world’s natural gas reserves, China has no choice but to further rely on imports.

For President Xi to even deliver on some of his environmental promises, BP projects the share of natural gas in China’s energy mix (12) will have to rise from 7% in 2017 to 14% by 2040. China’s natural gas demand is seen growing by an annual average of 4.4% over that 23-year period. But even at this rate of growth, gas will not displace the country’s filthy coal, which still generated 60% of its electricity last year.

The other grim reality is that China will have to rely ever more on a handful of oil and gas suppliers in the politically unstable regions of the Middle East, Africa and Latin America. The regions of Central Asia and the Caucasus, which hold some of the world’s largest hydrocarbon reserves, are rife with superpower and regional-power rivalries mixed with ancient ethnic and religious animosities. Russia has become China’s most important partner, but much of that rests on Mr Xi’s personal relationship with Moscow strongman Vladimir Putin who are bound by their common opposition to the US. Will Russia remain China’s reliable energy supplier and strategic ally when one or both leaders are no longer in power?

The US could have been China’s saviour had they not become each other’s number one strategic rival. Thanks to the decade-long boom in its shale-based oil and gas industry, the US has suddenly become a major force on the world’s energy markets.

“The United States will soon export more oil and liquids than Saudi Arabia,” predicts Norwegian energy consultant Rystad Energy (13).

The International Energy Agency (14) agrees, boldly forecasting the US to become an outright net oil exporter in 2021. Three years after that, it sees US net oil export reaching nine million barrels/day to overtake Russia and to eventually challenge Saudi Arabia for the top spot.

If there is to be a contest for superpower supremacy, the US already has an upper hand through its growing energy self-sufficiency while China sinks further into import dependency.

But Beijing doesn’t seem concerned about its energy handicap. On June 1, it raised the tariff on LNG imports (15) from the US to 25% as part of its response to the two countries’ worsening bilateral trade war. It has also drastically reduced oil imports from the US as it believes Saudi Arabia, Iran, Russia and others will make up for the loss. These moves will only increase China’s supply vulnerability as the bulk of its oil and gas from the Middle East must sail through the world’s worst chokepoints in the Gulf of Hormuz, the Strait of Malacca and the South China Sea to reach East Asia.

Against this backdrop, Canada’s importance to China’s economy is understated and can only grow. While Canada is unlikely to become an energy superpower, it still has nearly 10% of the world’s proved oil and gas reserves along with vast potential to produce food and other resources that China needs. From the late 1950s to the early 1960s, Canada delivered emergency food supplies (16) to China to save millions of starving people from famine resulting from Beijing’s failed policies. The Chinese leadership appears to have forgotten or overlooked these inconvenient facts as it rages over Ms Meng’s arrest and the Huawei issue.

The FortisBC deal is a timely reminder for China to take the long view of its own needs. Canada may not count for much now, but who knows what China’s situation will be as it plunges deeper into a long and harsh economic cold war with the US.

FOOTNOTES

1. https://talkingenergy.ca/project/tilbury-LNG-expansion-project#updates
   July 16, 2019. FortisBC secures first export contract for Tilbury LNG
2. https://www.newswire.ca/news-releases/woodfibre-lng-signs-foundation-customer-849714559.html
   June 26, 2019. Woodfibre LNG Signs Foundation Customer
3. https://www.shell.ca/en_ca/media/news-and-media-releases/news-releases-2018/shell-gives-green-light-to-invest-in-lng-canada.html
   October 2, 2018. Shell gives green light to invest in LNG Canada
4. https://www.cbc.ca/news/canada/calgary/chevron-neb-kitimat-lng-licence-1.5084430
   April 4, 2019. Chevron asks NEB for licence to nearly double Kitimat LNG project
5. https://www.asiatimes.com/2019/03/opinion/canada-pulls-back-welcome-mat-for-china/?_=2401693
   March 30 2019. Canada pulls back welcome mat for China
6. https://theconversation.com/chinas-ban-on-canadian-meat-imports-could-pummel-our-agri-food-sector-119509
   June 27, 2019. China’s ban on Canadian meat imports could pummel our agri-food sector
7. https://www.cbc.ca/news/business/canada-china-trade-1.5114989
   April 29, 2019. First canola, now peas and soybeans — Canadian crops face more headaches getting into China
8. https://www.cbc.ca/news/politics/canadians-arrested-china-state-secret-1.5138103
   May 16, 2019. China formally arrests Spavor and Kovrig, accuses them of spying
9. http://www.agr.gc.ca/eng/industry-markets-and-trade/international-agri-food-market-intelligence/reports/market-overview-china/?id=1530811718505
   July 2018. Canada: Market overview of China
10. https://cloudfront.ualberta.ca/-/media/china/media-gallery/research/tracker/2-year-end-review-2018.pdf
    2018: Chinese investment in Canada
11. http://www.chinadaily.com.cn/global/2019-06/05/content_37477320.htm
    June 5, 2019. Nation’s reliance on crude oil imports set to continue
12. https://www.bp.com/content/dam/bp/business-sites/en/global/corporate/pdfs/energy-economics/energy-outlook/bp-energy-outlook-2019-country-insight-china.pdf
    March 2019. BP Energy Outlook 2019: China
13. https://www.rystadenergy.com/newsevents/news/press-releases/North-America-becomes-self-sufficient-in-oil
    March 7, 2019. North America becomes self-sufficient in oil
14. https://webstore.iea.org/download/summary/2446?fileName=English-Oil-2019-ES.pdf
    International Energy Agency: Analysis and Forecast to 2024
15. https://www.ogj.com/general-interest/economics-markets/article/17279260/china-raises-us-lng-import-tariffs-to-25
    May 14, 2019. China raises US LNG import tariffs to 25%
16. https://www.manitobacooperator.ca/news-opinion/news/canadas-trade-relationship-with-china-built-on-wheat-2
    Canada’s trade relationship with China built on wheat