Canadian natural gas exports dropped in the last decade, while the US saw a significant surge. And the main reason behind this is the expansion of liquefaction facilities south of the border. Though Canada is late to the party, it is building an LNG terminal in British Columbia to cater to the fast-growing demand in Asian markets.
LNG Canada and natural gas producers
Canada has substantial reserves of natural gas. Almost 50% of its production is exported to the US via pipelines. When gas is cooled at -162 degrees Celsius, its volume reduces by 600x, which becomes highly economical to transport.
The US has eight LNG terminals spanning the entire LNG value chain, while Canada currently has only one LNG terminal that takes care of the regasification – the latter part of the value chain.
LNG Canada – the project under construction – will take care of the entire liquefaction and regasification part, and operational by 2025. With this project, Canada will likely be able to diversify and boost its natural gas exports.
The year 2022 was pivotal for LNG as Europe tried to quench its thirst for gas by eliminating imports from Russia. The US came to the rescue and exported almost 7 billion cubic feet per day of LNG to Europe last year. This was a massive 141% increase compared to 2021.
How Canadian gas producers are placed in the global LNG boom
Tourmaline Oil (TSX: TOU) is Canada’s biggest natural gas producer with nearly 4.5 billion barrels of 2P (proved plus probable) reserves. It has entered into a long-term contract to supply 140 million cubic feet per day of gas at Cheniere Energy’s Sabine Pass LNG facility.
The realized price Tourmaline receives in this particular contract is Japan-Korea Marker (JKM), which is way higher than what it receives in the domestic markets. This contract forms a small portion of Tourmaline’s total production. However, it could be among the beneficiaries when the LNG Canada terminal becomes operational.
According to the guidance, Tourmaline aims to increase its total production with the development of its Northern Montney Conroy asset. This project coincides with the LNG Canada timeline.
Tourmaline also sells its natural gas at some of the premium-priced markets in California, like Malin. As a result, even when gas prices fell by 60%–70% in the last six months, the impact on Tourmaline’s financials was minimal. Realized prices at Tourmaline in Q1 2023 came in 10% lower sequentially, when Henry Hub gas prices dropped by 50%.
LNG gateways to Asia
ARC Resources (TSX: ARX) is another Canadian gas producer that could benefit from the LNG boom. It is Canada’s third-biggest gas producer, with 900 million barrels of oil equivalent of 2P reserves.
It has an agreement to supply natural gas at Cheniere Energy’s Corpus Christi LNG terminal, which will begin in 2026. ARC also announced its agreement to supply and liquefy natural gas for the proposed Cedar LNG project. The company is expected to receive JKM prices for both contracts, which could enable superior margins. ARC will also supply 150 million cubic feet per day of gas to the LNG Canada project beginning in 2025.
Bottom line
Canadian energy producers have displayed commendable capital discipline since the pandemic, notably strengthening their balance sheets. Tourmaline and ARC Resources are no exceptions. This gives them more flexibility to invest in more prolific capital projects. Development of the LNG terminal and higher expected demand should broaden Canada’s gas exports. Thanks to these structural changes, Canadian gas producers will likely see superior free cash flow growth for the longer term.
