By Len Coad
In the Vancouver Sun
Feb. 25, 2014
The recent provincial budget signalled that British Columbia intends to develop its vast shale gas resources and use the revenue to pay off its debts and generate wealth for its citizens.
Before the province becomes too excited about the prospects of such riches, it would be prudent to do a reality check around associated environmental impacts, community impacts and project costs.
B.C. wants to export its shale gas in the form of liquefied natural gas. At some point, the B.C. government must explain to its citizens that the thousands of natural gas wells that are yet to be drilled, generating many thousands of person-years of employment, will have environmental impacts. An active plan to manage those impacts might carry more weight than a “clean gas” sound-bite.
On the cost side, shale gas costs have declined significantly in the past decade, shale wells in B.C. tend to be prolific, and some produce valuable byproducts that will help recover drilling and fracturing costs. That’s all positive.
However, shale gas is still expensive to develop, and its development has environmental consequences. Although current regulations in Western Canada do a good job of managing those environmental consequences, the LNG projects B.C. is promoting will require an order of magnitude increase in drilling and fracturing activity. B.C. may need to spend more than budgeted to ensure the regulatory capacity keeps pace with industry growth.
LNG development costs will also include billions to be spent on gathering systems, processing facilities, and long distance pipelines to tidewater. The global LNG industry is built on low-cost, prolific reserves that are at, or near, tidewater, putting B.C.’s cost structure at a competitive disadvantage. The only current offsetting advantage is the spread between global LNG prices and North American natural gas prices.
The B.C. budget deals indirectly with another part of this opportunity. The biggest challenge Australia’s LNG industry faces has been cost escalation, partly driven by limited access to skilled labour. B.C. needs to show it is aware of, and working to manage, potential cost pressures.
B.C.’s budget includes money for training programs, although those programs are not identified as targeting the skills LNG development will require. The budget does identify $29 million during three years “to support the development of an LNG industry.” That money appears to be earmarked for things other than ensuring an adequate supply of skilled labour.
If we look into the heart of the budget, we see an illustrative example of a 12 million-tonne-per-year LNG facility generating almost $250 million a year in LNG income tax revenue once it reaches the seven-per-cent threshold. B.C. plans on at least five such projects. The $29 million investment in this budget seems out of line with the much larger return expected.
On the issue of the LNG income tax, it is difficult to say much until the details are revealed this year. The example shown in the budget document, as well as the supporting text, indicate the tax will apply to LNG sales net revenue, as well as net revenue from the liquefaction process.
The budget example would impose an LNG income tax of about $0.40 per thousand cubic feet of natural gas processed. This is in addition to bonus bids to acquire mineral rights, production royalties, and income tax.
B.C. assures us this fiscal regime is competitive, and that investment will flow into B.C.’s natural gas industry to make it all happen. Yet with lower cost providers in the competitive international market, B.C.’s bet is facing some long odds. Great care will be needed to ensure the quest for wealth does not out-weigh the need to be competitive.
Len Coad is director of the Centre for Natural Resources Policy at the Canada West Foundation.