Prime Minister Harper’s recent posturing on Russian gas suggests he may be stuck in the era when Canada had a national oil company and Prime Ministers could influence how that company did business. The Canadian Government vacated that stage with the sale of PetroCanada which began in 1991. In 2014, the privately owned Canadian petroleum industry have full control over their production to dispose of as they see fit. Mr Harper is no CEO and he doesn’t direct industry’s commercial decisions. He cannot, therefore, imply that we are ready to supply Europe with gas his government doesn’t have or control.
Most Russia watchers would agree that Putin has considerably more influence over Russian oil companies than Mr. Harper would have over ours. When it comes to who oil companies can do business with, about all Prime Minister Harper can do is to approve or disapprove oil and gas exports. If he interferes beyond that in the marketplace, he does so at significant political peril. In other words, it is easier to tell gas companies who they cannot sell to rather than who they must sell to.
Realizing that gas trade moves on commercial terms and the infrastructure that supports it involves putting private, not public, capital at risk, those proposing to displace Russian gas must overcome a key economic reality. Russian gas can move to Germany much more cheaply than LNG from North America. Therefore, investments in the infrastructure required to make this trade possible would likely need to be backed by guarantees in the event of future stranding of those assets if the taps to cheap Russian gas were ever turned back on.
Harper’s intervention in this marketplace is problematic on other levels. Not the least of which is the probable reaction of European consumers if they can’t have access to cheaper Russian gas because a politician from Canada was bear-baiting to please his domestic audience. I don’t believe Mr. Harper is willing to subsidize European consumers in that event or provide investment guarantees to business. Existing Russian pipeline capacity is sufficient to move nearly 8tcf of natural gas/year to Europe, almost double the volume of gas currently shipped. That represents a significant sunk cost that any North American contemplating a run at Russia should think carefully about.
Clearly, to be Europe’s preferred gas supplier we would have to overcome Russia’s competitive advantages. But we would also have to consider the realities of our own supply and logistics.
Canada doesn’t have the infrastructure to export gas to Europe and Europe doesn’t have adequate import infrastructure to handle the equivalent of what it now takes from Russia via pipelines. Remedying this would entail several long and cold European winters building export and import terminals and the vessels to move gas across the Atlantic. In the meantime, damage to the economies of countries like Germany and Italy could be significant, dependant as they are on supplies of imported Russian gas.
If Canadian gas were to move to Europe, it would logically ship as Liquified Natural Gas(LNG) from the East Coast. However, Canada has no spare gas positioned there to export and no capacity to produce LNG.
Fields off NS are depleting and as we saw this winter, infrastructure bottlenecks in New England caused prices to spike in the Maritimes as supplies there were stretched.
Newfoundland and Labrador has gas offshore. But it is physically stranded and therefore re-injected in favour of oil production.
Western Canadian gas ships as far as Quebec. But the “Energy East” project will see the TransCanada Pipelines Ltd main line converted to bitumen export. As a result it will be a challenge to serve the peak gas demands of Quebec and Ontario from Western Canada, let alone serve an export market.
Potential exists to convert an underused import (re-gasification) terminal in Saint John, New Brunswick into an LNG export facility. But this requires a major commitment in capital for a liquefaction plant as well as a 20 year supply of natural gas to make it feasible. New Brunswick doesn’t currently have access to a domestic gas supply to meet that requirement.
An interesting but unlikely scenario is the development of existing East Coast offshore gas reserves with a floating LNG (FLNG) vessel like the recently launched Shell “Prelude”. FLNG units are more flexible than shore-based facilities as they can be moved to exploit stranded gas fields remote from pipelines like those off Newfoundland and Labrador. FLNG units can be built in low-cost jurisdictions like Korea and moved to the gas supply.
Unconventional gas production technology has transformed the North American supply picture. But success has meant lower prices. American gas producers would like to improve their returns, but that suggests moving product to more lucrative markets in Asia, rather than Europe. Canada’s Foreign Minister might dream of the Americans willingly going up against entrenched Russian companies on their home turf while yielding their Asian market push to Canada’s fledgling BC LNG. This doesn’t really make sense. In any event, US producers must expand export infrastructure, including pipelines to get new gas from the center of the continent to the coasts. This too will take time.
The bottom line is that Putin knows all this, Merkel also knows this and as with other aspects of the European Russian relationship, challenges like their over-dependence on Russian natural gas are much more complex than keeping some Canadian voters on side with sabre rattling. Mr. Harper may have oversimplified because he was appealing to a specific audience or maybe because he simply doesn’t understand the challenges facing Europe. In either case Europeans might be well advised to politely ask Mr. Harper to tone down the rhetoric, play in his own sandbox, and not promise what he can’t deliver.
