International Trade in Liquified Natural Gas

Clinic: Queen's/UOttawa, Spring 2018

Beneficiary: Global Affairs Canada

Executive Summary

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The global liquefied natural gas (LNG) market is in flux and, despite its position as the world’s fourth largest producer of natural gas, Canada is failing to gain a foothold in the market. Although the global LNG market grew thirty percent in 2017, a number of major Canadian LNG projects were cancelled in the same year. In recent years, demand for Canadian natural gas has decreased as production in the United States (US), its main importer, has grown. The US has already begun exporting LNG from its Gulf of Mexico and East Coast facilities. While there are currently no export terminals under construction on the US or Canadian West Coast, the proximity of any future West Coast terminals to Asia would put them at an advantage in the race to meet the rapidly growing demands of world’s largest LNG market.

With demand for natural gas increasing at higher rates than predicted among priority markets such as China, South Korea and Japan, LNG shows potential for Canada to achieve some of its trade-based goals if an appropriate balance is struck with its other objectives, such as protecting the environment and retaining a sufficient supply for its own future energy needs. Despite the need for Canada to seek out new trading partners for its excess natural gas production, no LNG export projects are currently in the construction phase. Proposed projects have been effectively halted by the decreasing global price of natural gas. Infrastructure costs have also substantially increased. Imports of materials that are essential to the construction of export terminals have recently been hit by anti-dumping duties of up to 46.8%, substantially increasing project costs.

The Canadian LNG industry also faces several other irritants that affect a variety of projects. Certain East Coast facilities seeking to import natural gas produced in the United States for liquefaction in Canada and re-export to third markets have unexpected hurdles in the process of obtaining export permits from the US Department of Energy (DOE). The US natural gas export permitting regime affects Canadian projects seeking to liquefy and re-export US-produced natural gas to certain third countries by subjecting those projects to a separate export approval process that frequently involves substantial delays.

Domestically, the Canadian regulatory matrix introduces unnecessary obstacles for potential projects. Many steps of the approval process are duplicated as between different federal and provincial agencies. These inefficiencies stall production and create additional costs for projects. This memorandum makes three recommendations to Global Affairs Canada to directly and indirectly address these irritants and increase the marketability of Canadian LNG exports.

Recommendation 1: Address the US Natural Gas Export Licensing Regime Affecting Canadian LNG Re-Export Projects

Despite decades of efforts to promote free trade and to integrate the North American energy sector, some restrictions remain. One key irritant impacting Canadian re-exports of natural gas involves the approach taken by the Department of Energy in determining which approval process to use for such projects. This approach was first clarified in Order 3639, issued in 2015,in which the DOE granted partial approval to a Canadian re-export project but also determined that a portion of that project’s application must be put through a much longer approval process. According to the DOE’s findings in this Order, the Department is required to assess the trade status of the country where the natural gas is sent for “end use”, and consequently applications seeking to export US natural gas to Canada for the purpose of liquefaction and re-export to certain third countries must undergo a lengthy assessment process.

To address this issue, Global Affairs Canada should seek an outcome that ensures that these findings do not apply to any future applications to import US natural gas to Canada. This can be achieved through the addition of a new provision to the NAFTA energy chapter, by challenging or threatening to challenge the regime’s compliance with US obligations under the World Trade Organization (WTO), or through efforts to support domestic initiatives in the United States to reform the export licensing regime.

Recommendation 2: Help Secure a Remission Order from Anti-Dumping Duties on Materials Used in the Production of LNG Export Facilities

Global Affairs Canada should advise the Minister of Finance of the public interest of exporting LNG to assist the industry’s effort to gain a Remission Order exempting them from anti-dumping duties on specific components.

Recommendation 3: Streamline Canada’s Regulatory Matrix by Authorizing a Single Regulatory Body to Perform Duties under Both Federal and Provincial Regulations

Global Affairs Canada should lead the initiative for a consolidated approval authority for LNG projects in Canada, eliminating the regulatory hurdles posed by a multi-agency process.

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