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BC ‘powers up’ LNG plans Premier Clark upends part of government’s clean energy strategy, supports gas-fired electricity generation to lower LNG export costs Gary Park For Petroleum News
The British Columbia government is undoing part of its once-proud clean energy policy to use natural gas for “powering up” its hopes of a thriving LNG export industry.
At the same time, the province’s goal of having three LNG projects up and running by 2020 is facing a shred of doubt, with the lead-off Kitimat LNG venture needing an extra year to secure firm off-take orders in Asia.
Premier Christy Clark has announced a major departure from her predecessor Gordon Campbell’s environmental policy that was supposed to put British Columbia in the forefront of North American jurisdictions.
Accused by her political opponents of “making changes on the fly,” she said natural gas will be reclassified from a fossil fuel to a “clean” source of energy under “certain circumstances.”
Gas-fired electricity plants that are used to extract and ship gas on pipelines to liquefaction terminals on the Pacific coast will be categorized as clean energy, enabling the industry to produce cheap electricity without compromising the objects of the province’s Clean Energy Act.
Clark said the change is necessary because of the huge power needs of the LNG sector.
Large energy needs Richard Stout, executive director of the Association of Major Power Consumers of British Columbia, told a business conference where Clark made her announcement that current LNG proposals would require five times the energy consumed by the 2 million residents of Greater Vancouver.
Clark and British Columbia Energy Minister Rich Coleman said the policy shift will change a law that commits British Columbia to get 93 percent of its electricity from renewable, non-fossil fuel sources.
Currently, natural gas can only qualify as “clean energy” if it includes the capture and storage of any carbon dioxide emissions resulting from gas development and consumption.
Coleman said a source of low-cost electricity is vital to support British Columbia’s fledgling LNG industry which holds the key to developing trillions of cubic feet of stranded shale gas resources in northeastern British Columbia.
Clark said the new regulation will apply only to power generation that meets world-leading standards on greenhouse gas emissions.
“This is consistent with our comprehensive natural gas strategy and is also consistent with our efforts to use renewable energy,” she said.
Energy needed for LNG Clark said her government must act to “power up” British Columbia’s LNG industry, which has three projects moving toward final investment decisions that would liquefy close to 5 billion cubic feet per day of gas — about one-third of Canada’s current output — with several others involved in feasibility studies.
Stout said that if the government-owned utility BC Hydro had been prevented from using natural gas to produce the cheapest electricity for LNG it would have been faced with buying “expensive” power from independent producers.
Doug Little, vice president of energy planning and economic development at BC Hydro, said the utility is anticipating a 50 percent increase in demand for electricity over the next 20 years without even allowing for LNG consumption.
Ellis Ross, chief counselor for the Haisla First Nation, a 50-50 partner with Houston-based LNG Partners in the 250 million cubic feet per day BC LNG Export Co-operative project, told the conference his community “supports resource development if it is done properly.”
He said planned industrial investment within Haisla territory, on the northern British Columbia coast, is estimated at C$40 billion.
Nicholas Heap, British Columbia director of the Canadian Wind Energy Association, said that wind energy costs are falling and that declaring something “clean and renewable” does not automatically make it so.
John Horgan, environment spokesman for the opposition New Democratic Party, said Clark is “going to designate natural gas a clean energy in one area for one purpose, while it remains dirty in every other corner of the province.”
He said such a major policy change should be subject to public consultation and not just a few lines in a speech.
Buyers not in place While the push by government and industry to profit from the Asian LNG market and offer some relief to Western Canada’s struggling gas sector gathers momentum, there is a smudge on the horizon.
Janine McArdle, Apache’s senior executive in charge of the Kitimat LNG project, conceded that more time will be needed to find buyers for the LNG, delaying the timetable for initial shipments by at least one year to 2017.
She told an unconventional gas conference that Apache — with Encana and EOG Resources each holding 30 percent stakes in the venture — must be certain it has a market for the gas before making a final investment decision, following which construction would take 50 to 60 months.
“We are moving as quickly as we possibly can give Canada is new to these buyers,” she said.
“We have been talking to multiple markets simultaneously and there is a lot of interest. I always have to remind people that these are 20- to 30-year marriages. These things don’t happen overnight.”
More than LNG needed Ed Kallio, director of gas consulting at Ziff Energy Group, told the conference that it will take more than LNG exports to restore a sense of balance to the Western Canadian gas industry, which faces a low-price environment for several years.
He said demand will have to increase and supply will have to come down as production of liquids-rich natural gas runs out of steam with a weakening of liquids prices as drilling driven by land tenure tapers off.
“We had such a rush and we had a bunch of cowboys out there, including Chesapeake Energy and Encana, that drilled like crazy because they had nice price hedges on through the end of this year.
“But they have very little hedged next year and that is why they are selling assets — they are selling fingers, toes, kidneys, prized assets to get their cash flows up” to survive the gas price slump, Kallio said.
The degree of unease within the gas-weighted sector was mirrored June 20 by Encana, North America’s second largest gas producer, which pumped an extra US$600 million into its US$2.9 billion capital budget to drill 75 more wells into 10 North American plays where higher-value products such as oil, propane and condensate are produced along with gas.
“Our stated goal is to transition to a more balanced portfolio of production and cash flow generation and to do so as prudently as possible,” said Chief Executive Officer Randy Eresman.
“We plan to increase the pace at which we develop our liquids-rich natural gas and oil plays while minimizing our investment in dry natural gas plays to largely preserve their value. We also plan to maintain our financial strength through multiple joint ventures and divestitures,” he said.
Encana said the newly announced investments will exceed cash flow for at least 18 months but will allow it to increase liquids output for 2012 by 7 percent to 30,000 barrels per day.
CIBC World Markets analyst Andrew Potter said that on the negative side the high-spending strategy in a declining oil and gas price environment “raises the risk profile of the company.”
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