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Canada’s East-Coast LNG saga continues. Conflicting signals as to whether Canada will help Europe phaseout Russian gas for good

Feb 15, 2023 | News, Canada, World, Featured, Business, Politics

Russia’ state-owned Gazprom reduced sales of gas to Europe in 2022 but is expected to continue sending gas to the continent going forward Image: ft.com / AFP / Getty Images

Yuri Bilinsky, NP-UN.

In 2022, while Ukrainian soldiers and civilians were being murdered in the war where the front lines span over more than a thousand kilometres, while the whole Ukrainian regions were being leveled to the ground, and while over eight million Ukrainians were seeking refuge abroad, Russia posted the current account surplus of more than USD 227 billion. This surplus of Russia’s exports over its imports helped it kill Ukrainians and ruin Ukraine with impunity.

Although Russia’s current account surplus shrank by 58% in January this year thanks to the EU- and G7-imposed price caps and embargos on its energy products, that country will for a long time have enough money to make and buy arms and munitions, and wage war. Even though Russia reduced its pipeline exports of natural gas to Europe by 55% in 2022, its sales of Liquefied Natural Gas (LNG) to Europe grew by 40%. Europe spent EUR 12.5 billion more on Russian LNG in January-September 2022 than a year before. Industry experts expect that going forward, Russia will still be selling tens of billions of cubic metres of gas annually to several European countries.

At the same time, it’s entirely possible to reduce the exports of energy products by the aggressor country much more drastically. Such considerable importers of Russian energy as Germany and Japan have turned to Canada as a preferred supplier of LNG.

Canada’s East Coast LNG – frustration has grown

While meeting in June 2022 during the G7 summit, German Chancellor Olaf Scholz and Canadian Prime Minister Justin Trudeau discussed the opportunities to export Canadian LNG to Europe from prospective terminals on Canada’s East Coast. Hopes were high that Canada and Germany would strike an LNG deal before or during Chancellor Scholz’s visit to Canada in August 2022. During and just after the visit, there was some confusion as to why the two leaders discussed the issue only briefly and what Trudeau’s words, spoken during the press conference, about the lack of a business case for East Coast LNG terminals meant.

By now, confusion has dissipated, and it has become clear that the Canadian government has not shown any initiative to speed up the projects to export LNG to Europe. The following titles and quotes tell the story:

Snubbed by Canada, Germany goes all-in with autocratic Qatar for its gas” (Tristin Hopper, National Post, Dec. 2, 2022);

Canada could be as green and wealthy as Qatar and Saudi Arabia if government wakes up” (Eric Nuttall, Financial Post, Jan 24, 2023);

As we sit on oil/gas that Europe & Asia want from us – our leader (aka loser) smooshes with other leaders – showing off his socks – & trying to look like a diplomat that should be considered for a UN position. In the meantime, Canada has sunk into oblivion” (Dianne Francis; Jan 26, 2023);

“While there may be insufficient gas pipeline capacity to the east coast or a lack of political support in Quebec, the “business case,” [for LNG exports from Atlantic Canada to Europe] as defined by economics, has never been better” (David Yager, Troy Media, Jan. 16, 2023).

The business case for LNG has existed for some time and Germany has just removed the last barrier

Since the onset of the full-scale Russian invasion of Ukraine, Germany has been very actively seeking to replace Russian natural gas with LNG from ”a myriad of different gas suppliers,” as DW put it in September 2022. Over the course of about nine months, Germany changed its legislation and built two LNG importing terminals from scratch.

The business case for Canada’s East Coast LNG projects seems to have become more realistic in November 2022 when the first long-term contract to deliver LNG to Germany was signed. The need for long-term off-take LNG agreements has long been cited as the prerequisite for the development of those projects. And the German unwillingness to have long-term agreements has been considered a negative factor for the projects.

However, this factor did not stop the U.S. from completing seven LNG export facilities from the scratch since 2016. For comparison, Canada had 15 LNG exporting projects proposed as of 2015 with only one under construction by now. The U.S. now has the world’s largest LNG export capacity while several additional projects have been approved or are under construction.

The American sales of LNG to Europe jumped from 1.1 billion cubic meters (BCM) in January 2021 to 8.3 BCM in December 2022. During this period, the U.S. rose from the fifth to the second spot among gas importers to Europe.

There is some Canadian gas in those American volumes going to Europe right now. Because Canada does not have the LNG capacity to send its natural gas to Europe, the country sells its gas to the U.S. at a discount for reexport to Europe. By some estimates, Canada, before 2022, used to lose $9 billion annually from lower prices on natural gas that goes to America. In 2022, these losses must have been much higher – last year, European gas prices were double the price in Japan and six times the price in the United States. There is little doubt that the proponents of the East Coast Canadian LNG projects are green in envy when they are now looking at the success of LNG projects across the globe.

On November 29, QatarEnergy and the American company ConocoPhillips signed a 15-year contract to deliver two million tonnes of liquefied natural gas (LNG) to Germany. German Vice-Chancellor Robert Habeck’s words, spoken after the signing, “Fifteen years is great, and the conditions seem to be really good. I wouldn’t mind 20-year or longer contracts, either” sounded like the final green light for Canada’s LNG exports to Europe.

Freeland Doctrine?

Even before the German Vice-Chancellor showed that Germany, out of desperation, abandoned its unwillingness towards long-term LNG contracts, Canadian Deputy Prime Minister Chrystia Freeland said that Canada is ready to help its allies heat their homes.

Freeland’s speech at the Brookings Institution on October 11, 2022, resonated throughout the world and became known as the “Freeland Doctrine”. It developed the U.S. Secretary of the Treasury Janet Yellen’s concept of “friendshoring” or, as Freeland put it, “a conscious effort” by democracies to build supply chains through each other’s economies. In the speech, Freeland said: “Canada must – and will – show […] generosity in fast-tracking, for example, the energy and mining projects our allies need to heat their homes”.

In that speech, Freeland did not specify whether she meant fossil-fuel energy projects but given the urgency of some of the Canadian allies’ need to heat their homes at the time, one could only think about Canada’s oil and gas in this respect. Given the political sensitivity of fossil fuels projects in Canada, Freeland’s words “we must then be prepared to spend some domestic political capital in the name of economic security for our democratic partners” could be interpreted as related to the oil and gas sector.

And finally, in her speech at the XXVII Triennial Congress of Ukrainian Canadian Congress on October 28, Freeland was quite clear: “Many of [the countries in Europe] have found themselves so economically dependent on Russian energy, particularly Russian gas. And I think what you are seeing, from the EU, very much from the U.S. Secretary of the Treasury Janet Yellen is this notion that we need to think more about resilience when we are building our supply chains, when we are thinking about our international economic relationships – of course, we need trade, Canada is a trading nation, it’s very important for us – but where we need to be vulnerable to other countries, let’s be strategically vulnerable to our friends and our allies. I think there is huge economic opportunity for Canada in that geopolitical shift, so, dear Ukrainian Canadians, let’s work hard on that.”

Deputy Prime Minister Chrystia Freeland speaks during the conversation with a former ambassador to Ukraine Roman Waschuk at the UCC's XXVII Triennial Congress on October 28, 2022

In December, in the light of “Freeland Doctrine” and the German readiness for long-term LNG contracts, NP-UN asked Chrystia Freeland’s press service about the necessity to develop the capacity to export LNG from the East Coast which could help secure Europe’s energy independence from Russia and help the Canadian energy producers export their natural gas directly and increase their profit margins.

The response was: “Russia’s invasion has upended geopolitics and Canada, along with our democratic partners, must work closely together now more than ever. Our unity in support of Ukraine is essential. With respect to energy security, we remain committed to supporting our partners. As Minister of Natural Resources Jonathan Wilkinson has previously announced, Canadian industry incrementally increased its oil and gas exports in 2022 by up to 300,000 barrels per day (200,000 bbl/d of oil and up to 100,000 BOE/d of natural gas), with the intention of displacing Russian oil and gas while not increasing global emissions. We are also investing in a more efficient project approval process, here in Canada, as evidenced by the $1.28 billion announced in the Fall Economic Statement in November 2022.”

By mid-February 2023, four months have passed after the Brookings Institution speech. So far, there has been no visible progress for any of the East Coast LNG projects. This compares to the term of less than nine months which took the Germans to change legislation and complete two LNG terminals. While the plan to increase Canada’s oil and gas exports by up to 300,000 barrels per day with the intention of displacing Russian oil and gas compares to 6.8 million barrels of oil and gas that Russia exported daily in 2022.

Are there changes on the horizon?

Although the effect of the “Freeland Doctrine” on Canada’s oil and gas is still unclear, chances seem to remain for Canada to help Europe with natural gas and simultaneously make some money. At the moment, the federal government has not yet revealed what the promised Just Transition to the low-carbon future will involve. An indication that oil and gas will continue playing some role came when Canada did not agree to add language calling for the phaseout of oil and gas to the final agreement at United Nations climate talks in Egypt in November 2022.

The Calgary-based energy expert David Yager is sensing a “remarkable” global shift in public attitudes toward acceptance of oil and gas. The shift, he believes, is caused by Russia’s invasion of Ukraine, which assaulted the global energy complex, and rising inflation and interest rates. As demand grew post-covid, fossil fuel shortages were reflected in the price. When Russia – one of the world’s largest oil and gas suppliers – invaded Ukraine, the gravity of the situation escalated immediately.

Coupled with the fact that Canada’s low-emissions oil and gas would replace higher-emissions Russian oil and gas, as well as coal, that shift in popular attitudes creates chances for a resurgence of Canadian LNG projects. Alberta Environment Minister Sonya Savage said on February 1 she’s hopeful Ottawa will commit to growing the LNG sector. Savage recently spoke with federal Natural Resources Minister Jonathan Wilkinson about exporting western Canadian gas to Japan. She suggested Canada could potentially receive international credits for such exports that reduce emissions in importing countries.

Completion of East Coast LNG projects will not happen soon, Yager noted. The fact the government has not moved on the East-Coast LNG file in any visible manner, he thinks, may mean a rift in the government between those who favor the projects and those who oppose them. But the pressure on Canada from Germany and the G7 will eventually produce the result, he expects. Canada will export LNG to Europe, said Yager, but after everybody else has made more money on gas.

And Canada needs to hurry. In November, Canada’s natural resources minister Jonathan Wilkinson told the House of Commons Natural Resources Committee that the window to get natural gas to European markets is just three years, with countries looking to pivot to hydrogen soon after. “They want to see the product in Europe within three years or they’re really not interested in part because they are aggressively moving towards hydrogen, which is something that Canada is very interested in supplying to Germany,” said Wilkinson.

On the one hand, that window may be wider than three years considering that commercial technologies to use hydrogen as fuel on a large scale may take longer to develop. On the other, the pace and costs Canada develops energy projects may further delay things. Costs on major infrastructure projects in Canada continue to soar due to labour shortages, high inflation, and lengthy development timelines. On February 1, TC Energy announced the budget of its Coastal GasLink pipeline grew from last summer’s estimate of $11.2 billion to $14.5 billion and could go higher. The pipeline will move natural gas from northeast B.C. to Canada’s first LNG export facility in Kitimat BC.

Coastal GasLink installs pipe along its 670-kilometre route from northeastern B.C.’s gas fields to an LNG export terminal in
Kitimat, B.C. CBC / Coastal GasLink

The main infrastructural impediment for East Coast LNG projects is the deficit of pipeline capacity from the natural gas production region in Western Canada. Currently, Atlantic Canada imports Western Canadian natural gas via the Maritimes & Northeast Pipeline. Whether the existing pipeline system would be enough for increased volumes of natural gas is unclear. If not, Quebec’s ban on pipelines may bury the prospects to export LNG from the East Coast. However, David Yager is optimistic that even this long-held position by the Quebec government may change in the face of economic necessity and the need to phaseout coal and reduce emissions in energy-starved Europe.

The project, considered to have the best chances to start shipping LNG off Canada’s East Coast, Saint John LNG in Saint John, NB, has just received a six-year extension for its LNG export licence from Canada Energy Regulator. The owner Repsol now has until 2032 to start selling LNG abroad. The project received the export license in 2015. It remains to be seen whether it starts exporting LNG 17 years after it received the licence to do so.

Saint John LNG import facility in Saint John, NB. Source: Company

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