In energy markets, a few years is a lifetime. Fast fluctuations in supply or demand, along with myriad other factors, can send oil and gas prices skyrocketing or into the cellar.
And the results — as B.C’s liquefied-natural-gas watchers can attest — can be dramatic.
In January, Shell delayed a decision on whether to pursue its LNG Canada joint venture project. In February, AltaGas Ltd. shelved its Douglas Channel LNG plant indefinitely, citing an inability to find customers in Asia for the natural gas. And this month, the Jordan Cove LNG project in Oregon was effectively nixed by American energy regulators when they rejected the pipeline that would feed it on grounds that there wasn’t demonstrated market demand to warrant the project.
The promise of LNG — investment, jobs, taxes and royalty revenue — is becoming more uncertain by the day.
The U.S. Energy Information Administration recently released data showing that LNG imports into Japan, South Korea and China dropped five per cent in 2015. And just as demand for LNG is softening, there has been a surge of LNG production. The result? Stubbornly low prices and fierce competition among would-be LNG producers.
B.C. is competing with a host of other prospective LNG suppliers, but it’s also competing with other forms of energy. The restart of nuclear reactors in Japan, coupled with growing use of renewable energy, are expected to push down LNG imports by as much as 10.5 per cent by 2020. And a recent study from economists at the Brattle Group, a respected economic consultancy, suggests that North American LNG faces increasing competition from renewable energy.
Not only does this finding call into question the assertion of LNG proponents that the fuel is a coal-displacing climate solution, it raises critical questions about the economic competitiveness of the North American LNG industry and its prospects for growth.
The Brattle group’s study, LNG and Renewable Power: Risk and Opportunity in a Changing World, finds intensifying links between global natural gas and electricity markets. This rapid evolution of renewable energy markets has caught many by surprise.
Last year saw a record for global clean energy investment, reaching over a third of a trillion U.S. dollars, according to Bloomberg New Energy Finance. In 2014, four times more renewable power capacity was added around the world, compared with natural gas-fired power. And while 2014 saw the lowest investment in new natural gas power since 2008, it was the biggest year on record for renewable energy.
Clean energy investment in China was up 17 per cent to $110 billion US, and is expected to remain dominant in the years ahead. Japan saw $43.6 billion US invested in renewable energy, and India saw investment rise to $10.9 billion US. In short: the very markets B.C. LNG companies are hoping to export to are investing significantly in clean energy.
A big driver of this continued growth in renewable energy investment is simple economics. Renewable energy is fundamentally different from energy commodities such as LNG because it is driven by technology and the fuel is free. Commodity prices are a rollercoaster ride of ups and downs. Technologies, on the other hand, follow a predictable price pattern — they get cheaper over time.
All of this means B.C. LNG is no sure thing.
The Brattle study suggests there is significant investment risk in proposed LNG export projects in North America. It finds that over the 20 years of a typical LNG contract, renewable power will quite possibly become cheaper than the LNG sales prices needed to justify the cost of LNG investments — and that’s before factoring in a cost on carbon pollution.
For those on the buying end, that makes a 20-year contract for LNG a questionable proposition.
As the Brattle study notes, if the cost of renewable power is low enough in the markets we want to sell our LNG into, “it could dampen the attractiveness of North American-sourced LNG as a fuel for electric generation and the willingness of market participants to continue to contract for LNG export infrastructure.”
The study concludes with a subtle warning for global LNG players: Consider carefully the implications of increasing competition from renewables. That includes governments — such as British Columbia’s — that are banking on LNG to deliver jobs, growth and prosperity.
LNG projects might still proceed in British Columbia. But if they do, they should be the gravy, not the meat and potatoes, of the province’s economy. It’s time the B.C. government developed a broader export plan that recognizes the opportunities of the fast-growing global marketplace for clean-energy solutions.
Written by Merran Smith and Dan Woynillowicz. Originally published in Times-Colonist, March 27, 2016.