Focus on Fuel Part I: A history of the Liquefied Natural Gas industry in British Columbia

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This is Part I in a five-part Martlet investigative series exploring the economic, socio-political, and environmental impacts of the B.C. government’s decision to pursue Liquid Natural Gas initiatives. This instalment narrates a history of the issue.

 

When the community surrounding the Medicine Hat gas field established itself as the first settlement in Canada with a gas utility in 1904, it unwittingly christened what would become a multi-billion dollar national natural gas industry, with Canada eventually becoming the third-largest producer of this particular natural resource in the world. This industry continued burgeoning in Canada right on through the new millennium, with technological advances and methodological evolution combining to create the $70-billion oil and gas industry that the Canadian government reports it to be today. British Columbia is the second largest producer of natural gas in the country, accounting for 14.8 per cent of Canadian natural gas production annually; ipso facto it should come as no surprise that the British Columbian oil and gas industry has been a topic of controversy and discursive debate throughout its relatively short existence. This provincial discourse has engaged groups ranging from the Stellat’en First Nation to eco-socialists to environmental activists at the University of Victoria.

Tax breaks, projected revenue, and costs

On Sept. 23 this year, the province approved $115.8-million in royalty tax breaks to companies constructing roads and pipelines, primarily in the Montney shale formation in Northeastern B.C. These new pipelines and associated facilities are in accordance with B.C. Premier Christy Clark’s vision to harness the nearly 100-trillion cubic feet of natural gas in the province, in order to tap into expanding energy markets in Asia. Clark hopes to spur investment in the Liquid Natural Gas (LNG) industry specifically, an uncharted market for the province, which the Clark administration assures its naysayers is full of economic promise, yet environmentalists, economists and First Nations alike contend is equally engorged with contradictions.

The Sept. 23 announcement marked the 12th instalment of B.C.’s Infrastructure Royalty Credit Program (IRCP), established under former premier Gordon Campbell’s Liberal administration in 2004. Since its inception nine years ago, the IRCP has allocated over $840-million to oil and gas companies, resulting in the creation or refurbishment of 78 resource roads and 140 pipeline projects, what generating $7.9-billion in capital investment and private sector drilling. The B.C. government currently derives nearly six per cent of its total revenues annually from its natural resource industries, with natural gas, petroleum, and minerals accounting for 54 per cent of these natural resource revenues. The $115.8 million in 2013 royalty credits are expected to generate $445-million in revenues for B.C. within five years, and assuming the B.C. government reaches its goal of three functional LNG facilities by 2020, it is estimated these plants will generate over $1-billion annually in revenues thereafter.

“We are creating jobs for British Columbians through the growth of our natural gas sector and the development of a new export industry,” said Rich Coleman, minister of Natural Gas Development, in a Sept. 23 press release. “Our infrastructure royalty credit program is helping us build the capacity we need to make B.C. a world leader in natural gas supply and export.”

The first major event, in 2007, in opening up the potential B.C. LNG market was the filing of an application for an Environmental Assessment Certificate by Pacific Trail Pipeline Limited Partnerships (PTP) for its proposed Kitimat to Summit Lake Pipeline Looping Project (KSL Project). PTP is a 50/50 partnership of Pacific Northern Gas Ltd. and Galveston LNG Inc.; Galveston LNG is the parent company of Kitimat LNG, the nomenclatural designation for the partnership between Apache Canada Ltd. and Chevron Canada Ltd. The partnership submitted its application to the B.C. Environmental Assessment Office on Jul. 24, 2007, and a little under two years later on Mar. 16, 2009, a receipt of federal environmental approval for the KSL project was issued.

The next major event of 2007 occurred only four months later, with B.C.’s announcement of the passage of the Greenhouse Gas Reduction Targets Act (GGRTA) on Nov. 24. The GGRTA requires a 33 per cent reduction from 2007 greenhouse gas (GHG) emission levels by 2020, with an ultimate goal of an 80 per cent reduction in emissions by 2050. A national inventory submission to the United Nations in April showed that British Columbia had nearly met its 2012 interim target of a six per cent reduction in emissions; the next target is an 18 per cent emissions reduction by 2016, a goal analysts from the Clean Energy Canada initiative say is impossible to reach should the Liberal government stay the course in its LNG policies. In the Liberal government’s pursuit of these targets, it has managed to enact numerous initiatives such as B.C.’s Carbon Tax, the Carbon Neutral Initiative and the LiveSmartBC energy retrofit program all drawn from the 2008 Climate Action Plan, which outlines ventures to get 73 per cent of the way to the 2020 target.

The B.C. Jobs Plan

In September 2011, the Clark administration launched the B.C. Liberal Jobs Plan, the primary aim of which was to attract foreign capital to British Columbia’s shores and bolster a flagging economy. Central to this new jobs plan was the aggressive pursuit of capital for the purpose of creating a multi-billion dollar Liquefied Natural Gas industry in British Columbia. The Liberal Jobs Plan outlined an LNG development schedule including one new LNG facility at Kitimat by 2015 and another two facilities at Kitimat by 2020. According to the job plan’s 24-month report released on Sept. 17, the Clark government is on track to have three operational facilities by 2020. The report also said, “should all five facilities be functioning by 2020,” this could result in $98-billion in new capital investment, government revenues in excess of $100-billion over the following 30 years and the creation of 75 000 permanent jobs.

It is easy to see why the Clark government has been so anxious to get the LNG industry off the ground, but despite the administration’s enthusiasm, many groups remain skeptical about the economic feasibility of developing B.C.’s LNG industry. Andrew Nikiforuk, an award-winning journalist and author of three books on the Canadian oil industry, spoke Oct. 6 at the PowerShift B.C. conference in Victoria, specifically saying that the Clark administration’s assumption about the economic viability of these LNG facilities in no way matches the reality of the market.

“This isn’t a free market,” said Nikiforuk. “The government is actively subsidizing [the LNG] industry to produce a resource when all the market forces say, ‘Leave it in the ground. We can’t make a profit doing that.’”

A revolution in fuel

For a decade leading up to the Clark government’s unveiling of the B.C. Liberal Jobs Plan, a revolution was occurring in the North American energy industry. Methodological and technological advancements in the oil industry, such as fracking and horizontal drilling, increased access to vast reserves of previously sealed natural gasses, instigating the “Shale Revolution” and a corresponding glut of natural gas in North America. British Columbian natural gas revenues peaked in 2006 at $2.6 billion, but as the resource continued to “flood” the North American market, prices plummeted in both the U.S. and Canada.

While LNG prices continued to fall west of the Atlantic, rapid modernization in China and a desire to diversify energy supplies in Japan led to increased LNG demand from Asia and prices increasing in tandem. In 2011, a thousand cubic feet of natural gas (about 28.3 cubic metres) cost $4 in North America, yet in Asia prices were up to four times higher. British Columbia normally supplies 41 per cent out of its daily production of three-billion cubic feet of gas to the United States, via two pipelines. Forty-three per cent is shipped by pipeline to other provinces and the remaining 16 per cent is consumed in British Columbia. With gas prices low both north and south of the border, and in the midst of a global recession, the Clark government began looking to Asia with intentions not only to diversify their LNG exports, but to replace ecologically hazardous energy supplies in Asia with relatively cheaper, lower emission LNG.

The Clark administration’s mounting desire to take advantage of emerging Asian energy markets, a neurosis furthered by the Obama administration’s approval of the United States’ first four LNG export applications over the last two years, has resulted in a string of initiatives and pacts from parties in both the public and private sectors involved in the LNG industry since the new year. On Feb. 23 this year, Clark announced the creation of the B.C. Prosperity Fund, which is where a portion of the revenues that are expected to result from the creation of the five proposed LNG facilities will flow beginning in 2017. The first priority of the Prosperity Fund is to repay all financial debt; once this is accomplished, the LNG revenues in the fund will be protected to ensure their existence for future generations. The Clark government estimates that eventually over $100-billion will flow to the fund from the five LNG facilities.

Vocal opponents  of the Clark government’s plans to tap into Asian energy markets (including PowerShift keynote Nikiforuk, as well as Oak Bay–Gordon Head MLA Andrew Weaver) have noted that the assumptions that underlie the administration’s eagerness to ship LNG across the Pacific, namely that LNG prices are as much as four times higher in a massive Asian market and that these prices will still be as high or energy markets as large by 2020, is not based on the reality of the situation.

“There is no guarantee you’re going to get higher prices by shipping [LNG] to Asia,” said Nikiforuk. Citing the fact that other countries such as the United States, Australia, and Qatar already have facilities producing and exporting LNG, Nikiforuk is doubtful about the economic prospects of B.C. LNG facilities.  “The price differential will be gone by the time [these facilities] are producing gas,” he said.

Two days after Clark announced the creation of the B.C. Prosperity Fund, PTP (Pacific Trails Pipeline) and the First Nations Group Limited Partnership (FNLP) announced a pact guaranteeing a payment of $200-million to the FNLP over the lifetime of the PTP project. The FNLP comprises 15 First Nations affected by the PTP project.

Janine McArdle, senior vice-president of Apache Corporation and president of Pacific Trail Pipelines Management Inc., is enthusiastic about the continuing backing of the First Nations for the project. “The support of First Nations for our projects continues to be tremendous, and we look forward to building on these integral relationships as we move forward,” McArdle said in a press release.

Legislature excluded

The most recent development in the Clark government’s push to develop a British Columbian LNG industry was last month’s announcement of $115.8-million in royalty credits to companies developing LNG infrastructure primarily in the Montney play. Coinciding with the royalty credits announcement on Sept. 23 was the publication of a report by Clean Energy Canada, which seriously called into question the feasibility of seeking to cut GHG emissions by 33 per cent while simultaneously pursuing the creation of five new LNG facilities. In fact, Clean Energy Canada estimates that for every “off-the-shelf” LNG facility that becomes operational, meeting emission reduction standards would be the equivalent of avoiding carbon pollution for two cities the size of Vancouver.

No cake is complete without the icing, so to top all these developments off, the Clark administration will not be recalling the legislature this autumn in order to work out the tax system for the emerging LNG industry. This has angered many British Columbian citizens and legislators, including New Democratic Party house leader John Horgan, who feels that the legislature should not be kept from the decision-making process, but should be debating the tangential issues, such as how this new industry’s energy demands will be met. Opposition leader Adrian Dix also voiced his discontent with the Clark government.

“With [Clark’s] decision to cancel the fall session, the premier is continuing her pattern of exercising contempt for public accountability and transparency,” said Dix. Alas, to the dismay of her opposition, it appears that Clark has her cake and plans to eat it, too.

The Clark administration currently deliberates on the tax system for the highly anticipated and equally contested B.C. LNG industry until the legislature is recalled next spring.

For part two of this series, click here: Focus on Fuel Part II.

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