Editor’s Edition: Canada ‘losing the race’ on energy transition as Trudeau casts LNG doubts

German Chancellor Olaf Scholz’s Canadian trip forged agreements on hydrogen and ingredients for electric vehicle batteries. However, a deal to supply one of Canada’s European allies with much-needed natural gas wasn’t in the cards.

On the final day of his visit, Scholz called for Canadian liquefied natural gas (LNG) to play a “major role” in boosting Germany’s LNG imports. Canada currently has no operational LNG export terminals.

During the visit, Prime Minister Justin Trudeau questioned the “business case” for exports from Canada’s East Coast.

Kevin Krausert is CEO and co-founder of Avatar Innovations, a Calgary-based venture capital firm and startup accelerator that pairs entrepreneurs with the biggest companies in Canada’s energy patch. He says the business case is “a lot stronger and a lot faster than our Prime Minister suggests.”

In the latest episode of Yahoo Finance Canada’s Editor’s Edition, Krausert also discusses the steep discount on Canadian natural gas, compared to soaring global benchmarks.

He also touches on the carrot-versus-stick contrast between Canada and the U.S. on energy, following the recent passage of U.S. President Joe Biden’s Inflation Reduction Act.

Got a question for Kevin Krausert? Email Jeff.Lagerquist@yahoofinance.com and let him know what interests you in the world of clean energy and technology.

Jeff Lagerquist is a senior reporter at Yahoo Finance Canada. Follow him on Twitter @jefflagerquist.

Download the Yahoo Finance app, available for Apple and Android.

Video Transcript

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JEFF LAGERQUIST: Welcome to "Editor's Edition." I'm Jeff Lagerquist with Yahoo Finance Canada.

One of my favorite episodes of "The Simpsons" is the one where German investors buy the nuclear plant from Mr. Burns. Ironically, Germany is phasing out nuclear power these days as the country grapples with an energy crisis. That's led the German Chancellor to meet with Prime Minister Justin Trudeau this week as he looks for alternatives to Russian natural gas.

In today's episode, we're going to dig deep into these bilateral talks. And joining me as always to break it all down is Kevin Krausert. He is CEO and co-founder of Avatar Innovations. It's a venture capital firm and startup accelerator that pairs entrepreneurs with the biggest companies in Canada's energy sector. Welcome, Kevin.

KEVIN KRAUSERT: Hey. Good morning, Jeff.

JEFF LAGERQUIST: Good morning. Well, we know the Germans are not here to buy a nuclear power plant, but energy is, of course, the focus as German Chancellor Olaf Scholz and a delegation of business leaders wrap up their Canadian tour today.

Scholz just said this afternoon-- or this morning-- that he hopes that Canadian LNG will play a, quote, "major role" as it abandons Russian gas imports. Will Canada come through, I guess, is the real question here. Let's listen to a clip from our prime minister.

JUSTIN TRUDEAU: There are a number of potential projects, including one in St. John's and some others that are on the books for which there has never been a strong business case because of the distance from the gas fields because of the need to transport that gas over long distances before liquification. We are looking right now-- and companies are looking-- at whether or not the new context makes it a worthwhile business case to make those investments.

JEFF LAGERQUIST: Kevin, appreciating everything that the prime minister just said about the complications of moving gas around, how do you view the business case for exports from the East Coast to Europe?

KEVIN KRAUSERT: A lot stronger and a lot faster than our prime minister suggested in that clip. Not only have you had a number of these projects in the books, currently, today, you have an existing and operating LNG import terminal in New Brunswick, operated by Repsol, the Spanish supermajor, that could quickly be turned around. And the argument of transporting gas from East Coast to West Coast, there's a lot of gas in the East Coast that wouldn't have to transport that-- that far to be able to do it.

So it's not-- where one makes money in the LNG game is really through arbitrage pricing. So for example, if you have, as we do today, $50 to $90 gas in Europe, and currently, in Alberta, we have $2.50 gas, in New York, you have $9 gas, you have a $40 to $50 minimum arbitrage of value creation that one could catch. That seems like a pretty compelling business case, to me, to deliver value to an investor and also, you know, politically help an ally in need. So I would respectfully disagree pretty strongly with that assessment.

Any rational energy transition scenario has natural gas as a bedrock cornerstone commodity that allows the planet to reach its current climate ambitions without derailing the economy. Natural gas is half as carbon intensive as coal. So by bringing additional supplies to market, there's the opportunity of decreasing emissions from coal sources, which is still the primary electrical source in most of Asia and if not the world.

So there is a business case, and even Canada making a signal that would move a project forward on LNG in Canada would decrease the amount of political risk that is being baked into LNG futures pricings as we speak.

So even a signal, despite the fact that you could do a turnaround on that facility in New Brunswick for an immediate short-term win, it's still going to take several years to get a new facility built. But even just that signal is going to decrease political risk that's baked into the pricing and decrease cost. So where I think the business case actually starts falling apart is on Canada's regulatory environment, which is perhaps why none of these projects have moved forward. And so I would encourage the prime minister to consider the impact of his comments on this.

You know, the reality is natural gas is now a fungible commodity, meaning that you can produce it on the West Coast of Canada and ship it to China and that will still have a decreasing effect on prices to Europe. So it's like you produce supply into a global market, it's going to decrease supplies.

And so West Coast Canada is also going to be a huge impact on the LNG race. You've got LNG Canada, which is currently under construction. They have the ability to add trains 3 and 4, basically doubling their capacity. You've got wood-fiber LNG in Squamish that is sort of ready to go. Enbridge has the right of way on the pipeline. There's community support.

And so it's-- and Canada has the proven ability of generating the cleanest LNG anywhere in the world because we are blessed with so much hydroelectricity so the compression costs and the power costs of producing that LNG could be the cleanest in the world if it was produced in Canada. And so you know, the challenge is the regulatory system of where this falls apart. This is-- all these projects are now up against the backdrop of a 40% sector-specific emission reduction cut.

So take LNG Canada, for example. I don't know the exact numbers, but I'm going to guess there's going to be an incremental increase in emissions in Canadian jurisdiction to bring additional trains online. However, that natural gas would go in to displace coal in China, which is going to have a net global reduction on-- on emissions.

So it's this political risk that Canada has of where the business case falls apart. And don't put that on the economics of-- of this, especially at this hour of need.

It's probably worth remembering that just 10 years ago-- 10 years ago-- there really wasn't a global LNG market. Natural gas was produced in areas where it was consumed. And if it wasn't, it was shipped along a pipeline. So basically you had regional pricing hubs where natural gas couldn't transport across long distances or across oceans.

You really only had LNG being produced by Qatar, or "kuh-turr," however-- I always get that one wrong. The US had no LNG export capability, Australia had no export capability, and Canada had no export capability. Now, 10 years later, the US is the largest LNG exporter in the world, with the vast majority of that LNG going to-- to Europe and many more projects on the books. Australia has a similar story. Canada has only been able to get one project across the line, and we had close to two dozen projects on the books two years ago.

And so what Canada can learn from this is not just the sobering realization that we're actually losing the race to be a globally renowned energy transition player, recognizing that natural gas has a critical role in reaching our net-zero ambitions, but also that we need to run a lot faster. And I think this should be a sobering assessment for any Canadian who's committed to our net-zero future, the economic productivity and viability of our country, and-- and committed to our allies in Europe who are basically using this absence of energy security to fund war crimes.

JEFF LAGERQUIST: So Trudeau said that he would ease some of the regulatory burdens on projects if a business case were indeed found, and it sounds like you're making a pretty decent one. What are the exact energy infrastructure needs and sort of path of least resistance here? One of the chief criticisms is that Germany is already in an energy crisis, and by the time we get online and get all of our ducks in a row, the situation could be different.

KEVIN KRAUSERT: Yeah. You know, you'd have to start from the front. You know, the big overarching challenge, I would say, is a needlessly complex regulatory system that involves far too many regulatory bodies to approve something. Secondarily, the Impact Assessment Act, which any major energy project-- or mining project, for that matter-- needs to go through. Currently has a number of concerns where you require political ministerial sign-off for these major projects. And no investor wants to put the whole bunch of work into that needlessly complex regulatory process I spoke about and then have it at the whim of whatever political party or political sentiment is happening at that day.

The Impact Assessment Act needs to be amended. And you know, the Germans, you know, taking their example, you know, they used to have a regulatory process, not that long ago, before the war started, of, you know, new energy projects taking years to get done. They've implemented legislation that it's a six-month project-- approval process for any energy project. Canada can do the same, and we should learn from our German friends on-- on how to do this.

JEFF LAGERQUIST: Do you think that the industry is willing to shoulder the financial risk of getting East Coast LNG exports off the ground? I-- I can't imagine that the Trudeau government would want to put some tax dollars into fossil fuel infrastructure, but is that what it's going to take to actually make this happen and help out our allies in Germany?

KEVIN KRAUSERT: Nobody is asking for financial incentives on natural gas to get that off the ground. You know, as I just said, you know, an arbitrage of $50 of gas in Europe and gas in North America is a pretty powerful business case that a lot of investors will kind of get behind. It's not an economic issue. And no one is asking for handouts. In fact, actually, it's going to be a net-positive economic return for the country if we could get some of these projects off the ground. And you know--

JEFF LAGERQUIST: What about the Germans? Oh, sorry, go ahead.

KEVIN KRAUSERT: I was just going to say I think that there's also a realization and an awakening that we need to have that, essentially, that we're on a war footing, that no one is talking about changing our net-zero 2050 goals. If we bring too much geopolitical instability to the world by skyrocketing energy prices, the tendency for that to elect extremist governments to derail the whole thing is, in my opinion, a far greater risk for our 2050 goals than a short-term increase in emissions that allows us to invest in the energy transition and energy systems of the future.

JEFF LAGERQUIST: Does Germany have the infrastructure in place to import natural gas? My understanding is that it's not quite there yet.

KEVIN KRAUSERT: Yeah, no. So that's-- that's almost a real good history of-- of energy security in Germany. No. The short answer is Germany doesn't. The long answer is, yes, Europe does have many LNG import terminals that could be repurposed to divert natural gas through new flows into Germany. The challenges and the history is in the sort of fatal flaw that German energy policy made was that they made the decision to weaponize natural gas, and that the Germans assumed that they could shut down nuclear, shut down coal, not grow their renewables at the pace that they needed-- because there's inherent challenges in that-- and then assume that Russia was always going to be a reliable and safe partner around natural gas.

Now, anybody who's followed the history of geopolitics energies knows that that was a pretty predictable move in those and we should be thinking about how to build energy security into our energy systems.

JEFF LAGERQUIST: So I want to stick with LNG for a moment, and go down a little bit of a Canadian-US rabbit hole with you. If we take this chart, we can see the futures price for LNG at the Henry Hub in Louisiana, it recently hit a 14-year high. Now, I don't have a chart for it, but the AECO price in Alberta is currently selling at a very steep discount. Can you tell me a little bit about why that is? And I mean, how much of a problem is this for Canadian producers?

KEVIN KRAUSERT: So you know, again, it gets back to that-- that resilience in energy or optionality in energy that we just don't have as-- as an export producer. You know, the short answer to that is we're producing more natural gas in Western Canada than we have takeaway capacity for.

So the price is-- is collapsing. However, you know, rewind a few year, and we would have taken $2.50 gas. So it's not that dire, and many of the producers have hedged contracts to NYMEX pricing or Henry Hub pricing. So you know, it's not as dire as those-- or as difficult as those numbers necessarily look because they're still getting revenues from other sources.

Right now, there's a whole bunch of summer maintenance work that's happening on the Western Canadian pipeline system that is-- is pulling, you know, takeaway capacity offline. And these increased prices have, you know, brought up natural gas production.

So take those three things together. It goes from there. And I think that's the sort of point, is that it doesn't actually take a whole lot of drilling to get a whole bunch of natural gas. We've just proven that it's the transport systems that are the sort of, you know, difficult, difficult ones.

So yeah, that's, I guess, in short, where-- where we're at. I think the situation will ease in the winter, but the takeaway is that Canada needs to be thinking about how we use our natural gas resources as a meaningful and powerful partner in the global energy transition, and then use those funds and those economic opportunities to invest in the technologies that are going to get us to net-zero 2050.

JEFF LAGERQUIST: OK. Let's return to our talk about the German Chancellor's visit to Canada. We saw Ottawa ink agreements with Volkswagen and Mercedes-Benz on EV raw materials. This is just a memorandum of understanding, so a very preliminary agreement. The idea is to put Canadian cobalt, graphite, nickel, aluminum, and all the other metals into the two companies' supply chains. Obviously, Mercedes-Benz and VW, two of the biggest global automakers. Kevin, how significant is this deal?

KEVIN KRAUSERT: I think it's a great initiative. You know, obviously, the world is marching towards the electrification of vehicles. That is going to require some pretty explosive growth in the critical minerals industry around the world to be able to meet those demands. You know, some of the projections I'm seeing are like 45 times growth in lithium, like 25 times growth in nickel. And Canada has got a long, strong, and robust mining industry that I think could deliver a lot of capabilities there. And we've also got some really exciting new mining technologies coming out of the-- coming down the pike.

One of them that is particularly exciting, I find, is extracting lithium from subsurface brines or petroleum brines. So that would have the opportunity of opening up a whole new sort of commodity line for-- for Canada to-- to export.

But again, there is-- still is this regulatory issue. Canada hasn't built a new nickel mine in over 15 years. The vast majority of Canadian nickel mines were built in the '70s. And these emissions reduction targets are going to impact mining as well. I've never seen a-- I've never seen a net-zero mining truck or-- or lifting. So there's going to be this increase for us to be able to actually produce the commodities that are going to be needed for us to decrease the emissions in the long run.

So I'm not nearly as close to the mining sector as possible. But I would say there would be the same concern as well. If our economic output is currently tied to our emissions until-- so any increase in economic output results in an increase in emission, we need to be able to increase our economic output of these critical minerals so that we can increase emissions in the long run. And here in Canada, we just have a little bit of a stick approach.

So I think it's a great initiative, but I-- and I know there's a lot of smart people-- Minister Champagne is a highly capable Innovation Minister working on these things. But it's a complex issue that is going to need to be seen in light around what is Canada's sort of growth agenda, if you will.

JEFF LAGERQUIST: Yeah, absolutely. And I think, when we talk about EVs, we often hear about how China has this grip on the metals that need to go into these batteries. And we've recently seen Saudi Arabia making some moves and-- or at least discussing it to a great degree. Where do you think, a few years from now, Canada will eventually fall on the global pecking order of EV ingredient production?

KEVIN KRAUSERT: You know, we've got-- we're blessed with a phenomenal geography. You know, you do have these long-term strategic investors and acquisition plays happening by, you know, the state energy companies from the countries you just listed.

And so I remain optimistic that the free market is going to be the-- the fastest way for us to be able to get there. And so I think, if Canada can recognize the opportunity we have in front of us and-- and demonstrate not-- business leadership as well as political leadership, I think we can-- I think we can retain a pretty-- a pretty top spot. But you know, for the reasons I just outlined, we've got a lot of work to do.

JEFF LAGERQUIST: Of course, it all comes back to regulations. Hydrogen was another big focus for Trudeau and Scholz on this But experts have warned that it carries a big price tag and won't help too much in the near term given the sort of state of the science, and costs, and all that. Now, how does that fit with your assessment of where we're at on hydrogen today?

KEVIN KRAUSERT: You know, hydrogen is-- holds, you know, huge potential. It's held huge potential for-- for 20 years, but for a variety of reasons, it hasn't gotten off the ground. The challenge with hydrogen is-- and I guess the opportunity as well-- is you can produce it anywhere you basically have water and electricity. You take water, you run an electrolyzer through it, it releases the oxygen and the hydrogen.

The challenge then becomes, where do you produce it? Currently, right now, that technique is only working with fresh water. So you need a steady source of fresh water as opposed to saltwater. So you'd need a breakthrough in electrolyzer technologies to make economic-- to do it with saltwater as some of the East Coast projects are proposing.

And-- or you produce it from natural gas, which is another highly economic way of doing it, by either capturing the carbon that's emitted into the atmosphere or cracking the methane molecule, which is one carbon and four hydrogens and doing something else with the carbon other than releasing it into the atmosphere.

So then, once you have it, it's very tricky to transport. Hydrogen is the smallest element. As a result, it doesn't interact well with steel. It really makes steel brittle. And so you've got to figure out a way to transport it either on some sort of breakthrough technology on the storage or transporting it through ammonia, which is binding that hydrogen with-- with nitrogen.

So you know, high level, we need to be investing in these technologies. The question I have is-- is we've got an energy crisis right now, not in 10 years. We need to be able to do both. We can walk and chew gum at the same time.

So this is all great, but it's a technology game, which is the work that we're doing at Avatar. But let's just be-- be realistic around the time frame we have to kind of be delivering it.

JEFF LAGERQUIST: Yeah, absolutely. And sort of guessing at the future energy mix is always complicated. When we look at Germany now, how much of where that country is today with sky-high energy prices and reliance on Russia has sort of been caused by the government's own clean energy plans and just sort of maybe reading the tea leaves a little bit wrong on how transition works and going too hard, maybe, on solar and wind?

How did Germany get here, I guess, is the short way of asking this.

KEVIN KRAUSERT: The short answer is they didn't learn from history. You know, the-- the longer answer is, you know, as-- is that they forgot the critical message around energy security, that by believing that Russia was going to be a reliable and safe partner in producing natural gas, that as they shut down their nuclear plants and their coal plants, and then the renewables didn't keep pace, they fell back on, you know, increasing their-- their natural gas supply, didn't build resilience into being able to access natural gas, and then they're in a position where, you know, the Kremlin is-- is dictating a pretty large portion of German economic activity.

And this is by no means the first example of the weaponization of energy in history. There are countless examples. The early days of the oil industry, you had sort of the scramble of-- of the world for new petroleum supplies led by Standard Oil in the US, Royal Dutch and Shell, Britain, and Holland, and the establishment of the Anglo-Persian, which sort of became BP.

You had Winston Churchill, after the First World War, make a strategic investment in Anglo-Persian, which was sort of the first major discoveries in the Middle East. And there were a number of geopolitical examples of that. You know, in the failing days of the Third Reich's war, they made a sort of Hail Mary pass to secure energy supplies by invading the Baku in the Caucasus.

The Suez energy crisis in 19-- Suez Canal crisis in 1956 was essentially a play by the Egyptians to gain, you know, power by recognizing the transport of energy from the Middle East had to go through the Suez Canal. The OPEC embargoes.

Throughout history, there's been a very close relationship between the might of a nation and its access to energy security. This has been going on for-- for decades. And we just happen to live in this period before-- kind of 2008 to 2022, where we sort of forgot about energy security, but it's been the defining characteristic of-- of energy security and economic policy for over a century.

And so there's an example here, I think, for us to learn, is that while we have the short-term energy security issue and geopolitical issue happening in Europe with Russia that needs to be solved, the medium-term implications is that you've got the Chinese, the Saudis, playing out a global game theory on future energy sources, critical minerals, access to current energy production.

And we cannot be naive as a country to not think that one of our major competitive advantages is our access to cheap and secure energy. And that's-- that's really what we need to-- to be learning right now and making sobering and real assessments that we can, you know, basically make a decision right now to decrease Canadian emissions but not American emissions in the short term and derail economic progress of the planet. Those are-- and those are the two choices Germany really has right now-- turn coal plants back on or decide to go into a recession.

JEFF LAGERQUIST: So that's very helpful context, especially on the history side there. And I'm glad you brought up the United States, because I've got one more big item that I need to squeeze into the final minutes of the show here. President Joe Biden recently signed a big piece of legislation into law. The Inflation Reduction Act includes $369 billion in public money for energy security and climate change. Kevin, you've talked about carrots and sticks. And Canada is looking to roll out a cap on its energy sector. Can you just sort of break down the differences in our approach here, you know, between the American carrots and the Canadian stick.

KEVIN KRAUSERT: [CHUCKLES] Yeah, I haven't had a chance to fully unpack the IRA, questionably named acronym for-- for it. But I think, generally speaking, anyone who is excited about the energy transition, especially the existing energy industry's role in it, should be encouraged by it. There largely was a consumer focus by providing consumer incentives for investments in electric vehicles, residential solar panels, and so on. But there also was a pretty dramatic expansion of the 45Q tax credit, which is their current tax credit mechanism for carbon capture projects, so being able to capture and store/use the CO2 associated with industrial applications.

And so they took the approach to work with the oil and gas industry, realizing that if they could incentivize them, they could make some very meaningful and material emissions reductions cuts. And so here in Canada, we're stuck with-- on the one hand, we come out with the incentive tax credit for carbon capture, which is fantastic. And then on the next hand, they say, well, we're going to come up with a punitive system for emissions reductions of 40% to 45% in the next seven or eight years under a complex regulatory system that I don't know if we can get there.

So just a couple of numbers, I guess, to be considering is, you know, in the-- in the IRA 45Q tax credit, they provided $180-a-ton credit for direct air capture, pulling CO2 out of the atmosphere, and $130 a ton for carbon capture utilization and storage. And so here we are now with $50 to $70 a ton pricing in Canada.

The only way for an investor to make an economic return by investing in these technologies is now by avoiding the carbon tax, where in the US, they have, now, a carrot to be able to do it at far more economic prices than we have in Canada to be able to do so. So this should encourage, you know, Canadian policymakers and Canadian decision-makers that we're-- now we've got to catch up if we weren't catching up already.

JEFF LAGERQUIST: Yet we often hear about this clean energy advantage that we've had in Canada, mainly because we have so much hydroelectric power that allowed us to push out coal in places like Ontario, you know, years ago. Is this advantage going to slip through our grasp in the next little while because of all of the spending in the United States?

KEVIN KRAUSERT: It has the potential to. And you know, we already we had a four-year head start on the Americans on-- on a lot of this stuff. And so you know, Canada is a very resilient and empowered people, capable of a lot, but we're not going-- we're going to lose this. We're going to lose any advantage we have if we don't start focusing on what a growth agenda is and what a technology agenda is and stop bludgeoning a particular sector like the oil and gas industry that can actually contribute a lot and that is at the table in a way it has never been before. Perhaps that's the most Canadian example, is how can we work together to win this.

JEFF LAGERQUIST: All right, Kevin. That feels like a good place to end. Thank you so much for joining me.

KEVIN KRAUSERT: Thanks for having me.

JEFF LAGERQUIST: For all the latest news on clean energy and the broader world of Canadian finance, please visit the Yahoo Finance Canada website. I'm Jeff Lagerquist. See you next time.

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