The abundant cheap energy created by the new oil-and-gas boom in the US and Canada is the kind of competitive advantage that other countries would like to emulate. But the reality is that North American energy companies would rather sell their product to Asian customers.
It is easy to understand why, said a panel of Canadian commercial and political insiders at the Asian Financial Forum on Tuesday. The wholesale price for natural gas in Japan is roughly $16 per million British thermal units (MBtu) compared with just $4/MBtu in the US — a difference caused by a lack of export infrastructure in North America, which has been caught unprepared to play the role of major energy exporter.
The panellists were Simon Kennedy, Canada’s deputy minister of international trade; Alister Cowan, chief financial officer of Li Ka-shing’s Husky Energy; Kevan Cowan, group head of equities at TMX Group; Kevin Lynch, vice-chair of BMO Financial Group; and Rod Reynolds, president of Asia Pacific and Middle East at Scotiabank. Robert Kwauk, chief representative in Beijing for Canadian law firm Blake, Cassels & Graydon, moderated the discussion.
All of them said they would like to see Canadian oil and gas sold in Asia and claimed that the arbitrage opportunity could easily pay for the cost of building the infrastructure needed to turn shale rock and tar sand into liquefied natural gas suitable for shipping across the Pacific.
“A very simple rule of thumb for LNG project financing is $2 for the pipelines, $3-to-$4 for the liquefacation and $2 for shipping,” said Reynolds. “If you can sell at $16 that leaves $5 left to pay bank interest and return on investment.”
One Chinese private equity guy in the audience was immediately interested. “I would like to get that $5,” he said. “Are there any export restrictions to China?”
But not everyone was so easily convinced. One audience member wondered how prices in Japan could stay at $16 if exporters were able to substantially increase the supply of gas shipped across the Pacific. Wouldn’t prices equalise?
“I don’t see that as an issue at all,” said Reynolds, who added that offtake agreements would ensure fixed prices for 20 to 25 years.
“It’s not clear what the market-clearing price is going to be,” said Lynch. “But early movers will at least have certainty.”
Whatever happens on the export front, the panellists agreed that the changes in the global energy market are revolutionary.
“Forecasts over the next 20 years say energy demand for oil and gas is going to go up by 33% to 35%,” said Lynch. “That's not unusual. The difference is [that] 97% of that is going to be from emerging markets. That's a complete reverse of the last 50 years.”