The B.C. Liberal government won’t win any forecasting awards for its predictions on natural-gas revenues.
Two years ago, the province estimated that royalties from this fuel would reach $846 million in this fiscal year.
In Finance Minister Mike de Jong’s recent budget, that was cut nearly in half, to $441 million.
Three years ago, the spring budget pegged revenues from natural-gas royalties at $447 million. As that fiscal year ended, that figure was reduced to $367 million.
In the worst guess of all, then finance minister Colin Hansen’s 2010-11 budget forecast revenues from natural-gas royalties of $1.25 billion by 2012-13.
Three years later, the updated figure was only 11 percent of that amount: $144 million.
That’s a shortfall of more than $1.1 billion from the earlier estimate.
Now Premier Christy Clark is predicting that the province will generate $100 billion in revenues from the export of liquefied natural gas over the next 30 years.
But is this prediction as bogus as the government’s other claims regarding natural-gas royalties?
Marc Lee, senior economist at the Canadian Centre for Policy Alternatives, counts himself among the skeptical.
“I just don’t know that the economics will hold up at the end of the day,” Lee told the Georgia Straight by phone. “The government has been making all kinds of bold claims about revenues and jobs and greenhouse-gas emissions that can only be considered propaganda. They’re not really anchored in anything real in terms of estimates going forward.”
According to a pre-election B.C. government document called LNG 101, this nascent industry will generate 21,600 direct construction jobs, 41,900 jobs supplying goods and services during the “peak construction phase”, 2,400 permanent jobs operating plants and pipelines, and 61,700 jobs to support LNG operations.
That’s predicated on five plants being constructed by 2021—although, so far, no company has made a final investment decision green-lighting an LNG plant.
Lee explained that the B.C. government’s bold claims are based on a huge differential in natural-gas prices between North America and Asia.
On the New York Mercantile Exchange, the price was $4.37 per million British thermal units on March 31 for May deliveries.
LNG prices in Japan, the world’s largest market for these shipments, topped $16 per million BTUs.
Nuclear reactor closures influence price
The CCPA economist pointed out that LNG prices have risen substantially in Asia since Japan shut down all of its nuclear reactors after a 2011 earthquake and tsunami crippled a nuclear power plant in Fukushima.
He declared that the B.C. government is pinning its hopes on these high prices continuing. That’s because it costs approximately $9 to $10 per million BTUs just to extract the gas in B.C., cool it down so it can be liquefied, put it on a ship to Asia, and convert it back to gaseous form onshore.
“If that price margin shrinks down to $11 or $12 [per million BTUs], then the amount of income generated on that is a lot less,” he said.
Lee also noted that following the Fukushima disaster, Japan has gone from a 50-year stretch of trade surpluses to three years of trade deficits.
As a result, he suggested that Japan has a “strong motivation” to restart its nuclear reactors, notwithstanding the political blowback at home.
In fact, he added, the new government has indicated in an energy plan that it will resume generating electricity with nuclear power.
Meanwhile, another huge importer, South Korea, has taken four nuclear reactors off-line following a scandal, but Lee said there’s no guarantee they won’t be fired up again, lessening demand for LNG imports.
“The prices that the [B.C.] government is looking at in paving the roads with gold is basically based on these short-term factors that are not likely to persist,” Lee said.
Natural Gas Development Minister Rich Coleman did not make himself available for an interview to respond to Lee’s comments.
B.C. misread U.S. energy revolution
The B.C. government missed the mark with its earlier forecasts on royalties because it failed to predict an explosion in U.S. energy production.
This largely came about through hydraulic fracturing, otherwise known as “fracking”, and horizontal drilling. Technological innovations in fracking generated huge new supplies, causing North American natural-gas prices to plummet.
The falling prices resulted in fewer royalties flowing into the B.C. government treasury.
Fracking involves pumping huge amounts of water along with sand and chemicals into shale-rock formations to free trapped gas.
Horizontal drilling enables companies to retrieve locked supplies by moving the drill bit across a deposit rather than going straight down.
A single platform can send horizontal drills in a multitude of directions, enhancing efficiency and saving money.
In his 2013 book, The Frackers: The Outrageous Inside Story of the New Billionaire Wildcatters (Penguin), Gregory Zuckerman chronicled how a handful of U.S. energy-industry outcasts refined these techniques and caused an American energy revolution.
“To me, it’s fascinating that this resurgence started in 2007 and 2008, which is right when America was sort of on its back,” he told the Straight by phone.
Zuckerman, a Wall Street Journal reporter, said that the United States is now producing about eight million barrels of oil per day, up from five million barrels per day in 2008.
In addition, U.S. natural-gas production rose more than 21 percent between 2008 and 2013.
ExxonMobil CEO Rex Tillerson has predicted that the U.S. will be energy self-sufficient by 2020.
The Frackers reveals that the people who spearheaded this sharp increase in energy production were not working for major oil companies like ExxonMobil, Shell, BP, or Chevron.
Rather, they were an assortment of little-known wildcatters from Texas and Oklahoma—George Mitchell, Aubrey McClendon, Tom Ward, and Harold Hamm—who became billionaires as a result.
They crisscrossed areas with shale reserves, buying drilling rights from property owners. Although there has been a lot of howling from environmentalists about the contamination of water supplies with fracking chemicals, the industry continues to grow.
“Everyone focuses on fracking—and fracking is key, as is horizontal drilling—but the most important thing is that innovators like Mitchell got it to work in shale, which everyone kind of ignored, especially the big guys and the experts,” Zuckerman said.
By targeting shale, Zuckerman maintained, Mitchell changed the country and the world.
That’s because manufacturers with high natural-gas input costs—such as makers of chemicals, tires, cement, and aluminum—are basing operations in the United States because of the low natural-gas prices. And Zuckerman said that this will give the U.S. a competitive advantage against other countries for years to come.
“Some economists say as many as two million jobs are going to be created,” he stated.
Canada exports less gas to the U.S.
As U.S. natural-gas production rose after 2008, Canadian production went in the opposite direction.
It fell from 15.4 billion to 13.6 billion cubic feet per day between 2008 and 2012, according to Statistics Canada. (B.C. accounted for 23 percent of the latter amount.)
The B.C. NDP’s critic for natural-gas development, Robin Austin, told the Straight by phone from Terrace that the province can no longer count on easy money from exporting energy to the United States.
Canada’s shipments of natural gas to the U.S. have fallen almost every year since 2007, according to the Energy Information Administration in the United States, because of ramped-up U.S. production. That includes a five-percent drop in 2012.
“People need to realize that the natural gas we produced over the last 10 to 15 years has, of course, all been exported to the States or exported to Ontario and Quebec,” Austin said. “Those markets are coming to a rapid end because of all the gas they’ve found.”
He emphasized that B.C. could face serious economic trouble if no LNG plants are built because the domestic market isn’t large enough to absorb all of the energy being produced in this province, and only liquefied gas can be exported overseas.
That’s why he’s hoping that at least one LNG plant is developed in the northwestern part of the province.
In the meantime, Austin claimed that the B.C. government has not examined options for making more use of this province’s bounty of inexpensive gas, apart from talking about building ferries powered by LNG.
Instead, he accused the B.C. Liberals of focusing exclusively on building an LNG-export industry.
“At least in the United States, they’re putting their huge finds to some domestic use,” Austin said. “They’re reopening aluminum plants because the cost of energy has gone down so dramatically as a result of gas.”
Kitimat is ground zero for LNG proposals
Austin’s Skeena riding includes Kitimat as well as the Nass Valley, which is home to the Nisga’a Nation.
The B.C. government website lists 12 potential LNG projects and six potential pipeline projects.
Four are in the Kitimat area, including the massive LNG Canada proposal from a partnership of Shell Canada, PetroChina Company, and Korea Gas Corporation.
Another huge undertaking, Kitimat LNG, is backed by Apache Canada and Chevron Canada.
“If either of those gets going, it will dramatically change the economy of the northwest,” Austin said.
First Nations want LNG projects
He said that in addition to locations identified on the B.C. government website, the Nisga’a have four potential sites for LNG plants on their territory.
The MLA pointed out that local, regional, and First Nations governments all want these projects because they would generate enormous tax revenues.
The Chevron-Apache plant was initially slated to be inside the boundary of the District of Kitimat, but Austin noted that the Haisla First Nation successfully negotiated to have it moved onto their territory.
One of the biggest obstacles is the sky-high capital cost of building an LNG plant—upward of $20 billion, and that’s not counting cost overruns.
The Wall Street Journal reported in December that the price for Chevron’s Gorgon LNG facility in Australia has risen to US$54 billion, up 38 percent from its original estimate.
Austin said that these high costs, combined with uncertainty over the direction of natural-gas prices in Asia, explain in part why no company has made a final investment decision here. But he also blamed the B.C. government for not moving quickly enough.
“We were supposed to have the fiscal arrangements made public in November,” he said. “Then it was by the end of last year, by December 31. Then we have a spring session coming up and everyone’s assuming, ‘Oh, well, now the spring session will happen and, as part of the budget, they’ll bring in the legislation for the fiscal framework now.’ Again, delayed.”
Companies play jurisdictions against each other
B.C. could also face intense competition from LNG export plants that could be developed in the U.S. along the Gulf of Mexico and in Oregon.
The CCPA’s Lee said that large companies such as Shell and Chevron want to cover their bases by staking claims in several jurisdictions.
“If you’re doing that in B.C. and Oregon and Australia and maybe somewhere else, then you’re able to play governments off against each other in terms of getting the most competitive deal,” he said. “So I think it’s smart for companies to be doing this.”
Lee and Austin agree that the key will be the price of LNG in Asia.
That’s also a topic of keen interest to Hillard Huntington of the Energy Modeling Forum at Stanford University.
His group brings people and organizations together to try to standardize assumptions about where energy prices are going.
The participants include energy companies, the U.S. government, Environment Canada, various utilities, academic groups, and industry associations.
Huntington told the Straight by phone from Stanford that U.S. federal officials are “particularly interested” in this research as they’re trying to decide how many LNG-export licences should be awarded.
“I’ve tried to get people involved from the B.C. government, but…it’s been a little hard to get their interest,” Huntington said.
He expects that the differential between LNG prices in Asia and North American natural-gas prices will “probably narrow a little more than people think is going to happen”.
“One of the reasons, of course, is as British Columbia and places in the United States start exporting more, that’s going to push up the price of gas here,” he predicted. “It’s not going to be dramatic. It’s not going to double the price or anything like that, but it’s going to push up the prices here as you’re selling overseas.”
That’s aside from the possibility that arbitrage (simultaneous buying and selling of commodities) in global natural-gas markets could offset the price differential.
Huntington also said that one of the biggest uncertainties is China.
According to a 2012 report by the U.S.–based Center for Strategic and International Studies, China has more “technically recoverable shale resources” of natural gas than the U.S. and Canada combined.
“You’re probably talking a decade or so before it really starts taking off,” Huntington said. “What that means is there’s kind of this window where some people will make money exporting these supplies. But I think it will be a limited window, and eventually market forces will kind of close that gap.”
That’s to say nothing of intense competition posed by gas-producing giants such as Qatar and Russia.
The Panama Canal expansion project has the potential to facilitate Gulf-state LNG exports to Asia, creating more challenges for B.C. plants.
LNG exports and global warming
And then there are the climate implications of burning all of this natural gas.
That’s of special concern to the CCPA’s Lee, who hopes to release a report on the LNG industry by the end of this month.
He said that if the B.C. government’s LNG dream comes true, it will be the equivalent of adding 24 million to 60 million cars to the world’s roads.
The economist also stated that the premier has provided no evidence to back up her contention that the LNG-export industry is a net benefit for the environment because it will reduce coal consumption in China.
“Those claims generally ignore the leakages of methane that have proven to be a really major issue, particularly in fracking operations,” Lee said. “In general, you get leakages of two to four percent over the life cycle from the wellhead to final consumption.”
He noted that methane has a global-warming potential 86 times that of carbon dioxide over a 20-year period.
Even at 1.2 percent leakage, Lee said, fracking natural gas is worse for the climate than burning coal.
“Companies are thinking long and hard about whether this makes sense for them in terms of their business,” he concluded. “The B.C. government doesn’t seem to be doing that at all.”
The province remains bullish on natural-gas royalties. The last budget predicted an average annual increase of 16.4 percent over the next three years.
For the sake of taxpayers, let’s hope this prediction isn’t as far off the mark as the government’s previous forecasts.