Canadian LNG Deals May Leave Europe Reliant on US Gas

European utilities buying Western Canadian liquefied natural gas are unlikely to ship it to Europe under ordinary conditions, says Energy Flux publisher Seb Kennedy. His modelling points instead to Asian destinations offering better returns, challenging the case that Canadian LNG will directly reduce Europe’s dependence on American supplies.

In an interview with Energi Media, Kennedy said the longer voyage from British Columbia to Europe, including canal costs, weakens the economics compared with selling into Asia.

“There are much higher profits to be made in Asia,” he said.

European buyers can still benefit from Canadian supply. They can sell Pacific cargoes to Asian customers while obtaining Atlantic supplies for their European customers. Additional Canadian exports can also satisfy Asian demand, leaving more American LNG available to Europe.

Kennedy said that improves the global supply balance but leaves Europe exposed to the United States. A profitable transaction for a European utility does not necessarily achieve the geopolitical objective promoted by politicians.

The Cost Test for New Projects

The interview also examined whether new Canadian LNG investments can recover their full costs in a looser global market.

Kennedy’s default modelling puts Ksi Lisims’ full lifecycle cost just above US$8 per million British thermal units. Using the futures prices incorporated into his analysis for 2032, he estimated the amount available to pay the export plant after downstream costs at US$7.80 for Asian sales, US$6.60 for the United Kingdom and US$5.24 for Germany.

The plant’s netback is revenue available before recovering its own costs; it should not be confused with net profit.

Those figures reflect assumptions about prices, shipping and other costs. They are not guaranteed future prices or audited project costs.

Under those settings, Kennedy said, revenues do not cover the project’s operating and capital costs. Investors or buyers would have to accept weaker returns, or the economics would need to improve.

Why Cargoes Can Still Be Worth Shipping

Kennedy agreed that full investment economics differ from the decision to ship an individual cargo.

Once capital costs are sunk and contractual fees must be paid regardless, buyers can find it worthwhile to lift and sell LNG even when the investment has not earned its expected return.

Lower operating costs and cheaper feedgas can improve competitiveness. Publicly funded infrastructure or tax concessions can also shift costs, Kennedy said, but his modelling does not establish the scale of any such support.

“It depends on your assumptions, right. And profitable for who?” he said.

Asian Demand Remains an Open Question

Kennedy expects Asian LNG demand to grow but disputes the industry’s most bullish projections.

Importing countries have incentives to diversify supplies away from vulnerable shipping routes. Repeated price shocks also encourage them to reduce exposure to imported gas, creating competing pressures on future demand.

Large portfolio traders can gain value by redirecting cargoes between markets, he added. That trading advantage may help explain investment decisions that look less attractive when judged solely on plant revenues.

For Canadian policymakers, the interview identifies two tests: demonstrate the commercial assumptions behind expansion, and explain how the resulting trade will improve energy security for the countries buying Canadian LNG.

End Notes