Why Russia and China’s $400 billion natural gas deal is bad news for B.C. LNG

“The world does not need Canadian LNG”: former Shell exec

B.C. Premier Christy Clark talking to Shell Oil president Marvin Odum

B.C. Premier Christy Clark talking to Shell Oil president Marvin Odum at the LNG in BC keynote on May 22. (Province of British Columbia)

The US$400-billion natural gas supply agreement between Russia and China announced this week does not bode well for Canada’s nascent liquefied natural gas industry, LNG Canada boss Andy Calitz told the LNG in BC conference on Wednesday, contrary to the reassurances offered by B.C. Premier Christy Clark and others.

“The world does not need Canadian LNG,” the outspoken South African-born former Shell executive said on a panel around Canada’s competitive advantages and disadvantages in this emerging global energy trade. He nonetheless predicted there would be between three and five projects running or under construction in B.C. by 2020. “Right now the fundamentals for Canada look great,” he noted. The problem is price, cost and revenue forecasts prove consistently wrong. Today’s high prices for gas in Asia, for example, owe a lot to the Fukushima nuclear disaster, which saw nuclear power substituted with natural gas in Japan—and was completely unpredictable. RBC Capital Markets managing director Greg Pardy predicted the big gas price differentials around the world would ease after 2016 as more export capacity comes online in Australia and the U.S., though other panelists weren’t so sure.

Canada’s big advantage is the upstream cost of the resource—around US$4 per thousand cubic feet right now, compared with nearly $5 in the U.S., $10-12 in Europe and around $15 in Japan. It is also closer to Asian markets by sea than the U.S. Gulf Coast.

The challenges, Spectra Energy’s Canadian LNG leader Doug Bloom said, revolve around three Ls: social licence, labour and logistics. Most existing LNG export terminals are in the midst of offshore gas fields, so the physical impact in onshore communities is limited. And on the Gulf Coast, some 25 proposed plants would mostly be built on brownfield sites with access already to infrastructure and skilled local labour forces. The 14 proposed B.C. terminals, by contrast, are all greenfield projects requiring at least 800 kilometres of pipe from the producing area inland to the coast. Most of that territory is remote. And the liquefaction plants themselves must be integrated with existing coastal communities. They will leave a relatively big footprint, in other words.

They may be negotiating heatedly behind closed doors, but Premier Clark and Shell Oil president Marvin Odum were all smiles and mutual admiration during a casual exchange over lunch Thursday at the LNG in BC conference. Odum shared Clark’s view that the Russia-China gas pact, in the works for a decade, “doesn’t change the outlook here at all.” First, China is only one of several countries on the Pacific Rim importing gas. And second, competition will also be coming from China’s own shale reserves, not to mention coal, which is the prime power-generating source gas producers aim to displace. “The bigger issue is how much of China’s energy mix will be gas,” Odum said.

The two were also agreed that larger national discussions need to be held around climate change, economic development and accommodation of aboriginal rights and title—and that LNG development should be seen as an opportunity to move on these issues. “It’s a pretty exciting time,” Odum said of the atmosphere at the conference.

Certainly some ad hoc working relationships are emerging among the province, resource companies and first nations as a result of the LNG rush, attendees learned at another panel on First Nations Perspectives. “It’s a very loosey-goosey protocol we have with the province,” Ellis Ross, chief councilor of the Haisla Nation in the strategic port of Kitimat said. Basically, as soon as it receives a project proposal within the Haisla traditional territories, the province shares it with the band and Haisla representatives are included in the discussions to follow. If the project is deemed acceptable for an environmental perspective and it helps band members become self-sufficient, “we can make it work,” Ross said. “All this is happening without a treaty.”

More than one panelist noted that it was not acceptable for companies to simply knock on their doors and announce what they had planned, but to work with the first nations individually to finance environmental assessments and generate local employment and business opportunities. “Take the time to understand our values and our goals,” said Lax Kw’alaams mayor Garry Reece, who singled out BG Canada as one proponent making all the right moves. But even in relatively well-governed and business-friendly communities like Lax Kw’alaams (pop. 3,700), a poll showed members split roughly three ways between supporting, opposing and undecided on the prospect of LNG.

“My staff is running ragged,” said Ross Wilson, executive director of the Metlatkatla Stewardship Society. The environmental assessment body for the Coast Tsimshian people is currently analyzing eight different LNG proposals.

Fort Nelson First Nation chief Sharleen Gale said she understood business’s need for certainty before committing to capital-intensive projects. “What does it take to get to certainty? It takes trust. It takes creativity. It takes respect.”