Prospects for B.C.’s LNG sector have ‘darkened,’ report says.

‘No plant ... operational’ by 2020

In one of the gloomiest forecasts yet for British Columbia’s nascent LNG sector, the International Energy Agency says prospects for export projects have ‘darkened’ and deferrals are likely.

In a five-year outlook on global demand for natural gas published Thursday, the Paris-based agency throws cold water on the B.C. government’s hopes of being home to three liquefied natural gas projects by 2020.

“Prospects for (Canadian) LNG projects have deteriorated and no plant is expected to be operational over the time horizon of this report,” the IEA said.

The curtailed outlook reinforces what B.C. LNG proponents have feared in recent months — that their window of opportunity to build export projects on the West Coast may be closing. As many as 19 consortiums have proposed export projects, but none has taken a final investment decision.

While the Petronas-led consortium and the smaller Woodfibre Ltd. are expected to make that decision this year, deferrals are likely if oil and gas prices do not improve, the IEA said.

Japanese LNG prices, which are loosely linked to oil prices, have fallen 50 per cent in the past 12 months, trading at US$7.12 per million British thermal units, far lower than the US$10-US$13 per mBtu needed for most LNG projects.

Global LNG supply is also set to rise 40 per cent during the next five years, leading to a global glut that will likely keeping prices lower for longer.

Although Canada’s LNG projects would be closer to Asia than projects in the United States, they suffer from higher capital costs and follow the traditional integrated upstream model; their remote location is also adding to the investment bill.

“Procuring the required skilled labour is more difficult and costlier in this environment,” the IEA warned in a section on Canadian gas titled “A darkened outlook.” “Proceeding with such large-cost items is challenging under any market condition, but the plunge in oil prices will certainly make companies think twice before pushing ahead.”

While Canadian natural gas’s growth potential may be evaporating, it is also facing a major fight on its home turf amid the march of U.S. shale gas.

Canadian natural gas exports to the U.S. have contracted 30 per cent over the past seven years, but Alberta gas also finds itself being displaced by U.S. Marcellus shale producers in its core market of central and Eastern Canada and U.S. Midwest.

“Further displacement seems likely when judging from the pipeline of new projects,” the IEA said.

The Canadian natural gas rout is part of a global disappointment in the promising natural gas sector.

Only four years ago, the IEA had confidently stated the world was approaching the “golden age” of gas.

The North American shale gas revolution and expanding LNG trade, juxtapositioned with concerns over global climate change and nuclear power, implied the golden age of natural gas may be just around the corner, the IEA argued at the time.

On Thursday, the IEA painted a much different picture.

“One of the key — and largely unexpected — developments of 2014 was weak Asian demand,” IEA executive director Maria van der Hoeven said in the report. “Indeed, the belief that Asia will take whatever quantity of gas at whatever price is no longer a given. The experience of the past two years has opened the gas industry’s eyes to a harsh reality: In a world of very cheap coal and falling costs for renewables, it was difficult for gas to compete.”

China has been the big disappointment, with gas slow to replace coal in power generation, although the fuel’s long-term growth potential remains promising.

Gas demand growth increased at a rate well below its 10-year average in both 2013 and 2014, and many parts of Asia have emerged as key areas of weakness, forcing the IEA to cut its growth forecast for global demand for gas to two per cent a year till 2020, compared with 2.3 per cent in previous forecasts.

The major natural gas winners will be the United States, which will see a number of LNG vessels set sail to Asia and Europe and emerge as the world’s third-largest LNG exporter after Australia and Qatar. Meanwhile, with 72 billion cubic metres of LNG capacity under construction, Australia is set to overtake Qatar as the world’s largest LNG exporter.

But Canada’s other competitors will face tougher times. Russia’s aspirations to build new LNG projects will likely be weighed down by financial sanctions, while east African projects also face significant delays. Qatar, which has placed a moratorium on new LNG development, will see flat production growth.

Indeed, the challenge for new competitors will be to find a foothold in a market that relies heavily on long-term contracts. On average, major Asian LNG importers secured about 72 per cent of their volumes through long-term contracts in 2014. As much as 90 per cent of the six Australian LNG projects are contracted out while 80 per cent of the four U.S. LNG projects are also underpinned by long-term offtake agreements.

“High LNG prices in recent years have dented the viability of gas. Consumption growth is fading amid tough competition from coal and renewables,” van der Hoeven said in the report. “Does this mean that we no longer see a bright future for gas? Not necessarily, but it means that we may well be at a crossroads.”

In a world of very cheap coal, it was difficult for gas to compete