For those remaining few who aren’t yet believing the LNG Canada FID is coming next week, we would direct you to Prime Minister Trudeau’s tweet yesterday. It included a photo of Trudeau meeting with Shell CEO van Buerden in New York and the caption “Today, I had another excellent discussion with @Shell’s CEO, Ben van Buerden, on how we can work together to advance energy project that are good for the our economy and our environment – and how to do so responsibly”. Anyone who knows politicians knows that they like to hint and be in early on any big news and his tweet has to be a not so subtle hint that the LNG Canada FID is coming soon. Its probably the final indicator pointing to the LNG Canada FID next week. This week, it seemed like everyone (investors, sellside and media) seems to be writing and calling for the LNG Canada FID on Tues Oct 5. This would be a significant positive event for the Cdn natural gas outlook because it provides the potential for a structural fix to western Canada natural gas. The biggest impact will be in a few years as production ramps up and first LNG becomes near. While there will be an immediate impact, it will allow capital providers to believe a structural fix is coming to western Canada natural gas over the mid term. After all, the two potential phases of LNG Canada will provide visibility to ~3.4 bcf/d of demand, which is material relative to western Canada gas production of ~18 bcf/d.
The local buzz has been building and has pointed people to the FID on Tues Oct 5. There has been a barrage of investors, sellside and media comments on LNG Canada, and basically all were presenting a similar view as Bloomberg did in its story “Yes to LNG Canada? Decision poised to be announced next week” ][LINK]. To a great degree the Oct 5 timing used by Bloomberg and others is based on local feedback and the buzz in Kitimat.
Trudeau and Horgan have given specific comments or hints that it is coming in the next week. Anyone who knows politicians knows they want to make sure they drop some hints or specific comments on any major news announcement. After all, they want to make sure voters know they are involved and played a roll a role in making it happen. (i) Last week, CBC reported [LINK] on comments from BC Premier Horgan and wrote “B.C. Premier John Horgan stated that his government was “very, very close to having a final investment decision from an LNG company,” during his closing address to the Union of British Columbia Municipalities in Whistler, B.C. When asked by reporters about a timeline, he said an announcement could come in the next couple of weeks.” (ii) Yesterday, Trudeau took the time out of his UN trip to meet with Shell CEO van Buerden. His staff took the time to post his tweet “Today, I had another excellent discussion with @Shell’s CEO, Ben van Buerden, on how we can work together to advance energy project that are good for the our economy and our environment – and how to do so responsibly”.
Trudeau and van Buerden last met in Jan in Davos and were then pointing to a LNG Canada FID in 2018. Our Jan 28, 2018 Energy Tidbits memo [LINK] was titled” Shell CEO Drops A Big Tease That Seems To Point To FID For Its BC LNG Canada Project “ based on reports from the Trudeau/van Buerden meeting at Davos. We then wrote “Shell’s CEO van Beurden made what can only be called a big tease and one that points to Shell probably going FID in 2018 for its LNG Canada LNG export project in BC. The National Post ran a story [LINK] that didn’t get much attention on Wed morning “PM Trudeau applying pressure on U.S. in NAFTA talks, says Wilbur Ross’ because markets are interesting in what happens to NAFTA. However, there was also an excellent commentary on Shell’s LNG Canada project. The Post wrote “In the early evening, Trudeau met with the head of Royal Dutch Shell, Ben van Beurden, who said in front of reporters his company is looking to invest in a major “green” project in Canada. “We are looking indeed … probably investing in the greenest and cleanest energy project ever built and probably looking at the largest single investment ever made in Canada,” van Beurden said without elaborating. To which Trudeau replied, “Very exciting.” At that time, we also said that we are not aware of any project in Shell’s inventory that could fit this description and believe van Beurden must be referring to its LNG Canada project”
Shell has called this strong LNG market over a year ago, if anything the LNG market is even stronger today than the summer of 2017. Last summer, the consensus view, including Shell’s supermajor competitors, was that LNG markets were in oversupply in 2017 and would be oversupplied to ~2025. Whereas Shell clearly laid out a contrary (and not really accepted) very bullish view in a Sept 5, 2017 Bloomberg terminal video conference presentation by Maarten Wetselaar, Shell’s Integrated Gas & New Energies Director. Our Sept 20 2017 blog “Shell: “Every LNG Cargo That Could Technically Be Produced In This World Has Been Produced And Has Found A Well Paying Customer” [LINK] noted Wetselaar’s view “So this market is in more balance than people perhaps perceive”. This was not the consensus view, and we saw having a balanced starting point in 2017 as a material change for the go forward LNG view. There was also key data to support Shell’s view that LNG was not in oversupply in H2/2017 last summer such as Japan spot LNG prices which had started to turn higher on a YoY basis last summer after a couple years of lower YoY Japan spot LNG prices.
We have been very bullish on global LNG demand and LNG Canada FID going back to Sept 20, 2017. Our bullish LNG view was also driven by China’s urgency to deal with pollution and was detailed in our Sept 20, 2017 blog “China’s Plan To Increase Natural Gas To 10% Of Its Energy Mix Is A Global Game Changer Including For BC LNG“ [LINK]. That blog concluded with the diversification advantage of LNG Canada “BC LNG will have to be cost competitive, but it also gives Shell more diversity to its LNG supply – a good thing for a global supplier of LN G”, and finally “And perhaps most of all for Canada, its why we see a better chance than ever to see a Shell FID on its BC LNG in 2018.”
We are even more bullish on LNG today than our bullish call from a year ago. Last week (Sept 18), we had our 2nd SAF Energy Market Outlook webcast (a replay is available at [LINK]) that outlined our view for global natural gas markets. A year ago in our 1st energy outlook, our surprise call was our very bullish call on LNG markets at a time when almost everyone believed to the contrary. After seeing the developments over the past 12 months, we are even more bullish on the global outlook for natural gas. That positive outlook was reflected in 2017 natural gas demand growth. Global natural gas consumption growth continued to accelerate, from up 6.9 bcf/d YoY in 2015, to up 8.8 bcf/d YoY in 2016, and higher again to up 10.2 bcf/d YoY in 2017. As we look forward, we continue to believe that the single major issue that will be the driver to strong global natural gas markets is China. It’s a simple view that China’s move to get natural gas to 10% of its energy mix by 2020 is a game changer to global markets. We don’t think China gets there, but it is certainly trying to do so and even if they fall short, it is still a game changer for natural gas demand growth. It was also supported when we saw that in 2017, China natural gas demand increased by 3.1 bcf/d to 23.3 bcf/d. This compares to 1.4 bcf/d increase in 2016 YoY and only 0.6 bcf/d in 2015 YoY. But at 23.3 bcf/d, natural gas was only 5.7% of China’s total 2017 energy mix. If China is to get natural gas to 10% of its energy mix, we estimate China’s natural gas demand should be 42.8 bcf/d in 2020 and then up to 69.8 bcf/d in 2030. Compared to 2017 consumption of 23.3 bcf/d, to 2030, this is growth of just under 4 bcf/d per year. If we assume that China can grow their domestic natural gas supply by 1 bcf/d, this means that China needs to increase its natural gas imports by almost 3 bcf/d per year for the next decade. To put in perspective, 3 bcf/d per year every year is equivalent to five Cheniere LNG trains every year or just shy of the ultimate 4 train 2 phase development of a LNG Canada ~3.4 bcf/d every year. Its also almost equivalent to the massive Gazprom power of Siberia 3.6 bcf/d gas pipeline to China. Again, this is every year for the next decade. This is why we say, China alone can fix the LNG oversupply picture sooner than expected.
If LNG Canada goes FID and ultimately builds out its two phases, it’s a game changer to western Canada natural gas. We have been bullish on the potential for LNG Canada to go FID since our bullish LNG call a year ago. We recognized that Trans Mountain has zero direct impact on LNG Canada and, importantly, LNG Canada project has not had stakeholder issues like Trans Mountain. Its why we have been steadfast in our view that a LNG Canada FID was coming around now. Last week, our 2nd SAF Energy Market Outlook webcast also included out outlook for Cdn natural gas. The US continues success in the Marellus is far from finished and it also means that we don’t see a lasting fix to western Canada gas prices until LNG Canada is about to start. The structural fix for western Canada natural gas is LNG Canada and how it could add ~3.4 bcf/d over its two phases. LNG Canada would, by itself, provide visibility to several years of western Canada gas growth. The two phases total ~3.4 bcf/d, which compares to total western Canada gas production of approx. 18 bcf/d and the prior peak of 19.7 bcf/d in 2006. It may not move stocks, but at least it will allow capital providers to finally believe there is a clear path to a fix coming for western Canada natural gas.