Why BC Needs an LNG Plan B
Seismic shifts in global gas market threaten Premier Clark's vision.
In January, one of the world's most sophisticated deep-sea drilling vessels, the $540-million "Chikyu," left the Japanese Port of Shimizu destined for a distant point in the Phillippine Sea.
The voyage marked a milestone in what by then was an 18-year, $700-million research and development effort aimed at one day weaning Japan off of its dependence on oil, natural gas and coal imports.
What the scientists and technicians aboard the Chikyu were after was a form of natural gas known as methane hydrate. Methane hydrate is exotic stuff. Ice that you can set on fire. But don't confuse its exoticism with rarity. As investigative science journalist Charles C. Mann notes in a timely piece in The Atlantic, there is an awful lot of it around.
Methane hydrate forms when plankton and other tiny organisms in the ocean die and slowly drift to the seabed. Microorganisms feeding on the dead material emit methane.
"This undersea methane bubbles up," Mann writes, "but it quickly encounters the extremely cold water in the pores of the sediment. Under the high pressure of these cold depths, water and methane react to each other: water lattices link into crystalline lattices that trap methane molecules."
According to the US Geological Survey, the seabed methane hydrate fossil fuel resource is stupefyingly vast: By a conservative estimate, more than two times greater than all other known fossil fuels on earth.
If Japan figures out how to economically extract methane hydrate - and those aboard the Chikyu believe it will in as few as 10 years -- Mann warns that "petro autocracies" like Russia, Iran, Venezuela, Iraq, Kuwait and Saudi Arabia could be in a lot of trouble. Japan is, after all, the third largest net importer of oil on Earth.
Mann doesn't discuss what this would mean for smaller players in the global fossil fuel trade or for those jurisdictions that are chomping at the bit to enter the game; let's call them petro pretenders. But it's hard to see how they wouldn't pay a steep price too in the face of a global gas glut. When commodities flood markets, sellers lose. Buyers win.
A world awash in gas?
British Columbia, as anyone who has followed Premier Christy Clark's economic pronouncements will tell you, is a petro-pretender. The Premier maintains that in less than a decade the province will be a major seller of natural gas to countries on the other side of the Pacific Ocean, including Japan.
The Premier's economic vision can be drilled down to three initials: LNG, or liquified natural gas. Liquefied natural gas, the Premier says, holds the key to a debt-free future and tens upon tens of billions of dollars flowing into a future prosperity fund that pays for improved health care and education. In just 20 to 30 years, LNG exports from B.C. could generate $1 trillion in economic activity, the Premier claims.
To underscore the importance she places on LNG, Clark recently appointed her cabinet ally, Rich Coleman, to the new position of minister of natural gas development. Coleman, who is also deputy premier, was formerly minister of energy and mines and is among LNG's biggest boosters.
But none of what Clark or Coleman say is best for B.C. will happen any time soon. Not one corporate board has yet committed the billions of dollars necessary to build just one gas pipeline to B.C.'s coast, let alone twice the funds again to build just one massive processing plant to supercool the incoming gas to liquid form. It will be well after the next provincial election, then, before any liquefied natural gas is shipped out of the province.
Clark and Coleman assume that those corporate boards will any day now invest in LNG because there is huge money to be made in Asia, where prices per unit of natural gas are currently running four times higher than those here. But energy analysts warn that it is dangerous to project what energy prices may be years down the road.
"Markets change, and you can end up doing things and spending money on things that five years later look very dumb," Mikkal Herberg, research director of the energy security program at the Seattle-based National Bureau of Asian Research, told The Globe and Mail in April. Herberg calls LNG "the biggest and highest-risk piece of the global energy business these days."
As if to underscore the risks, along comes the Chikyu.
In March, two months after setting sail, the ship's crew tapped into an infinitesimally tiny fraction of the vast undersea methane hydrate resource, successfully extracting four million cubic feet of the gas in total. In nearby Australia, the event was viewed almost immediately as a potential game-breaker for that country's LNG ambitions.
Australia is well ahead of B.C. in the LNG game and is poised to produce more. Parts of the country's LNG industry also enjoy a competitive edge over their would-be North American competitors (they can complete a round-trip LNG delivery in four days less time).
Within days of the news of the Chikyu's successful methane hydrate mission, Sydney's daily newspaper The Australian ran a story warning of potentially heavy seas ahead for the country's energy sector. Should Japan succeed in commercializing methane hydrate extraction, the consequences would be devastating. The article noted that Australia currently exports more than two thirds of its LNG production ($11 billion in value in 2010/11) to Japan, with forecasts rising to $30 billion by 2016/2017.
The Australian article quoted financial forecasting firm Wood Mackenzie saying that a successful Japanese foray into methane hydrate production would "severely disrupt the global LNG market," casting doubt on the financial viability of LNG projects in Australia, Malaysia and Papua New Guinea.
For the moment, however, petro-pretenders have other things to worry about. Seismic shifts may be underway in the economics of the global LNG trade.
Asian buyers appear increasingly unwilling to lock themselves into long-term contracts to buy LNG at the prices currently paid. The buyers have a different take on where the world is heading than do the petro pretenders. Thanks to discoveries of new gas and oil deposits in shale rock formations around the world -- discoveries triggered by the shale gas orgy that began in Texas more than a decade ago -- the buyers foresee a world awash in gas.
Competition will get fierce
Why, then, would they pay big premiums for such fuel? Australia alone currently has seven new LNG plants under construction. Each of the massive projects is plagued by huge cost overruns ranging from 15 to 40 per cent.
When all that new production comes on line, buyers will be less inclined to pay high prices because of all the additional gas flooding the market, which means much lower profits for companies that have already overshot their budgets by billions of dollars. No surprise then that Woodside Petroleum recently walked away from its proposed $45 billion LNG project in Australia. That's not a typo, by the way. Just a 15 per cent cost overrun in a project of that magnitude would add another $6.75 billion to the cash outlay, which would have to be paid back with interest before the company recorded any profits.
Closer to home, there are other developments that are also being paid close attention to by the industry and industry analysts.
As its efforts to commercialize methane hydrate continue, Japan says it is no longer going to pay the high prices that it has for natural gas.
In March as the Chikyu completed its world-first methane hydrate haul, The Financial Post revealed that "Japan is planning a new energy strategy that could change how natural gas is traded around the world and put pressure on some of the proposed Canadian liquefied natural gas projects."
Japan's government has offered $11 billion in loan guarantees to Japanese companies to source LNG from the United States. Analysts quoted by the Post believe that U.S. producers "can profitably deliver LNG to Asia at a price of between $8 and $10 a unit, which is far less than the current $14 to $18 paid.
The Post article ended with words of warning for petro-pretenders like Premier Clark. Steven Paget, an analyst at Calgary-based First Energy Capital, noted that were B.C. to set a high tax on prospective LNG producers, those companies could always move their gas elsewhere.
Currently, several large LNG plants are proposed for coastal B.C. with the most advanced proposals in either Prince Rupert or Kitimat. The bigger prospective LNG players kicking the tires in B.C. include Malaysian state-owned Petronas, Shell, British Gas, and, most recently, Exxon.
But if the high prices in Asia begin to soften, and if the B.C. government attempts to place a high tax on gas profits, Paget believes that companies with stated LNG plans for B.C. may seek a cheaper outlet for exporting the gas. One alternative is to ship gas from northeast B.C. via existing pipeline infrastructure to the US Gulf coast, where a push is underway to retool what were once LNG import terminals to export terminals.
"We believe that brownfield conversions in the U.S. from LNG re-gasification facilities into liquefaction facilities would be cheaper than new-build sites in B.C. and adding a tax in B.C. would add to the expense," Paget warned.
The Clark government, desperate to get at least some shovels in the ground as far as a new gas pipeline and at least one LNG facility in the province is concerned, appears to be heeding Paget's words.
On Friday, June 14, the premier was quoted in The Wall Street Journal saying that her goal is to make B.C. "the most competitive jurisdiction for liquified natural gas anywhere in the world."
Translation: she's prepared to pare down tax rates to entice companies into the game. She went on to say that the government is in direct tax negotiations with one LNG producer, and that the outcome of those negotiations would serve as a model for others.
"We're getting toward the end of our negotiating with one of the big companies that's in play and setting out the business case that all of the companies will play by," Clark told the Journal. "I do hope we'll get it nailed down in the next couple of months."
A race to the bottom
All of which economist and former provincial NDP MLA David Schreck finds rather interesting.
Before the Journal broke its story, Schreck had completed an analysis of Premier Clark's election campaign commitment to make B.C. debt-free by taking in gobs of new cash from an expanded natural gas industry. His analysis drew on reports commissioned by the provincial government and published in February by Ernst & Young and Grant Thornton.
The reports, Schreck noted, were shockingly thin (only a couple of handfuls of pages each) and were filled with qualifications. They both relied on numbers provided by government. Schreck said then that it didn't take a rocket scientist to realize reading both reports that even if natural gas production rates tripled in B.C., nowhere near enough funds would flow to the provincial treasury from traditional revenue sources such as natural gas royalties to even offset the provincial government's own capital cost projections of $10 billion over the next three years.
In order to make any headway in paying down debt, let alone placing $100 billion into a B.C. Prosperity Fund over the next 30 years, the government would have to be prepared to impose a super-profits tax on B.C.'s LNG industry, Schreck said.
"With so much bet on LNG, will the Clark government negotiate the tax structure, trading off certain construction against uncertain thirty year returns?" Schreck asked. We now know the answer to his prescient question. The critical issue is now: How much is Premier Clark prepared to lower taxes and hence future provincial revenues to give birth to a B.C. LNG industry?
In the meantime we know beyond a shadow of doubt that Japan wants to pay less for its natural gas. It is well advanced in research and development efforts aimed at tapping the world's largest fossil fuel resource. In the interim, it still needs natural gas and has, in fact, entered into a purchase agreement with Petronas, in the event that the company eventually builds an LNG plant in Prince Rupert. It's very hard to see in light of everything else that the country is doing, however, that Japan has any intention of paying a price premium for gas coming from the plant -- if the plant gets built at all.
Two plans, two paths for BC
All of which raises the question: Does Premier Clark, the great petro pretender, have a Plan B?
Plan A is known. We drill as fast as we can. We pipe whatever we've got to the coast as fast as we can. We then liquefy all of that gas at LNG plants and ship it all away. And we provide generous tax concessions to make it all happen. In the process, we render billions of cubic metres of water toxic forever in fracking operations at gas wells and the province jettisons all hope of meeting its legislatively mandated greenhouse gas emission reductions.
Plan B isn't known because it doesn't exist. Or if it does, the government isn't saying.
But it could look something like this:
We slow down because LNG is a risky business. We figure out how to use our one-time, finite natural gas asset here at home to maximize job opportunities and to make B.C. a true green leader.
We build small, domestic gas processing plants here as needed to allow us to power the BC Ferries fleet on natural gas instead of diesel. Ditto for converting diesel buses and truck transport fleets. We ensure that such plants are world-leading low carbon emitters and that their output is used to lower carbon emissions further still.
We use gas as a firm power source to address the intermittency shortfalls of renewable wind, solar and tidal power. We thus avoid the need to build the more environmentally contentious of a number of proposed run-of-river hydro projects and, potentially, a third massive dam on the Peace River which would flood thousands of hectares of productive farmland. (Irony of ironies, the Site C dam on the Peace River would become a big power source for a vastly expanded natural gas export industry.)
We completely eliminate gas flaring and ensure that our gas transmission infrastructure is second-to-none in having the lowest methane leak rates of any jurisdiction on earth.
These are just some of the planks of what could be an alternate natural gas strategy for the province.
Think what you will about the wisdom of Japan's near 20-year effort to open up the methane hydrate frontier, at least its government has a plan that looks like it could meet its objectives. It's hard to say the same thing for the plans of our great petro-pretender.