The Canadian Association of Petroleum Producers predicts that the country's oil production will nearly double by 2030, reaching 6.7 million barrels per day. The increases are underpinned by the country's massive oil sands, which could provide up to 5.3 million barrels per day alone. Canada's shale formations hold an estimated 16 trillion cubic meters of technically recoverable shale gas resources. Canada also has the technology, investment environment and political drive needed to develop the resources.
However, so does the United States, which historically has been Canada's sole customer for its energy exports. Growing U.S. energy production has squeezed Canadian energy out of the market and will continue to do so in the future, particularly natural gas. This has already created problems for Canada. Energy prices have collapsed in Alberta, home to most of Canada's energy production. Oil sands projects have been abandoned or delayed because the investment returns are not there. Canada's natural gas production has declined consistently, because companies can no longer profit by drilling new wells.
Given these circumstances, Canada has been exploring every avenue it can to make its oil and natural gas available to global markets. This is not without controversy. The most logical route for exports would be pipelines through the Rockies to the British Columbian coast, but British Columbia has a large and vocal environmentalist population. British Columbia is largely against crude pipelines, hence TransCanada's proposal for the Energy East pipeline to the Atlantic. In contrast, liquefied natural gas projects have found support in British Columbia; they would benefit the local economy, contributing an estimated $1 trillion over the next 30 years and adding 75,000 jobs (plus 60,000 other jobs during construction), and British Columbia has a portion of Canada's shale gas reserves that could be exploited. However, British Columbia is ensuring that those proposing liquefied natural gas projects are mindful of environmental safety.
Recognizing Canada's potential, China and Japan are both considering the country's energy resources as a way to supplement their supplies and diversify their imports. This is particularly true in natural gas markets, as Asian prices for liquefied natural gas can approach nearly $20 per mmbtu, and the emergence of new suppliers will dramatically lower Asian natural gas prices.
China's Recent Moves
China has already made significant investments in Canada's oil sector. PetroChina has shares in the upstream sector of both shale gas blocks and oil sands projects. China National Offshore Oil Corp. finalized its acquisition of Canadian energy firm Nexen for $15 billion earlier this year. Sinopec has spent nearly $7 billion in acquisitions in Canada. Even the smaller Chinese energy company Shaanxi Yanchang Petroleum is buying into Canadian assets.
Despite the country's slowing economic growth, China's natural gas and oil consumption is expected to rise dramatically. Even the lowest estimates have China's natural gas consumption increasing by 50 to 100 billion cubic meters by the end of the decade. In the longer time frame, as China partially switches from coal-fired power plants to natural gas-fired power plants to combat pollution, China's demand will grow even more, with some estimates by the International Energy Agency projecting China's natural gas consumption to approach nearly 550 billion cubic meters by 2035. Also in the longer term, as a small percentage of China's population becomes middle class, oil consumption is expected to dramatically increase. When China's demand for a commodity increases, it increases on a "China scale," which sends shock waves through the international market for that commodity. With oil and natural gas markets already under pressure, particularly in Asia, it is no surprise that China has been aggressive in developing its own shale gas resources and developing production abroad.
Chinese energy companies' actions have created a backlash in both Canada and the United States. After PetroChina's acquisition of oil sands projects, Ottawa announced in December 2012 that it would not allow any more state-owned companies to purchase controlling interests in Canada's oil sands projects — a move clearly aimed at Beijing. This effectively suspended Chinese acquisitions in Canada until Shaanxi Yanchang Petroleum's investment earlier this month.
Despite the backlash, Canada and China share an interest in moving Canada's energy production from regional to global markets. Nexen, now a subsidiary of China National Offshore Oil Corp., has been cultivating ways to do this. Nexen and Japanese firm Inpex are considering a natural gas liquefaction terminal in British Columbia that would send liquefied natural gas to Asia. Because oil pipelines are more controversial for the British Columbian government than natural gas projects, exporting oil from Canada's western coast will be more challenging. Greenpeace Canada has found documents showing that Nexen and Canadian National Rail have been discussing the possibility of moving crude by rail at volumes roughly equivalent to proposed pipelines that have not been approved — roughly 600,000 barrels per day — to the Pacific Coast for export to international markets.
Last week Nexen's CEO mentioned that Nexen and China National Offshore Oil Corp. were evaluating the possibilities of moving forward with the liquefied natural gas project alone, which would likely send the gas directly to China. Because natural gas markets are more regionalized than oil markets, and East Asia's natural gas prices are so high, furthering potential gas export projects is more important for China than oil production. Because of this, China and Japan, the world's biggest importer of liquefied natural gas, have a shared interest in opening up Canada's hydrocarbon sector.
Japan and the Liquefied Natural Gas Potential
Unlike their Chinese counterparts, Japanese energy companies' acquisitions and deals in Canada have not been controversial, although the firms have also been extremely aggressive. In addition to the aforementioned joint liquefied natural gas project between Nexen and Japan's Inpex, Mitsubishi has a 20 percent stake in Shell's proposed liquefied natural gas project. During their meeting, Harper and Abe discussed cooperation between their countries on furthering the development of Canada's natural gas sector, with Abe hoping Japanese companies could aid with the construction of facilities and pipelines.
As with China and other Asian countries, natural gas is a central issue for Japan's economy. Following the Fukushima disaster and the shutdown of the country's nuclear power plants, other sources of energy are needed in order for Japan to meet electricity demands. Natural gas became a huge component of this as Japan increased its liquefied natural gas imports dramatically.
While Japanese natural gas consumption likely has peaked, increased competition for liquefied natural gas cargos from China and India has driven up prices. This has led Japan to take aggressive actions to secure long-term contracts with new providers, break down the historical oil-linked pricing mechanism in contract that traditional natural gas providers prefer and actively increase the global supply of natural gas.
For Asian consumers and oil and natural gas companies, Canada is just one player in this process. Despite Harper and Abe's insistence, the economics for the companies involved will be the main factor in determining whether or not these energy supplies materialize and where they go. With liquefied natural gas coming online in significant quantities from the United States, Russia, East Africa and Australia as well as Canada, supplies of liquefied natural gas by 2020 will increase dramatically — possibly to the point at which the market is overstocked. Even in that scenario though, Asian prices will remain higher than prices in Europe or North America because of the costs of liquefaction and transportation.
Moreover, Canada has to compete with these other liquefied natural gas producers for the capital needed to build the plants — and as Australia has discovered, cost overruns can be significant, with some plants costing nearly $50 billion. The economics of liquefied natural gas projects in British Columbia have been questioned by some analysts and oil companies, citing Australia's problems and increased competition from other providers. Regardless, this has not stopped Japan and China, along with other Asian countries, from eyeing Canada's oil and natural gas industry.