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The Economic Risks of LNG Exports

Subtitle: 
Panel Remarks at the ALM Insight BC Power Summit, Vancouver March 6, 2010

Don’t promote

Burning Dollars

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ALM Insight 8th Annual BC Power Summit

Panel Remarks, March 6, 2013
 
Nigel Protter, CEO, BC Sustainable Energy Association
 
The BCSEA is a non-partisan, non-profit association of hundreds of professionals, academics, citizens, local governments, IPP developers, utilities, First Nations, business people, consultants, students, and energy service firms united and proactive in steering BC toward sustainable development in energy.  While sustainable energy has negative impacts, they’re orders of magnitude less than the alternative. It’s environmentally responsible, economically competitive in a truly levelized cost environment, and never runs out.
 
We believe anthropogenic climate change is real, presents an existential threat to the kind of world we want to live in, has substantial and growing future costs, and can be mitigated by our actions, the sooner the better.
 
We believe that energy security begins at home first by reducing consumption and dependance, then by progressively displacing energy from fossil fuels burdened by large environmental externalities and unknowable future costs with renewable energy derived from natural flows with well-understood impacts and stable future costs.
 
BCSEA works in five areas:
 
1/ Education: Through our Climate Change Showdown program we educate kids in the classroom about climate change and demand reduction teaching them and their families how to reduce consumption and measure the results. We’re working toward having those savings registered, and we’ve reached over 54,000 BC kids to date.
 
BCSEA hosts a comprehensive web site and discussion forums where members and the public discuss critical issues and find information. We have BCSEA chapters across the Province that act semi-autonomously dealing with local interests and issues, and all united behind the Provincial organization.
BCSEA holds super-interesting and useful monthly free public video webinars on emerging sustainable energy technologies and market trends. See our web site for details.
 
2/ Public Interest: We’re regular intervenors at BC Utilities Commision hearings in service of ratepayers’ and BCSEA members’ interests.
 
3/ Solar Markets: We operate SolarBC on behalf of the Province, Fortis BC, and BC Hydro, developing business cases for small scale thermal and PV solar systems in a BC climate context, incentivising their installation, then monitoring and verifying the results to build a data set that will inform a nascent solar industry.
 
4/ DSM Retrofit Markets: We operate RetrofitBC on behalf of the City Vancouver, Vancity, Fortis BC and BC Hydro, implementing largescale energy reduction retrofits in Multiple Unit Residential Buildings (each 100s of units), developing business cases, incentivising and assisting their installation, monitoring and verifying the results to build a data set that will inform the retrofit and greenfield DSM industry.
 
5/ Policy Evolution: We work with elected officials, regulators, and bureaucrats to inform and improve policy and regulation.  We collaborate with other Provincial and National organizations and institutions like BC’s universities, PICS, CEBC and MRC, CHBA and CEA, Pembina, Suzuki and Tides, and many others on policy direction and sustainable energy initiatives and projects.
 
British Columbia is a renewable energy powerhouse
 
British Columbia is a renewable energy powerhouse with massive demand management, hydrokinetic, wind, marine, biomass, geothermal, heat exchange, and solar energy resources as yet untapped.
 
Its hydro dam heritage – despite the negatives, is a pioneering sustainable development built long before the sustainability cliché was ever coined.
 
Demand reduction and green energy self-sufficiency represent an economic identity that naturally aligns with the wild, verdant and fragile nature of BC’s thundering landscapes. This alignment is what underpins BC’s world-leading prosperity and livability.
 
The international oil and gas game
 
The international oil and gas game is by far the world’s largest, most important, and highest-stakes industry. It’s centered on the world’s most necessary commodity and it generates intense and deadly competitive forces among the world’s wealthiest and canniest players. Its potential for reward drives producers to extremes of profit-maximizing behaviour and largesse which explains the likewise extreme environmental consequences and social and economic divides left churning in its wake.
 
Oil and gas is inevitably a cyclical boom and bust industry because players have delayed and imperfect information about its everchanging resource, technology, policy, and cost drivers. Regular natural and man-made disasters along with geopolitical changes profoundly affect it, and competitors brutally game each in jockeying for advantage. It’s no market for dilettantes.
 
Now in the face of heavy election pressure, a lingering global financial malaise, and a revolution in natural gas discovery and recovery, BC’s Government has fully, completely re-cast its worldleading sustainable energy policy of the past six decades into one pinned on grabbing a bigger share in the global gas game. It’s a massive values shift in BC’s energy-policy orientation toward inherently unsustainable increases in fossil fuel production, conveyance, consumption, and exports coupled with a new dependancy on increased electricity imports that’s bound to increase consumer electricity rates.
 
Whether or not BC’s LNG scheme is ultimately served by gas or electric compressors, its inevitable that massive new industrial power demands will be placed onto BC’s electricity system from the construction and operations of the scheme, plus other developments such as new mines and continuing resource exploration, and this will change forever the nature, scope and economics of our electricity system, much more so than the pulp and paper and sawmill explosion of earlier decades ever did before.
 
Today BC generates about 61,000GWh electricity a year, over 90% of which is from clean or renewable resources. On average we’ve consumed about 10% more than that, BC is a net electricity importer. A mid-range LNG export scheme would use between 12,800-25,600 GWh/y in energy equivalents, new gas exploration a further 4,200 GWh/y, and mines 2,000 GWh/y, minus DSM projections of -7,000 GWh/y, which combined would raise annual electricity demand in BC between 13,000GWh/y and 25,800 GWh/y not including expected load growth in the rest of the BC economy.  
 
An energy demand increase between 20% and 40% over the next 7-9 years
 
That’s a total system energy demand increase somewhere between a staggering 20% and an unrealistic 40% over the next seven to nine years just for gas and mines.
 
When you consider that it takes between five and eight years to bid, contract, permit and build a renewable power project in BC, that no clean power calls are in the offing and Site C is bogged down as it always has and likely will remain, it appears that imported dirty power from across the Western Interconnect is destined to take up the slack, either that or gas fired self-generation, or some combination.
 
Why the rush to a massive LNG export scheme for BC? Government leaders have repeated over and over that “…it’s a race”, but it’s not.  That gas isn’t going anywhere, nor is global demand, prices will have to rise, and technology to cleanly extract and use it should one day appear. That gas in the ground is like money in the bank, potential fuel for BC’s future. There is no convincing economic or social argument that demands BC’s stranded shale gas must be quickly extracted, connected, and sold into risky Asian gas futures contracts ASAP whatever the consequences.
 
Premier Clark favorably compared BC’s LNG opportunity to Alberta’s oil sands in size, scope, and economic importance, but did anyone predict Alberta’s recent troubles, where surging oil production in the U.S. has gutted Alberta’s oil patch profits and royalties by $6B last year, a 45% drop? And did Clark even consider the comparably negative climate impacts?
 
BC’s Climate Action Target
 
By law, British Columbia must cut its greenhouse-gas emissions by 33 per cent below 2007 levels by the year 2020 and 80% by 2050, but under a new government regulation, the gas burned producing LNG won’t affect the province’s targets. What kind of Shell game is it when the first two LNG facilities planned using natural gas for their energy requirements would produce almost as much CO2 as from every one of the Province’s 1.8 million homes combined?
 
It turns out that certain fracked gas fields are now known to emit 7-9% or more of their total production as fugitive emissions from fissures in the overburden (perhaps caused by fracking itself), plus well-head leaks, which is far more than the 2-3% predicted. Since methane, the primary ingredient of natural gas, is 100 times as effective as CO2 at atmospheric warming, this new information potentiallysets fracked natural gas on par with coal as a destructive climate change agent.
 
Natural gas never was oxymoronic clean fuel
 
Natural gas never truly was that oxymoronic clean fuel, and now we now realize to our disappointment that frack gas may not be that suitable bridge fuel we’d hoped would replace coal with something significantly cleaner.
 
We identify two baskets of economic risk with the BC LNG export scheme; the risk to capital and economic stability, and the net financial impact to household, commercial and industrial energy consumers.
 
While the cheerleaders of BC LNG say that the high risk to investors’ capital is of no consequence to BC’s government or ratepayers, we think any such losses would severely stunt both investor confidence in BC and local trickle-down spending. Indeed a lack of profits along with concomitant royalty reductions (such as the $327M royalty holiday already granted to stressed gas projects in BC last year) will discount the net energy returns that are the firmament of discretionary spending and liquidity in our economy.
 
An astounding fossil energy boom
 
While we’re witnessing an astounding fossil energy boom, the relationship between hydrocarbon reserves and well flow rates are just not the same as they were before the easy gas was gone.  Despite stories of huge tight gas reserves, well-head flow rates from horizontally drilled, fracked wells are uniformly uneconomic today and for the forseeable future, with severe hyperbolic declines now ranging between forty and sixty percent per year, resulting in a frack gas well half-life of between one and two years versus 8-12 years for conventional gas wells.
 
It’s now a drilling race just to keep production even, at enormous capital and environmental cost, a marching army of men, steel, and diesel laying waste to entire landscapes with hardly any producers making money and fugitive emissions invisibly seeping to the sky. For example in Texas’ Haynesville Shale, 125 rigs are currently drilling in a play that will never demonstrate commercial viability unless gas prices exceed $8.68 per mmBtu, which they won’t approach under any forecast scenario and their distribution and export capacity is already in place.
 
The hyperbolic flow declines of tight gas wells earn a fraction of the net energy returns per dollar invested in conventional gas plays. The surplus or net energy left over after exploration and extraction is the fuel that our complex, just-in-time economy runs on. With less net energy, there’s less liquidity to grow our debts or ship billions of goods tens of thousands of kilometers from low cost labor markets to high profit consumer markets. (1)
 
The tight gas resource has been greatly over-hyped
 
Furthermore, a variety of independent analysis strongly suggest that the tight gas resource has been greatly over-hyped and that North America has little more than a 25-year supply in the ground, all with significant environmental costs. In general, our research indicates that reserves are over-stated by more than 100%, with recoverable reserves overstated even more so.
 
Meanwhile BC’s abundant gas fields are stranded from foreign markets where boosters wish they might make arbitrage on Asian prices three to five time higher than a gas-glutted North America’s low-ball Henry Hub marker. It’s very hard to say if it’ll be worth it, since perhaps 8% to 10% of the gas would have to be burned in order to compress it for pipelining, up to 9% leaks as fugitives, well production decelerates at a torrid pace, and then there are construction, liquefaction, storage, shipping, impact/benefit, environmental mitigation, royalty, and marketing costs.
 
Indeed by the time we get our gas shipped overseas, it’s and even bet that new massive tight gas fields in Asia, Indonesia, Australia, China, Russia, Europe, and Africa will see huge new production and pipelines, quite possibly depressing Asian prices at or below our delivered cost, especially if the economy hiccups.
 
Within China alone in recent months, exploration firms have committed $2B to shale gas exploration over 19 formations and hundreds of $billions more where that came from if China so decrees. Within five years China is as likely as not to not care for BC gas at all. Japan is also unlikely to significantly rely on putative BC exports all things considered.  
 
Blindfolded along this perilous path
 
So I wonder why are we rushing to shove our Province’s destiny blindfolded along this perilous path when the wise thing would be to wait patiently for our moment and meanwhile invest in a less exciting but more promising and secure package of sustainable economic drivers? There will be no heritage asset left after the natural gas is gone.
 
Before we technologically and economically lock BC to an international LNG gas price-taking role at the mercy of global energy market forces, the BCSEA demands that government open up the negotiations with producers and First Nations and not commit to any forms of contract serving the LNG scheme pending results of responsible due diligence, serious examination of alternatives scenarios, and comprehensive risk analysis.
 
BCSEA supports these initiatives
 
We’re not against everything. BCSEA supports these initiatives:
 
1. Generate green jobs through efficiency retrofits for the BC building stock. (Massively extend and expand LiveSmartBC to include commercial buildings. Gradually extend Vancouver’s unique building code to qualifying municipalities and RDs across BC to allow more creative ways to save energy and take advantage of location specific resources and opportunities)
 
2. Raise the carbon tax and extend it to all emissions, including fugitives, (with revenues generated beyond $30/tonne returned to sustainable energy initiatives.)
 
3. Long-term commitment to convert future incremental power demand planned to be met by imports or natural gas to domestic renewable power generated by Green IPP projects.  Self-sufficiency. Returns to Critical water definition in IRP.  Domestic Renewable production will insulate us from future cyclical energy cost rises by locking in today’s costs.
 
While it’s uncertain whether the prices given to IPPs will turn out to be too high over the long term. Is anyone willing to bet hydrocarbons will be cheap for the next 30 years? Contracts with IPPs lock in a set price for electricity that may end up being cheaper than buying the same quantity of electricity on the highly volatile spot market.  Proactively, positively and under a multi-year commitment support Independent Power Project development and operations with regularly scheduled clean power calls.
 
4. Stimulate Cleantech Industry. Studies indicate that for every $1M invested, 16-20 jobs are created with green economy investments versus 4-5 for oil and gas investments. Canada is far behind its trading partners, capturing just 1% of the cleantech market.
 
5. Phase out all fossil-fuel subsidies. Canadian governments continue to subsidize the oil patch to the tune of about $2.8 billion, the fiscal cost of the subsidies is expected to double by 2020, causing a two per cent increase in Canada’s greenhousegas emissions.
 
6. Implement fuel switching for transportation (Electric for consumer vehicles, natural gas for commercial. Changes to auto motive transportation, autonomous vehicles driver assisted vehicles electric vehicles plug-in hybrids plug-in hybrid serving as firming capacity. The storage that consumers will willingly pay for in their electric or hybrid vehicles is much more expensive per kilowatt then grid storage at any price would be therefore if enough electrics or hybrid electrics are sold there’s a huge aggregating opportunity of subsidized capacity useful for firming and shaping.)
 
(1) Chris Martensen

 

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