In the past two issues of Maple Leaf Memo, we’ve highlighted some of the challenges facing Canada’s liquefied natural gas (LNG) growth story, as well as what some producers are doing to overcome them.

This time around, we decided to highlight the relative advantages Canada enjoys in this arena, in addition, of course, to the stability of its economic and political system compared to resource-rich competitors such as Russia.

In the global LNG market, proximity is paramount. It not only means lower shipping costs, it also can give certain exporters an edge over their peers because of the dependability and flexibility afforded by a shorter shipping time.

While much of the news in recent weeks has focused on the 30-year, USD400 billion natural gas deal between Russia and China, that deal represents only a sliver of future Chinese demand and a drop in the bucket of overall demand in the region.

In terms of global LNG imports, for example, the Middle Kingdom is currently tied for third, with India and Spain, each consuming 6 percent of total LNG imports, based on 2012 numbers compiled by the International Gas Union and TD Economics.

Due in part to the idling of its nuclear reactors following the 2011 Fukushima Daiichi nuclear disaster, Japan currently accounts for the largest share of global LNG demand, at 37 percent, with South Korea coming in second, at 16 percent.

And since Japan is completely dependent upon LNG imports to satisfy domestic natural gas demand, it’s currently the highest priced market.

Japan’s status could change in the years ahead, assuming the country eventually restores its nuclear capacity. But in light of the numbers being bandied about with regard to future Chinese demand, it’s important to remember that China is not the only major prospective consumer of Canadian LNG.

Although Canada’s west coast is 3,000 nautical miles to 4,000 nautical miles from import destinations in key Asian markets, such as Tokyo, it actually ranks second, just behind Australia, in terms of the distance of its future British Columbia export facilities from the port of Tokyo, according to TD Economics.

That distance means a shipping duration of nine days to 11 days, compared to 11 days to 13 days from Russia and 13 days to 15 days from Qatar and the US West Coast.

Meanwhile, Canada’s east coast also enjoys greater relative proximity to Europe, which could be a major consumer of Canadian LNG if ongoing political turmoil precludes Russia from continuing to be one of the Continent’s most important suppliers.

As we noted earlier, proximity on both fronts not only confers a negotiating edge in securing long-term contracts from buyers keen for dependability and flexibility, it also translates into lower costs for producers and shippers.

So Canada enjoys an average breakeven price for its LNG exports to Asia that’s considerably lower, in some cases, than its Australian peers, while on par with or lower than competitors in the US and Russia.

Despite Australia’s considerable advantage from its relative proximity to Asia, the country’s resource boom caused a spike in labor costs, as the number of new projects outpaced the supply of skilled labor, which caused numerous cost overruns for various projects.

Asian buyers are increasingly wary of the potential for such cost blowouts, and as we noted last issue, the companies behind several of the largest Canadian LNG projects have already banded together as the B.C. LNG Developers Alliance, with the hope that collaboration and avoiding redundancies will help keep a lid on the price of skilled labor.

Canada’s declining exchange rate can actually help give it an additional edge on cost, particularly for labor, though TD notes that projects will still feel a pinch from a lower Canadian dollar, since much of the equipment used in their construction is priced in US dollars.

Finally, though we’ve highlighted the role politicians and regulators have had in hindering the development of these projects, the fact remains that both provincial and federal governments are very much incentivized to ensure this industry is successful.

The LNG growth story will not only help boost the economy in terms of employment and trade, it will also provide a substantial stream of tax revenue, the latter of which is always compelling to politicians, regardless of ideology.

From LNG to Oil Sands

Still, the potential for cost overruns remains a major concern for Canada’s energy sector. Last week, for instance, French oil major Total SA (NYSE: TOT) announced that it would be deferring the final investment decision on its Joslyn oil sands mining project indefinitely, though not canceling it outright.

Revenue generation from this project was still a few years away, since production wasn’t slated to begin until 2017-18.

In a conference call last week regarding this decision, Andre Goffart, who leads Total’s Canadian operations, said the company would continue exploring ways to improve the project’s cost-efficiency. This is the second time Total has put the potential 100,000-barrel-per-day project on hold.

The company has no plans to sell its 38.25 percent stake in Joslyn. The stakes among its other partners are: Suncor Energy (NYSE: SU, TSX: SU) (36.75 percent), Occidental Petroleum Corp (NYSE: OXY) (15 percent) and Inpex Corp (OTC: IPXHF) (10 percent). According to Mr. Goffart, all partners supported Total’s decision.

And Total remains committed to its stakes in other oil sands projects, including Surmont, which produces 27,000 barrels of bitumen per day. Once further development is completed, the project could start producing up to 136,000 barrels of bitumen per day, as soon as next year.

And Suncor and Total are also partners in the Fort Hills asset, which is expected to start producing 180,000 barrels per day in the year following its start-up in 2017.

So global energy firms are still keenly interested in fully exploiting Canada’s abundant resources.

But it’s time for Canada’s policymakers to take steps to ensure the country’s massive energy projects don’t suffer the same cost blowouts like their peers in Australia.

In addition to numerous regulatory hurdles and development costs that run into the billions of dollars, multiple competitors are drawing from a finite, though still ample, pool of skilled labor. And in some cases, the labor supply is further constrained by the fact that many energy projects tend to be remote from desirable areas in which to live.

Although developing new sources of energy are key for these companies’ long-term growth, it has to be economic to do so. And if the numbers don’t add up, at this point in time, then it’s prudent for them to delay spending until it makes sense to proceed.