Market News

 July 22, 2014
B.C. Gets Reality Check on LNG Export-Sector Plans

 A new report on British Columbia's proposed multi-billion-dollar LNG export industry has a provocative title: "Risky Business, The Issue of Timing, Entry and Performance in the Asia-Pacific LNG Market."

The 86-page report, from the University of Calgary's School of Public Policy and released at a Vancouver news conference on July 10, says B.C. is in danger of losing out to global competitors in the race to supply LNG to growing energy markets in Asia because it's too slow in developing its LNG export sector.

Provincial plans to levy a special additional tax on LNG production could also negatively impact financing costs for its LNG projects, the report added.

It also noted B.C. must overcome other challenges before the new sector gets off the ground, such as securing rights-of-way for required pipelines, negotiating with First Nations, and dealing with public environmental concerns over pipeline and marine transportation risks.

The report stressed that B.C. risks missing out on lucrative contracts if its LNG industry isn't up and running by 2018-2024. Thus far, 14 projects have been proposed for the B.C. coast but none have reached the critical final investment decision stage, even though B.C. Premier Christy Clark said in 2013 that the government's goal was at least one operational LNG terminal by 2015.

"I would say right now that this is not very realistic," said Michal Moore, director of the school's energy and environment program and one of the report's six authors. "To imagine that the (LNG) market is infinitely large and infinitely growing and that it will take on all comers is simply a mistake," he told the Vancouver news conference. "That's wrong. There are a lot of countries and companies lined up to provide adequate supply to meet that demand."

However, the B.C. government's response to the University of Calgary report was limited to a short written statement by Natural Gas Development Minister Rich Coleman -- "I'm confident in how B.C. is preparing for this new industry. We've seen major global companies show a strong commitment to B.C.'s LNG future and making large investments in our province. These companies know we offer a stable business environment to build successful export facilities."

Coleman "is in denial," Moore told Energy Prospects West several days after the Vancouver news conference.

"When you're part of an administration you've got a company line to protect but at the end of the day there has to be a dose of reality somewhere," he added. "There should be a Plan B with a project this size because there's a good chance it will fail but as far as I can see there's no Plan B whatsoever."

Part of the problem, according to the report, is that more than a dozen projects are proposed on the B.C. coast.

"The province should have concentrated at first only on one or two of the strongest LNG projects, and then once they're established, use them as a mark of success to launch the next few," Moore told Energy Prospects.

"We point out again and again in our report that these are very expensive and risky projects but so far the investment market is acting cautiously about them."

The report is also highly critical of a special tax B.C.'s government is proposing to levy on the nascent LNG sector. This special tax was proposed in B.C.'s 2014 budget, and the government expects to announce details in November.

"We worry that the LNG industry in B.C. is far from being fully developed and that putting this extra tax [in addition to existing provincial natural gas royalties] at this stage is premature and potentially harmful," Moore said. "To do this before you know how globally competitive the B.C. LNG industry is going to be is definitely putting the cart before the horse, in our opinion. It will also have a cooling effect on LNG investment."

Provincial governments in Canada own mineral rights, then levy taxes on production via royalties. These royalties are above and beyond corporate income taxes and are designed to ensure that citizens and the provincial government receive a "fair share" from development of the resource, the report said.

"Given that the province already collects royalties on natural gas production there is no need for an LNG income tax to ensure a fair share for the province," the report said. "The LNG tax is a poor policy and appears to be solely a revenue grab," it added.

The B.C. LNG projects also face other obstacles, the report said, and it grouped those into three main categories.

In the finance and fiscal relationships category, the report said, there are more proposed LNG export projects globally than are required to meet projected demand for the foreseeable future. "There are already significant projects in the Middle East, Australia, and the U.S. Gulf Coast that are capable of capturing a significant fraction of current and near-term demand increases," it said.

Under the second category -- political and regulatory uncertainty -- the report said a lack of timely and coordinated approval of projects including pipeline rights-of-way agreements with First Nations, along with demonstrated safety and handling plans, will erode confidence in financial communities and will add costs to project finance agreements.
"Ultimately, taxation and royalty concerns can be a deciding factor in a project's success since excessive levels of tax or inappropriate tax applications can render projects unfeasible in the marketplace," it added.

Finally, under the category of environmental and social-justice relationship, the report warned that while the LNG shipping industry has an extremely good track record, "marine safety will prove to be a significant regulatory concern, and added costs here may demand collective or novel approaches to guaranteeing a high standard of safety within Canadian waters and beyond.

"The ruggedness of the terrain and its seismicity could also add to costs and time for identifying suitable pipeline routes, securing rights of way and permits and constructing pipelines across the Coastal range," the report said.

The fact that all but one of the proposed projects would use on-site natural gas to produce the necessary electricity would also potentially raise costs and make it difficult for the B.C. government to meet its greenhouse gas emissions-reduction targets, the report also said.