Resource World Magazine

For months the provincial government has extolled the fiscal virtues of turning significant amounts of the vast natural gas resource in northeastern BC into LNG by shipping the gas by pipeline to the west coast where soon-to-be constructed LNG plants will convert the gas to liquid for shipment to Asia. They say they want to take BC from being a producer of natural gas facing an oversupply of that commodity to a global-strength supplier of LNG. "We are going to be the most competitive jurisdiction in the world when it comes to liquefied natural gas," Premier Christy Clark said recently. Government projections indicate up to two trillion cubic feet per year could be exported, with current prices hitting $18 per million BTUs, up $2 from last year; they reached $20 mmBtu in 2008. That compares favourably with regular natural gas prices hovering around $3 due to a glut on the market. LNG, used primarily for electricity generation, heating and transportation, is natural gas cooled to -160°C. With a 50-year safety record, it's considered stable and a low risk to transport; if there is a spill, it dissipates harmlessly into the atmosphere. Five LNG plants are in the works for BC's west coast: In the Kitimat area, Kitimat LNG by Chevron [CVX-NYSE] and Apache [APA-NYSE], LNG Canada by a consortium consisting of Shell [RDS-NYSE], KOGAS, Mitsubishi [MTU-NYSE] and PetroChina [PTR-NYSE]; on Ridley Island near Prince Rupert the British Gas Group [BG.L-LSE] plans another; while Petronas and its subsidiary Progress Energy have plans for Pacific Northwest LNG on Lelu Island near Prince Rupert; and CNOOC [CEO-NYSE] subsidiary Nexen, Inpex and JGC plan another for an undisclosed location on BC's north coast. Premier Clark has suggested government will collect a new tax from LNG exporters to help ensure the province can cash in on the expected boom. Government assumes gas royalties and tax revenue from the industry can be used to reduce provincial debt, cut taxes and enhance government programs. "That resource belongs to British APRIL 2013 Columbians and I am determined to make sure that the people of this province share in the benefits of that resource," Clark said recently. Announcements to that end have included federal approval of an LNG export permit to Shell Canada's proposed Kitimat terminal, $120 million in provincial royalty credits to the natural gas industry, a $200-million benefits agreement between pipeline developer Pacific Trails Pipelines and 15 First Nations along the proposed route, and a $32-million provincial loan to those First Nations. But those assumptions are based on a substantial differential between the price of gas here and in Asia. Analysts suggest competition will narrow the gap. For example, the Oxford Institute for Energy Studies suggested last October that LNG coming from the US, which is awash in cheap gas, could make Asian markets more competitive, knocking higher-priced gas supplies out of Asian markets. The International Energy Agency has said natural gas development in North America and East Africa "will increase overall flexibility to the LNG supply chain" and that "LNG producers will have to provide more flexible terms if they want to sell volume to customers." But that doesn't sit well with the Canadian Association of Petroleum Producers (CAPP). Spokesman Geoff Morrison said CAPP members warn it's a competitive industry "and competitiveness on the global scale is tight." CAPP wants Ottawa to offer tax breaks to the LNG sector. Meanwhile, BC Hydro has indicated it does not have existing surplus electrical energy supply for the LNG export facilities currently proposed, or the existing transmission infrastructure to deliver surplus energy to the Prince Rupert area. But Hydro has offered itself up as a way to make provision of the supply as environmentally friendly as possible. President and CEO Charles Reid spoke at a two-day conference on LNG in Vancouver last month that, "We're flexible. We'll work with you, we want to support your industry, and we'll do whatever we can to do that." It could mean considerable pressure for Hydro. The more electricity LNG producers use, the lower the greenhouse gas emissions but the more demand it puts on BC Hydro. Power demands to cool up to 10 billion cubic feet per day of natural gas into a frozen fuel could range from 2,000-4,000 megawatts between 2018 and 2025. While globally, all base-load LNG plants produce their own energy using natural gas, the province has yet to determine what proportion would come from gas or electricity. But it's a given that BC's grid cannot supply the power required, estimated to total 50% of BC's existing power. BC Hydro forecasts that peak demand could climb by 5,000 MW. And the anticipated load growth runs contrary to BC's greenhouse-gas reduction targets – set at 33% below 2007 levels by 2020, raising questions about the likelihood of successful permitting applications. Premier Clark says LNG will mean billions of dollars for the province – as much as $1 trillion in cumulative gross domestic product between now and 2046. She expects gas revenues to increase 20-fold in the next two decades, and predicts LNG prices will be 2.5 times higher than our domestic price by that time. There are reasons for optimism. Against the backdrop of global LNG price increases that could once again march into record territory, Asia is experiencing rapid economic growth and Japan has embarked on a nearly total shutdown of its nuclear power industry after the 2011 Fukushima nuclear plant meltdown. Another factor is a drought in Brazil that has forced that country to buy emergency fuel supplies at high prices. Also, China plans to triple its use of natural gas by 2020 and India, China and Singapore have five import terminals ready to add 18 million tonnes of capacity. With 80% of global LNG supplies locked up under long-term contracts, it is countries like Brazil, Argentina, China and India that rely on short-term deals that could face the biggest hit. "The supply situation is worse than we thought it would be," said independent LNG analyst Andy Flower. "LNG production declined last year and it doesn't look as though it will increase by much this www.resourceworld.com 53

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