Tuesday, February 12, 2013

BC Prosperity Fund and conflicting data on LNG

In the Throne Speech today the BC government announced the creation of our own sovereign wealth fund like Alberta Heritage Savings Trust Fund, the Alaska Permanent Fund and many others globally.   The new Prosperity Fund is to be endowed with the taxes from LNG exports.

The Prosperity Fund was announced today and I assume will be a major part of the election campaign, but it will not exist for at least another four years and effectively, if the debt is to paid down first, will not really exist till 2027 to 2030.  It is a very long term promise that the current government can claim even though they will not actually do much that I can see to make it real.  

If this Prosperity Fund makes sense, why not start now by putting all the non-renewable resource revenues into it?   We already produce a couple of billion a year in non-renewable resource royalties so there is no reason we could not do it right away.  What makes LNG something special for this illusory future fund but current coal, oil and natural gas revenues are just put into general revenues?

The first of the LNG plants will not be open till 2017 but the Throne Speech is making assumptions about future demand for natural gas along with future revenues.   $100,000,000,000 in revenues over the next 30 years from natural gas may sound like a lot, but that is only just over $3 billion a year.  Yes, that is a decent amount of money, but it is not as big a deal as it initially sounds.   It is also I think an overly optimistic projection into the future.

The $100,000,000,000 over 30 years is I assume based on more than three plants opening and also would mean the tapping of a lot more natural gas resources in BC.   The small backgrounder released today sounds like BC is considering a new taxation regime and up to five LNG plants.   Apparently the details will be available next week.  

The government has gone from pro LNG a year ago to betting everything on LNG.   They have upped the benefits of LNG significantly from  what is within BC's own Liquefied Natural Gas Strategy document released last year.

From the 2013 Throne Speech

This can trigger a possible $1 trillion in cumulative GDP benefit to our province over the next 30 years.

An estimated 39,000 new full time jobs, on average, will be created during a 9 year construction period. Once all facilities reach full production, there could be over 75,000 new annual full time jobs.

From the Natural Gas Strategy document by 2020 we would see:
9,000 construction jobs and 800 long-term jobs

 From the Throne Speech
The first comes from revenues generated from the growth in employment and business activity – new revenues in a growing economy that will greatly enhance government's ability to provide services families depend upon, year after year.

The second stream of revenue comes from new royalty revenues directly for the province – British Columbia's share of resource profits. This could exceed one hundred billion dollars over the next 30 years.

From the Natural Gas Strategy document by 2020
over $20 billion in direct new investment
over $1 billion in additional revenues to government

The benefits are rising dramatically it would seem.   I really need to see the analysis for the numbers because they do not seem realistic to me.   Natural gas is a very fickle commodity and while it has been the source of major windfalls for the government, it has also often been the reason for restating revenues lower part way through the year.

BC has had huge boom and busts for natural gas revenues for the last 15 years, it is very hard to predict the value of the government take from year to year let alone looking 30 years down the road.   We are into the fourth year of a global glut of natural gas and every indication is that this is not going to change anytime soon.

In recent years coal bed methane and shale gas have come on line and are creating all manner of new supplies.   The US is predicting they will be a natural gas exporter in the near future.

Natural gas carries with it several uncertainties for the long term:
1) What happens if fracking is no longer allowed?
2) Climate change will in the medium term require all natural gas to be carbon neutral.
3) What happens when the Chinese economy hits a major recession?   The way China is a governed it is inevitable that a major market crash will happen there.   Will it be in two to three years or will it be in five year?   No one knows but it will come because China does not have the economic tools to avoid a crash.

I suspect all three will come into play within the next fifteen years and will harm future BC revenues for natural gas dramatically.   I suspect BC should not expect a generation long ride from natural gas.    We would be much better off


List of Current LNG plants proposed - all of their dates for construction start have been delayed from when they were first announced.

  • Kitimat LNG - Construction this to start this year if the economics make sense, the start date has slipped.  Construction was to start in 2005 and it was to be operational by 2008 when it was announced in 2004.  It is now estimated to be operational by the end of 2016 - eventual volume 500 billion cubic feet per year.  $4.7 billion investment
  • Douglas Channel Energy Partnership - Construction this year?   45 billion cubic feet per year  $0.5 billion investment.  It has not broken ground though they have their export licence 
  • Pacific Northwest LNG - Construction 2015, operational 2018 $9-$11 billion investment
  • BG Group LNG - Est start in 2015 and operational in 2020 $12 billion investment
  • LNG Canada - in the feasibility stage till 2015 - projected volume 700 billion cubic feet per year

Note that not a single one has started construction and a number of them are still very early on in the process meaning that if the economics do not make sense they could easily pull the plug.

Given the on going slippage on start dates (Kitimat LNG has already been delayed by at least eight years), I think it is safe to assume that we are unlikely to see more than one plant open by 2018 and unlikely to see three anytime before 2025


Grant G said...

Great analysis Bernard..And just look at the LNG over-budget nightmare in Australia, who by the way are 5 years ahead of us..


Brian said...

"If this Prosperity Fund makes sense, why not start now by putting all the non-renewable resource revenues into it?"

You answered that question in the sentence that preceded it.

The plan seems to be to destroy the northern half of the province to fund the lifestyle of the southern half, in one great roll of the dice at the tables of the the Non-Renewable Resources Casino (Open Every Night! Prime Rib Buffet!), in an act of petro-desperation.