British Columbia is one very pro-LNG province. Both main parties are firmly in favor of LNG projects, and both have made them a prominent point in their reelection campaigns, Canadian media report. But the LNG bet might turn sour, according to a new report.
In July of this year, the Conference Board of Canada released a report—funded by the Canadian LNG Alliance—that said developing the LNG industry of British Columbia could create as many as 100,000 new jobs, some $94 billion in revenues, and $11 billion in additional GDP annually. According to the Institute for Energy Economics and Financial Analysis, however, these projections have little to do with reality.
The main problem identified by the IEEFA is the price. Canadian liquefied natural gas is too expensive to be competitive in the biggest markets, notably the Chinese market. According to calculations by the authors of the IEEFA report, under the best-case scenario, Canadian LNG would cost $8.30 per million Btu. The average Chinese price for LNG at the city gate, however, is $8.23.
LNG prices on the spot market were earlier this year pummeled by a glut and the pandemic but are now starting to improve, mostly thanks to seasonal factors. LNG cargoes for delivery to Northeast Asia in November average $5.50 per mmBtu. Cargoes for delivery in December are even more expensive, at $5.70 on average. This is far below the best-case scenario for Canadian LNG, even excluding transport and regasification: just the production and liquefaction of the gas are calculated at $6 per mmBtu.
Current LNG prices, however, are not an immediate concern of the companies involved in LNG projects in British Columbia. The biggest of these projects, LNG Canada, was planned to become operational before 2025, but the pandemic has slowed things down and led to layoffs, so LNG Canada may be a bit late. If finished, it would add 13 million metric tons of LNG production capacity to the global total, initially, with the option of expanding that to 26 million tons.
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The likelihood of this happening appears to not be very great. LNG production capacity is being built elsewhere as well, and some of it is cheaper than Canadian LNG would be, based on the IEEFA calculations, which refute earlier cost estimates made by companies and other stakeholders in the LNG industry of British Columbia. According to IEEFA, those estimates failed to consider the cost of regasification and transmission to the city gates once the LNG reaches China.
Wayward LNG prices already sealed the fate of one large-scale LNG project in Canada. The Pacific NorthWest project, led by Malaysia’s Petronas, was canceled by the company back in 2017. Prices for LNG back then were on the downward spiral, just as they are now. But now, according to energy forecasters, including Shell and BP, LNG’s future is bright, even with the continuing pandemic. This would be largely thanks to emissions-cutting efforts in many parts of the world, again notably in China, whose president has promised net carbon neutrality by 2060.
But this bright future is precisely the reason why competition is intensifying. There are several LNG projects in the works south of the Canadian border. And U.S. LNG is not even the cheapest one. Qatar and Australia are major exporters to Asia, and so is Russia, via the Northern Sea Route, which has contributed to the competitiveness of Russian LNG.
Meanwhile, B.C.’s first LNG project is just 27 percent complete, according to recent reports. Some industry insiders believe Canada has already missed its chance to become a major LNG player: the former head of the IEA, Maria van den Hoeven last year said the unique regulatory challenges that Canada puts in the way of new energy projects may deprive it of a place at the table of the big players in the LNG field. There is also substantial environmentalist opposition to new energy projects, including LNG Canada.
But the B.C. government seems to have something else in mind with its support for LNG besides a place at the exporters’ table that the province may or may not earn. According to a recent report by The Narwhal, there are plans to earn credits for low-carbon projects—including LNG—under emission-trading mechanisms many expect and hope to be developed as part of the Paris Agreement.
Such an emission-trading mechanism is already active in the EU. Still, opinions on this approach as a means of reducing pollution are mixed: while the official stance is that it helps ultimately reduce emissions, critics note that it could demotivate polluters to actually cut their emissions when they can sell them.
And then there are British Columbia’s own emission-reduction targets. One report from think tank Canadian Centre for Policy Alternatives pointed out that even the current production of oil and gas in the province would make it impossible for it to achieve its own emission targets. When planned LNG capacity is added, emissions will exceed 2050 targets by as much as 160 percent. Between the questionable profitability of the current LNG projects in the province and its emissions-cutting plans, the B.C. governments—current and future—have their work cut out for them.
By Irina Slav for Oilprice.com
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