Last week's China-Russia gas deal deflated British Columbia's much over-hyped LNG dreams and delivered a political earthquake for Premier Christy Clark.
Even the timing was awkward.
Just as global energy markets shifted, Clark promised more prosperity from shale gas at an LNG industry conference in Vancouver.
She even declared that her fantastic export dream was "all about building a nation, creating jobs, [and] rolling up our sleeves to take advantage of this generational opportunity to build a prosperous future for every Canadian."
But across the ocean on a more sober Beijing stage, Russian President Vladimir Putin and his Chinese counterpart President Xi Jinping signed a $400 billion gas supply deal that obliterated Clark's rhetoric.
The major deal has shaken up the energy world.
Russia, the world's number one gas producer, will now annually pipe 38 billion cubic metres (bcm) of Siberian gas to China for 30 years starting in 2018. The volume of gas exports could grow to 130 bcm.
That great sum is equal to what Russia now supplies Europe, its largest gas buyer. It's almost equal to the volume of gas (154 bcm) that seven proposed B.C. LNG projects want to ship to Asian markets. (And that dubious figure is almost three times greater than what the province now extracts.)
The deal immediately alters global prices and markets for LNG in Asia. For years now, Japan and other Asian buyers have paid extravagantly high prices for natural gas due to a convoluted pricing mechanism based on the price of oil.
While North Americans have enjoyed natural gas prices as low as $4 a million BTU, Japanese buyers have forked over $14 a unit for gas.
Meanwhile struggling shale gas frackers such as EnCana, Exxon and Shell have been spending nearly $6 a million BTU to extract the resource and, as a result of weak North American prices, have been bleeding cash badly.
These financial losses (corporate write-downs in the shale gas industry now total $35-billion) explain North America's intense corporate push for LNG terminals to serve Asian markets. (It's instructive, that Gwyn Morgan, former CEO of EnCana, has been one of Clark's shale gas advisors.)
But the Russian gas deal has probably killed the Asian price differential by effectively setting a new benchmark for natural gas prices in Asia. Given that the Chinese will soon have access to natural gas estimated to be as cheap as $9 or $10 a million BTU, the basic economics of B.C. LNG exports do not work due to the high cost of shale gas extraction in the province's remote forests.
Russia can afford these prices because it is simply much cheaper to pipe gas than to chill, compress and liquefy the stuff to minus 161 degrees Celsius, and then ship it on specially constructed tankers. (The complex process requires the cannibalization of eight to 15 per cent of the gas destined for export or more.)
Price drop tsunami headed to BC
The Chinese bargained well. They took advantage of Russia's weakening gas sales in Europe thanks to the ongoing crisis in the Ukraine. They demanded cheaper rates from Putin and got them. In return Putin now has a secure and authoritarian market that will keep his government primed on hydrocarbon revenues.
With China poised to become the largest gas importer in the region and the largest LNG importer too, the deal dampens natural gas prices for the whole region.
As a consequence Asian buyers won't want to lock themselves into long term inflexible price arrangements at a time when market dynamics are actively lowering prices. In fact some analysts, such as the Oxford Institute for Energy Studies foresee the day when Asian buyers will form their own price hub for natural gas.
Lower prices, of course, will force LNG developers in British Columbia, Australia, East Africa, the Mediterranean and Middle East to cut costs and or cancel projects. The Australians, which have invested nearly $200 billion in natural gas export industry, have already axed or cancelled many of their bloated mega-projects.
To date Australia's growing dependence on the kangaroo-like volatility of natural gas has inflated its currency, killed its carbon-fighting programs, raised energy prices for Australians, polluted aquifers, fragmented farmland, and wasted billions of dollars in cost overruns.
In addition public opposition is growing to the export scheme which has neglected proper environmental monitoring from day one. The use of fly in and fly out temporary workers has also alienated the nation's workforce. In addition there is also growing concern about how much gas is available for export due to poor reserve conversion and declining well productivity.
None of these developments surprise seasoned energy experts. Around the word oil and gas mega-projects are in big trouble due to the extreme nature of unconventional hydrocarbons such as shale gas and bitumen. They not only cost more energy and capital to develop but deliver fewer returns than conventional resources and some renewables.
The trouble with mega-projects
Ed Merrow, the founder and president of California-based Independent Project Analysis, recently reported that oil and gas mega-projects that cost a billion dollars or more failed more often than other conventional mega-projects due to speed, sloppy upfront planning and bad management.
While 50 per cent of all non-oil and gas mega-projects tend to succeed, about 78 per cent of oil and gas projects fail due to massive cost-over runs and unrealized production targets.
In other words these projects do not mine or pipe anywhere near the volume of hydrocarbons that they promised to investors. (The spectacular under performance of steam plant or in situ projects in the oil sands is a case in point. Projects that promised 60,000 barrels a day typically deliver 30,000 barrels. There are also serious questions about the volume of unconventional gas in Australia, given rapid depletion rates and escalating extraction costs.)
Last but not least, the Russia-China deal has dire implications for LNG profits. Last year Clark promised to collect a minimum of $100-billion over the next 30 years in taxes and royalties for British Columbians, the owners of the resource.
But with LNG prices falling in Asia, companies will aggressively push to reduce taxes for resource owners as they have in Australia. That means the Russia deal has probably vaporized Clark's $100-billion windfall.
The promised windfall was largely a PR exercise. For starters the multi-billion industry, which exports half of its shale gas to the tar sands, currently earns peanuts for British Columbia at less than $300-million a year.
A calculated and high risk government policy, that puts off any earnings from shale gas for decades, explains why taxpayers are losing big time. (In contrast even the petro state of Texas demands the money upfront in the short term.) Incredibly the B.C. government still actively subsidizes the largely foreign-owned industry with low royalties, free water, free geoscience and even road and pipeline incentives.
'Contractual train wreck'
Last February the Oxford Institute for Energy Studies offered several scenarios for LNG developments in Asia.
They noted that a well endowed LNG market will likely postpone or kill several high cost LNG projects around the world and give Asian buyers an incentive to create their own hub pricing centre, perhaps in Singapore.
They warned that this process may not be smooth, and could involve a "contractual train wreck." Some Asian buyers such as Japan may balk at high prices and sue North American sellers. Meanwhile LNG exporters will scramble to cover the costs of shipping in the spot market. Several years of commercial upheaval could dog LNG exporters and add more volatility to shale gas fields around the world.
If that happens (and the Russia-China deal makes it highly probable) the current government of British Columbia, which has gambled everything on LNG, is heading for a contractual train wreck with its citizens.