Motherlode or Fools Gold ? 2 Things that will have you questioning the push for BC LNG
** updated below post Feb 20, 2020. CGL pipeline has applied for a federal loan to help build the pipeline.**
With Wetʼsuwetʼen supporter blockades and demonstrations ongoing, no one can miss the barrage of pro LNG industry advertising popping up everywhere heavily promoting Coastal GasLinks natural gas pipeline.
The Coastal GasLink pipeline begins in BC, ends in BC and if finished will transport natural gas to LNG Canada’s plant when its completed in approximately 2025. Industry groups and Premier Horgan have both said this project is critical for British Columbians and will bring prosperity and revenue into provincial coffers for decades.
For the average, non political person, these ads – viewed without knowledge of global LNG market problems or how subsidized the industry is – do make it sound like the motherlode of all opportunities for BC.
But a deeper look at some industry reports I came across recently, really has me shaking my head at the public relations campaigns from the BC LNG Alliance and Resource Works. Even industry reports are transparent about the need for subsidies to even make LNG happen in BC.
This all won’t be sexy info for most people, admittedly. But British Columbians are on the hook for a lot when it comes to LNG. And they should be asking why.
It’s of no news to anyone, least of all John Horgan, that the spot price of LNG right now is at a historical low. There has been a glut of LNG flooding the market for some time, and due to a warmer winter than normal and China’s Covid-19 outbreak, it’s a bit of a nightmare for LNG exports right now.
Prices are sitting around the $3.00 US per mmBTU in Asia, down from $20 six years ago.
However alarming that is for gas producers, it isn’t the current price of LNG we need to worry about. LNG Canada’s plant won’t open until 2025, so it is the price of LNG in 2025 that analysts look towards as one factor in viability.
This is where it gets interesting. One would think that with LNG prices at rock bottom prices, there would be no where to go but up, and those with skin in the game will do anything to make you believe it will . After all, their jobs depend on it, to be blunt.
…But while the glut is set to come to an end, which should lift rock-bottom spot prices, the race to give the green light for new projects has intensified, the analysts said. The winners in the next race would be low-cost producers with clear funding plans and some LNG service companies.
“Competition to sanction the next wave of LNG projects has intensified risking another glut in the mid-2020s,” Bernstein said.”The seeds of the next cycle are already being planted.”
“With a further 110 million tonnes per annum of potential projects the competition for market space will be intense,” Bernstein said.
That article should be read in full as it details other projects coming online mid 2020’s when LNG Canada will be online.
This anticipated future glut is a big reason Chevron is trying to shed its stake in Kitimat LNG, the other potential LNG plant on tap for Northern BC.
Now, the likelihood of another LNG glut in the global market in the mid 2020’s could spell disaster for the LNG Canada partners…or spell disaster for the provincial and federal governments. Let me tell you why.
The Canadian Energy Research Institute issued a report July 2018, on the viability of LNG in Canada, West coast potential projects versus East coast projects. You can read the full report here: https://ceri.ca/assets/files/Study_172_Full_Report.pdf
From the report:
The cost competitiveness of an LNG plant is in relation to the destination markets. A project with
certain supply costs and transportation costs needs to ensure that the price offered at the
destination market over 20-years will cover those costs. Otherwise, the LNG owners risk a loss.
In this section, the landed costs of LNG in Canada and competing jurisdictions are compared with
prices at the destination markets. Further, the section presents ways to improve cost competitiveness for Canadian projects. ** note, improving cost competiveness = more government subsidies, LY**
1. Western Canada and Eastern Canada LNG landed costs are more expensive than the
current spot price in Japan (for Eastern Canada LNG, northeast Asia is not a priority
market). The difference between Western Canada LNG landed costs and spot price is
$0.80 at the time of writing (May 2018). ** spot price at the time of this report was $8.20..its sitting far lower now at $3.00ish**LY
2. Under an oil-linked contract ( which many Asian buyers prefer), a Western Canada LNG project will need an oil price of
approximately $80 or higher over the life of the project to break-even (contract price is
assumed at 11.5% of Brent contract; break-even costs include a return to investors).
3. The total liquefaction costs of Western Canada LNG (all costs except for natural gas) are
higher than for the US GoM-based project.
Do you see the issue now? These calculations for viability,while approximates, actually included the provincial governments ‘incentives’ aka subsidies, at an LNG price that was much higher than it is now.
The report mentions how governments could make it more competitive by offering more incentives. (I recently explored the amount of lobbying going on by CAPP and other industry groups here : https://lailayuile.com/2020/01/29/lng-lobbyists-policy-why-big-money-is-still-a-very-big-problem-in-bc-politics/ )
The questions surrounding the economics alone are unsettling. BC LNG projects require much higher LNG prices AND an oil price $80 just to break even. To make a profit it would have to be even higher.
This is why those LNG lobbyists are all busy lobbying right now. They want better policy for them and more subsidies to ensure the industry can make money.
It’s even been questioned why LNG Canada would even go ahead with such challenges. Some analysts speculate it’s just a way for LNG Canadas partners to lock down a dedicated gas supply for 40 years. Pretty much on BC taxpayers dime.
Marc Lee touches on this in his dissection of the LNG subsidies given by our current government. I suggest you read it if you haven’t. https://www.policyalternatives.ca/sites/default/files/uploads/publications/BC%20Office/2019/05/CCPA_BC%20Critiquing%20the%20LNG%20Canada%20agreement_FINAL_190506.pdf
Further food for thought on the challenging economics and viability of LNG can be found here, in this Oxford Energy Study: https://www.oxfordenergy.org/wpcms/wp-content/uploads/2019/10/Challenges-to-the-Future-of-LNG-NG-152.pdf?v=3e8d115eb4b3
One thing before I go. Boosters keep pushing the save China from air pollution and coal line. Frankly, it’s bunk. Yes, LNG is used overseas and it will continue to be. But coal is very cheap right now and will be used heavily for years to come. Right now Japan is racing to build new coal plants, despite knowing how environmentally unsound it is. https://www.nytimes.com/2020/02/03/climate/japan-coal-fukushima.html
And China is not only building more coal plants, it is also financing others in less developed countries who can’t get financing for them anywhere else.
Any LNG we produce is not going to displace the impact of all these new coal plants overseas.
Now we are in a spot where the ndp government has focused so much on one project and industry just like the BC Liberals did, that zero work has been done to diversify and create resilient northern communities that don’t bust when the resource disappears.
A lot can happen in the next few years. Many countries are moving past LNG right to renewables. Investors are wary and just this week the headlines declared worlds top LNG producer is in trouble.
LNG in BC. Is it really the motherlode…or is it just fools gold? Only time will tell.
*** update Feb 20, 2020.
CGL pipeline has applied for a loan or grant from the feds. In essence taxpayers loaning money to help build a pipeline to LNG Canada, a project that isn’t viable without billions in government subsidies.