The Clark government’s rosy projections of a $100 Billion “Prosperity Fund” from its proposed liquefied natural gas (LNG) industry will never materialize, says a new report from the Canadian Centre for Policy Alternatives.
The big idea is to export BC’s natural gas to new markets in Asia, taking advantage of the much higher price they’re currently paying for the resource. But that’s easier said than done, as the process of cooling and liquefying gas – in order to load it on tankers – is enormously expensive. Moreover, that higher price, a historical anomaly, is predicated on a number of factors that will likely change by the time exporters invest the tens of billions of dollars in capital and years of construction time into the pipelines and terminals required to make it all happen.
Asian LNG price not a sure bet
The CCPA report takes a closer look at a number of key factors and market indicators in order to paint a more accurate picture of the touted benefits and real financial risks to the nascent industry – everything from the future Asian price for LNG, to infrastructure costs, to the government’s tax and revenue structure, outlined in the 2014 Budget.
- Asian demand for LNG will be undercut as Japan and Korea reopen nuclear facilities, while China has many domestic and international options for new energy supplies in addition to BC-based LNG. And five countries that account for 70% of LNG imports (India, Japan, Korea, China and Taiwan) are forming a common front on price through a “buyer’s club”, making it far less likely that they’ll continue to pay top-dollar for imported LNG.
- The start-up costs for BC’s LNG industry are massive, greatly eating into the gap between Asian and North American gas prices. Meanwhile, many competitors are simply adding capacity to existing facilities, increasing supply and driving prices down.
Falling prices, shrinking revenues
Last year, one of the world’s leading business publications, Bloomberg, predicted a 60% drop in the Asian LNG price by 2020, the first year BC exporters could realistically begin shipping their product. Because LNG is currently 2 and a half times more expensive to produce than typical gas, that figure would fall below the break-even point, adding up to a 6 million dollar loss per tanker. These sort of cold, hard realities have been sorely absent from the BC Liberal government’s rhetoric on LNG, the CCPA report argues.
Meanwhile, the long-awaited export tax regime at the root of projected BC LNG revenues, announced in last month’s Budget, doesn’t suggest the windfall profits the government has been promising. The CCPA report predicts just $0.2 to $0.6 billion per year for a fully mature industry, far short of the $5 Billion a year that would be required to achieve a $100 Billion “Prosperity Fund” by 2040.
As Kevin Logan has detailed in The Common Sense Canadian, the BC LNG tax structure enables companies to deduct their enormous capital costs from their 7% export tax payments (phase 2 rate, which only kicks in 3-5 years after the paltry 1.5% in phase 1). With an industry notorious for huge cost-overruns – like Chevron’s staggering $54 Billion Gorgon plant in Australia, still unfinished – taxpayers could be waiting a long time to see a single penny out of the industry.
All the risk, very little reward
To the CCPA’s chief economist Marc Lee, BC is taking enormous environmental and economic risks with very little promise of reward. “The danger is that BC ramps up production at a large cost—including costs of regulatory oversight, infrastructure, and additional public services, for example, as well as environmental costs—but doesn’t receive much benefit in terms of revenue,” says Lee.
[quote]Rather than rely on fantasy projections of LNG investment, BC should go back to the drawing board to develop a regime for LNG development that ensures public benefits.[/quote]
As the CCPA report underscores, it’s high time the Liberal government’s rhetoric be held up to proper scrutiny. And the potential environmental, health, and socio-economic impacts of the industry demand more sober reflection before racing headlong into what could very well become a major boondoggle.
“BC has been rushing to get resources out of the ground regardless of the returns. Without a well thought out plan, the proposed LNG industry is likely to do more of the same,” it notes.
[quote]With market prices expected to drop and a poorly thought-out plan for public benefits, it’s time for the government to take a step back and ask themselves if we can do better.[/quote]