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BC finds no easy path to LNG riches, but says it’s competitive
For all of its 140-year-plus history as a province of Canada, British Columbia has built its economic engine from parts assembled out of the natural resource sector.
But beyond lumber, minerals and fish there has never been much evidence of a Plan B to cover its budget and spending needs, confining British Columbia to its role as a hewer of wood and drawer of water.
Until less than a decade ago, the province - despite building evidence of untold natural gas riches in its northeastern region - was even gearing up to import LNG.
Then came a breakthrough from the use of horizontal drilling and multi-stage fracturing to release gas from shale deposits, coupled with the insatiable demand for LNG in Asia, with customers forking over US$18 per million British thermal units.
In no time, global energy giants were assembling natural gas exploration rights and staking out sites on the Pacific Coast to build liquefaction and tanker facilities.
Changing provincial views The glowing outlook allowed Premier Christy Clark, an unfailingly cheerful person in even the gloomiest of times, to sell the notion of a new industry that would invest C$1 trillion over 30 years, spawn 100,000 jobs and allow her government to build a C$100 billion Prosperity Fund to wipe out British Columbia’s debt (currently at C$60 billion), while covering the cost of all imaginable services and infrastructure.
That shaped a dramatic comeback from months of polls pointing to a resounding defeat for her Liberal Party administration and got her re-elected by a sweeping margin in May 2013, all before the healthy margins in global LNG started to evaporate along with the Prosperity Fund before it had even been established.
The reversal of fortunes was evident on Oct. 20 when the government delivered its new LNG tax regime that effectively cut in half the royalty tax it counted on collecting, all to entice the energy behemoths to make their final commitments to LNG projects.
Now British Columbia is not even sure it will play host to an industry, although there could be healthy returns if a handful of companies does start producing from the province’s shale gas basins.
Finance Minister Mike de Jong, while conceding the outlook for LNG is “not quite as lucrative as it once was,” said he is satisfied British Columbia has made a case for investment in the sector by striking an “appropriate balance that is fair and reasonable for the proponents and fair and reasonable for British Columbians themselves.”
He estimates the government would collect nearly C$800 million from a medium-sized LNG plant in the first year of production and that would grow modestly over the next decade.
In addition, an LNG plant would generate additional corporate, motor vehicle fuel, property and carbon taxes as well as royalties from natural gas.
De Jong brushed off criticism that the government had been bullied into lowering its tax rate by LNG proponents, saying only that those companies had “aggressively” advanced their position.
Report shows appeal To bolster its case within the highly competitive global industry, British Columbia commissioned a report from Ernst & Young that shows its tax and royalty regime should be slightly more appealing to companies than Australia and the U.S. states of Alaska, Georgia, Louisiana, Texas and Oregon when the fiscal framework in each jurisdiction is totaled up across federal, provincial/state and local governments.
But the margins - based on low- and high-price scenarios - are slender in an analysis that did not cover Qatar, the world’s No. 1 LNG producer, or Russia, which has the world’s largest reserves and recently inked a major gas deal with China, which remains the largest prospective customer for British Columbia LNG.
What the analysis does not cover is the cost of extracting the gas feedstock for LNG, building and operating pipelines to coastal terminals and shipping the liquefied product across the Pacific.
- Gary Park
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