Tuesday, April 23, 2013

The Liberal focus on LNG is bugging me

I know many others have recently posted about this issue.   I posted about this in mid February pointing out the problems with seeing LNG as a some sort of financial saviour of BC. It does not take an advanced degree in resource economics to see that the long term price differential in natural gas prices globally is not likely to survive for any length of time.   There will never be a huge financial benefit to government from LNG.

What I do have is close to 20 years of working on natural resource and Crown land use issues in BC - as part of my work I track the daily prices for things like gold, copper, coal, 2x4s, pulp, oil and natural gas.   Every price spike for a commodity over the last 20 years has been met with a corresponding rise in supply to cash in on the high price.   This current global natural gas price premium in parts of Asia is not going to last.

LNG is natural gas, it is just expensive natural gas.   It costs money to turn natural gas into a liquid and then transport across an ocean.   The process adds $4 to $5 per MMBtu to the price of natural gas.  This means the price in Asia has to be at least that much more expensive than in North America for LNG to be worth doing, ideally you want a larger price differential.to allow for profits and higher government revenues.

The price differential has been as much as $12 per MMBtu in the last two years but this differential comes about for two main reasons that will not last forever.  

  1. Fracking in the US started first so North America is the first market to flooded with massive amounts of new natural gas sources.  This is coming elsewhere especially in Asia - China and Russia have no history or current inclination to act in a green manner, they will develop all their unconventional natural gas resources as soon as possible.
  2. Japan had a large earthquake which caused their nuclear power plants to be shut down and immediately caused a dramatic rise in the demand for LNG.   Over time this sudden new demand will dissipate.
Australia developed LNG terminals because they have a small domestic market and have to export.   Oman has extensive LNG infrastructure because no one needs more natural gas on the Arabian peninsula.   In BC we have not developed LNG because we have had an American market that would buy whatever we produced at a reasonable price.   It is only now that the value of gas in one of the biggest natural gas markets in the world has plummeted that we are talking LNG in BC.

The reality is that LNG is a short term desperation move by any natural gas producer because it adds too much to the price and makes the product noncompetitive in any market other than one completely dependent on LNG like Japan is.   

I have no problem with companies developing LNG terminals in BC but that it not for the government to push, it is for companies to make the business case for and then decide to build because it makes sense.   If we have a government that is trying to attract LNG we have a problem because it means the government is either going to give companies money to develop LNG or forgo revenues.   It does not make financial sense for the government to actively push LNG.

I honestly think that if LNG is pushed not only are we not going to see tens of billions in revenue, the government is going to end up subsidizing the industry.   If we offer stiff competition to Australia and Oman, I see both those countries offering incentives to companies in LNG and that will be used as leverage to get tax breaks and such.

Because LNG is more costly, there is going to always be less margin for profit and for government revenues than there is with just putting it into the North American pipeline grid.  Over time with the expansion of fracking and of LNG terminals, I suspect that the price of LNG will within five years being at a negative price differential than the price of natural gas in North America.

By all means let companies build LNG plants but never expect them to provide some huge windfall, the history of natural resource prices indicates it is not going to happen.

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