Economics and why LNG will not work now or in the future for BC
January 30, 2016
Eoin Finn
Op-ed by Eoin Finn, January, 2016
“100,000 jobs, BCers first in line for those jobs, a debt-free BC, a $100 billion heritage fund and a trillion dollar boost to the provincial economy”. Promises the BC Liberals made for the LNG industry in the 2013 provincial election campaign. We all remember them- what wasn’t to like?
But… you may well ask … three years on and not a single LNG project is a-building … how are we doing on those promises? And what part will Woodfibre LNG play in delivering on the promises?
You could be excused for being skeptical. After all, the world price of LNG has plummeted. Even with the price drop, Asian demand, which is 75% of world demand, has steadily declined. Australia and the U.S. have left us in their dust with their dozen new LNG plants, Japan is restarting its nuclear reactors and China has done gas pipeline deals with Russia, Myanmar and Uzbekistan. The world is facing a long-term glut of the stuff from all those new plants. Last week’s lifting of sanctions on Iranian exports (Iran has the 2nd largest proven gas reserves in the world – Canada’s are a measly 21st) cannot but add to the glut. And, of course, we have lately realized we have to wean ourselves off GHG-emitting fossil fuels.
Time for an expectations reload? Not if you are the BC Government. Faced with such ill omens, it can hardly be accused of being ungenerous to the 20+ LNG gold-rushers. It has gifted them below-cost hydro, no PST on gas purchases, legislated 25-year royalty tax holidays, accelerated cost write-downs, a $9 billion hydro dam and a $3.5billion bridge, bargain-basement property taxes, breathtaking exemptions from labour, emissions and safety standards, expensive trade mission junkets, rushed environmental assessments and silenced regulators. And bullied BC’s First Nations aside wherever their hereditary rights got in the way of fracking pads, pipelines and LNG plants. Desperate measures … for an industry which, at best, might constitute 2% of BC’s GDP.
Locally, there is Woodfibre LNG. Its supporters argue strenuously that Squamish needs local jobs, LNG property taxes are necessary to hold down ours, and our environment, brand and blossoming tourism economy can co-exist with LNG. Detractors have faulted its dodgy cooling method, the unenviable environmental, human rights and tax evasion track record of its Indonesian owner, the equally-dodgy resumes of its top management, and safety concerns about LNG tankers transiting Howe Sound. And then there is FortisBC, whose notion of fostering good community relations extended to suing a Council gamely defending its treasured estuary. Would you believe – unhelpful?
Spare a thought for Woodfibre’s predicament. With LNG approaching USD$6 in Asia, and the cost to produce and get it there topping USD$12, how would you convince a banker to loan you the $2 billion needed to build, assemble and commission the plant? When you have never before built or operated one and don’t have any signed customers. And, even if you could be convincing, what guarantee could you give that oil (and oil-linked LNG) will recover anytime soon. Oil at USD$85–plus per barrel (it is USD$30 now) is needed to make enough to start to pay back the loan. How would you convince penny-pinching Asian customers to pay more than the going price for the surety of a Canadian supply that may never materialize – when Australia, the U.S. and others are lower-cost suppliers of their glut? All those new LNG plants in way-cheaper places than BC are going to be around for 25-30 years, so you would have to bet that the world will fail in its efforts to reduce its fossil-fuel addiction and GHG emissions and the loonie will sink into peso territory. That is far too many “ifs” for most bankers’ taste. Alas… those scenarios are unlikely.
So – barring a major war in the Middle East, not much will happen on the LNG-in-BC front in the short run. Competitive economics will prevail, however much the BC Government tries to pretend otherwise. It always does. As for those election promises - best not to hold your breath.
*************************
Eoin Finn is a seasonal resident of Bowyer Island in Howe Sound, a retired partner in accounting & consulting firm KPMG and a co-founder of My Sea to Sky.
References:
http://www.squamishchief.com/news/local-news/woodfibre-fortisbc-approvals-still-in-limbo-1.2159971
https://www.kpmg.com/Ca/en/industry/Energy/Documents/8563-GHG-for-LNG-Final-Web.pdf