In the race towards LNG exports in North America, the United States has a dominate lead over its neighbors to the north.

But in any competition, a big lead can always be overcome. For Canada, the collapse in crude oil prices might lower LNG related costs for labor and pipelines, giving it the chance to be cost competitive with the already thriving development in the U.S.

But that lead is awfully big.

“Some 50 million tonnes per annum of LNG production capacity is now under construction in the U.S., compared to none in Canada,” Alex Munton, principal analyst of Americas Primary Fuel Fundamentals at Wood Mackenzie, said in an April report.

The appeal of LNG exports for both countries is clear—natural gas shipments could mean significant investment, jobs and economic growth. Exports also provide a destination for the huge gas resource base in North America.

The key behind the different pace between the two countries has been cost. Nevertheless, Canada is still on the field and with prevailing market conditions, could even make a race of the LNG export business.

U.S. Forging Ahead

The oil price collapse has had little effect on the level of construction activity for LNG facilities in the Gulf Coast region of the U.S., which has easy access to a large local labor pool, the report said.

“For the U.S., the reduction of the U.S. Gulf Coast’s cost advantage does not jeopardize projects close to be sanctioned like Corpus Christi and nor does it preclude a second wave of U.S. LNG from getting sanctioned later,” Munton said.

Most of the big industrial projects are far too advanced to slow down now, Munton said.

About 54 companies have applied for applications to export LNG to federal trade agreement (FTA) and non-FTA countries. Companies continue to jockey for position, though out of all applicants, only eight companies have applied to export more than 2 Bcf/d.

The U.S. Department of Energy (DOE) has approved nine companies for exports to non-FTA countries. The U.S. has FTA agreements with Australia, Bahrain, Canada, Chile, Colombia, Dominican Republic, El Salvador, Guatemala, Honduras, Jordan, Mexico, Morocco, Oman, Panama, Peru, South Korea and Singapore.

If all applications were granted, roughly 47.05 Bcf/d would be exported to FTA countries and 40.31 Bcf/d to non-FTA countries.

LNG developers in the U.S. have focused on low-cost brownfield expansion where the incremental expenditure needed for LNG exports is primarily the cost of adding the liquefaction trains as well as some modifications to the existing marine facilities, storage tanks and pipelines, the report said.

In addition to the nine liquefaction trains now being built on the Gulf Coast, construction has also started on six world-scale ethane crackers in Texas and Louisiana as well as methanol, fertilizer and other petrochemical plants, Munton said.

As the level of construction activity grows in the U.S., so does costs and the ability to secure craft labor.

Total capex on firm developments in the petrochemicals and LNG industries in the U.S. could exceed $130 billion over the next five to six years, with much of the investment focused on the Gulf Coast region, he said.

“The availability of cheap gas feedstock has brought about a resurgence in gas industry investments in the U.S., which has pushed up demand for craft labor, leading to wage pressures and overall cost increases," he said.

With the competition for labor needed for the many construction projects on the Gulf Coast growing, “developers will likely need to reduce expectations of returns if they are to remain competitive,” he said.

Munton estimates that it could be at least 18 to 24 months before capital costs for new LNG developments to retreat to the level they were at prior to this “gas-fed construction boom.”

The U.S. also has an advantage through greater operational and destination flexibility than many other supply options available, he said.

Canada’s ‘Window Of Opportunity’

Several LNG projects have been proposed in Canada—17 according to Canada’s Department of Natural Resources—but many are having trouble securing a final investment decision from investors.

The higher capital costs have made it difficult for projects in Western Canada, where most large-scale project activity is focused, to demonstrate the commercial returns necessary for investment to be sanctioned.

In Western Canada, multiple factors add to cost including:

  • The proposed large-scale developments are all on remote greenfield sites that have little of the infrastructure needed for an LNG development;
  • Requirements for long-distance pipelines, up to 900 kilometers, to access feed gas; and
  • Lower labor availability relative to the U.S.

“A window of opportunity is opening for Canadian LNG to become potentially cost competitive with U.S. LNG into Asian markets,” Munton said.

The local construction market in Western Canada has already started to cool with the end of a period of heavy investment in oil sands between 2011 and 2014, as 16 unique oil sands project phases got delivered into production.

Development spend in oil sands is expected to drop from more than C$29 billion (US$27 billion) in 2014 to under C$20.5 billion (US$17.1 billion) in 2015, the report said.

Munton added that the outlook for steel prices is also bearish. Steel is a major component of the overall cost of long-distance feed gas pipelines. A slump in steel prices could help lower overall costs.

“This improves the cost structure for LNG developments in Canada to a greater extent than those in the U.S. because of the need for long-distance feed gas pipelines,” he said.

In addition, the implications of recent tax concessions by both the federal Canadian government and the local British Columbian government could improve project profitability.

Now the collapse in oil prices is contributing to more rapid industry cost deflation as companies defer further phases of investment, causing a sharper reduction in capital spend and greater slack in the labor market, including crafts.

For example, in order to proceed with Pacific North West LNG in 2015, Petronas will be hoping for cost reductions of at least 15% from contractors compared to 2014 levels, Munton said.

“It remains to be seen whether contractors will oblige,” he said. “If they do not, then the worry will be that a rising oil price will push the costs of Western Canadian LNG back up again.”

Contact the author, Emily Moser, at emoser@hartenergy.com.