Gary G. Mar is the President and CEO and Colleen Collins is the Vice-President at the Canada West Foundation
When Japan’s prime minister visited Canada in mid-January, one of the topics of discussion was whether Canada could be a reliable partner in the Indo-Pacific region. Japan needs liquified natural gas (LNG). But will the Japanese PM receive the same answer as the German chancellor — that there is no business case?
Since German Chancellor Olaf Scholz was rebuffed last August, there has been a lot of attention directed at whether or not a business and a political case exists for supporting additional LNG export from Canada. Some in the current federal government seem to recognize this, based on Finance Minister Chrystia Freeland’s comments in Washington, D.C. and Calgary that ”we will always be looking at economically viable LNG projects.”
The political case for supporting LNG export to Japan and other allies rests — or should rest — on three pillars: a sufficient business case, a compelling security case, and a strong environmental case.
A clear business case
Japan surpassed China as the world’s largest LNG importer in 2022. But an increasing amount of that supply came from Russia, and Japan is struggling to replace it.
Japan has asked Australia and the U.S. to ensure a greater and stable supply, and Prime Minister Fumio Kishida’s visit indicates that Japan is interested in purchasing additional LNG from Canada as well. This would build on a historical relationship dating back to 2013, when then-Prime Minster Stephen Harper and Japan’s Prime Minister Shinzo Abe agreed to promote LNG cooperation.
A number of Canadian LNG projects have or have had Japanese partners: the LNG Canada facility in Kitimat, B.C., was financed in part by the Japan Bank for International Cooperation, and Mitsubishi is a partner with a long-term supply agreement.
Japanese trading company Itochu Corp., Malaysia’s state energy firm Petronas, and Inter Pipeline have conducted a feasibility study and signed an MOU to build one of the world’s largest production and supply systems of low-carbon ammonia and methanol (both produced from natural gas) in Alberta.
They aim to start construction in 2024, with commercial production to follow in 2027. In addition, Mitsubishi Corp and Shell Canada signed an MOU in 2022, to produce low-carbon hydrogen using carbon capture, storage, and utilization (CCUS) near Edmonton, for export to Japan as ammonia.
We can only hope our Japanese partners are very patient. The first deliveries of LNG from Canada to Japan are expected in 2024. And there are 13 other West Coast LNG projects with export licences awaiting impact assessment or final investment approvals that depend on federal and B.C. government decisions.
So the business case appears to be strong.
Ensuring energy security
The energy security case is similarly clear.
Energy security is a major concern for Japan. The country recognizes the problems of over-reliance on any single source of supply — particularly from countries that are prone to geo-political aggression. However, its hands are, to a certain extent, tied.
Currently, almost 95 percent of Japan’s crude oil is supplied from the Middle East. Japan, which has cancelled Russian crude oil contracts, is relying on shipments from Canada’s Trans Mountain pipeline expansion, in late 2023.
Japan’s LNG supply is more diversified, with Australia as the majority supplier, but Russian imports are not insignificant. Japan signed an additional long-term supply agreement with Russia in September 2022, bringing the total Russian LNG supplied to Japan to about nine per cent.
Japan’s May 2022 Clean Energy Strategy recognizes “it is crucial for Japan to strive to reduce its reliance on Russia, and to accelerate decarbonization, while ensuring a stable supply of energy.” From an energy security perspective, Canada has the potential to be that secure and decarbonized supply.
Canada’s unique problem
The environmental case is both simple and complicated.
On the one hand, Canada’s proposed LNG facilities would create the lowest-emissions LNG in the world. From a global emissions perspective, this makes Canadian LNG the no-brainer supply for Japan, which also has strong decarbonization goals.
But Canada has created a problem, which brings us back, full circle, to the political case that Prime Minister Fumio Kishida will face in Ottawa. Nor is it a problem faced by competing LNG producers in Qatar, Australia, the U.S., Mexico, and Malaysia.
Canada is the only LNG supplier (or potential supplier) that faces constraints imposed by its own domestic climate targets, through net-zero legislation.
In Canada, increased greenhouse gas (GHG) emissions associated with additional LNG or hydrogen production for export count as Canadian emissions, even if those products are exported, and even if those exports displace higher-emissions energy sources (such as the coal that Japan relies on for 30 percent of its electricity production).
Canada’s strict emission targets mean that although there are a number of economically feasible LNG projects on the books, as well as potential hydrogen export projects in development, it is highly uncertain whether these projects will either receive final approval by the federal or B.C. governments — if there is the potential for associated GHG emissions to push Canada over its targets. Also uncertain is whether costly abatement measures (like CCUS) will receive financial consideration from customers who value lower emissions along the energy value chain.
Japan can help Canada solve its dilemma
That brings us to the political case.
Japan is one of the few energy importers that recognizes the problem Canada has, and can help our country dig itself out the political hole it has created for itself.
Japan has been providing leadership to address the failure of the Paris Agreement on the issue of GHG emissions associated with international exports. (Which is not a market failure, but a failure of rule-based accounting systems to provide preference for lower-emissions products, regardless of where they are produced.)
To their great credit, Japan has proposed a process and led meetings in 2022 to begin to address the issue — but no resolution is in sight. Canada, for its part, also needs to come to the table to work with customers like Japan, to pilot a set of rules that make sense in the real world to reduce global emissions.
Japan is also going further by working with like-minded suppliers in Canada, and investing in technologies that will drive down the costs of key decarbonization technologies (such as carbon capture, storage, and utilization) in both countries.
Japan has demonstrated its patient preference for clean western Canadian energy, over other commodity producers that pay less attention to environmental performance. To reiterate: we can only hope Canada will finally reward that patience.