Building of the TransCanada mainline in the late 1950s ranks as one of the most monumental pieces of industrial infrastructure in Canada’s history. Since the contentious decision was made to lay the pipe, trillions of cubic feet of western natural gas have flowed east and south to heat homes, cook food, generate electricity and make downstream products like polyester suits.
The economic benefits of Canada’s connection to continental natural gas supply systems have been far and wide, creating employment for Canadians upstream to downstream, and revenue for governments – provincial and federal – in the form of land sales, royalties and taxes. Exporting gas to the United States has been especially lucrative: since 1958, Canada has shipped over 100 trillion cubic feet of natural gas to the American market for a total estimated value of over $450 billion in today’s real dollar terms.
In this context, the imminent approval of Canada’s first liquefied natural gas (LNG) export facility off the coast of British Columbia is as significant as the decision to lay more than 3,500 kilometers of pipe across the country 60 years ago.
Late last week, Petronas, the Malaysian state-owned oil company, signaled that a conditional final investment decision (FID) on its $36 billion Canadian LNG export project might only be weeks away. And assuming that First Nation concerns can be resolved, the final “FID” would follow. The Final FID is the most important rubber stamp for any multi-billion dollar megaproject. The ink barely dries before steel is ordered, people are hired and shovels hit the ground. It sounds as promising as it is important.
But there is more here than just the creation of jobs to pour concrete, weld steel and fit pipes. The opening up of natural gas export facilities off the west coast of Canada represents a 180-degree flip of our west-to-east supply compass to growth markets in the other direction, to Asia and beyond. That’s timely, because since 2006 western Canada’s continental market share has been clobbered by US shale gas, resulting in 25% lower production volumes and 50% lower prices. This double volume-price whammy has left both producers and governments counting coins instead of bills.
Once upon a time, a long 10 years ago, natural gas was a $50 billion a year business in Canada. Today it’s only $15 billion. Liberating Canada’s natural gas business out of the continental cage should boost revenues, propelled by both output and value. How much value is debatable, but anything is better than what is being realized now. Royalties are driven off revenue and taxes off profit. Right now there is not much of either happening. The unspoken reality is that Canada is shipping natural gas to customers, especially the United States, for almost zero “rent” as economists would say, or “value-add” in the jargon of policy wonks. Let’s just call it “money,” and note that there should be more of it upon entry to higher value global markets.
But no one should expect an overnight windfall. Like the TransCanada Mainline, realizing value from LNG facilities will be a multi-decade play. And like the late 1950s, the decision to build is one of recognizing a long-term growth market. As our figure this week shows, natural gas has been outpacing oil demand growth since the 1960s. As a substitute for both coal and oil, the growth profile for natural gas is likely to steepen. Estimates from various agencies range from 40% to 50% increase in global consumption over the next 25 years. Given the scalability of natural gas and its relatively attractive carbon emissions, the growth rate could be even higher. So the next half-a-trillion dollars could come faster than the first.