In the era of fossil fuel’s global decline, why is Canada hanging onto LNG?

July 17th 2019

Liquified natural gas (LNG) is being promoted as a green transition option to replace dirtier fuels. But when renewables are coming in cheaper than new gas- and coal-fired plants for two-thirds of the world, why is this the case?

LNG’s economic prospects are waning because renewables price declines are having a bigger impact than anticipated, and there is an LNG global market glut. The shale gas industry is also experiencing more costs than revenues, and greenhouse gases (GHGs) in the LNG supply chain may be as bad as coal.

But, as with the case with oilsands, Canada chooses to ignore the signs of a global evolution to a green economy at its own peril while heading toward stranded assets.

Yet the Government of Quebec is now promoting an LNG facility north of Quebec City and a pipeline to bring in Alberta shale gas using the same clean energy transition export messages as those used for the LNG Canada facility in Kitimat, B.C. and the Coastal Gaslink shale gas pipeline.

It’s like watching two vehicles in the night with their headlights on being driven toward each other, oblivious to the pending crash.

This summer in the U.S., a milestone occurred when a California solar and battery power project was the object of a power purchase agreement (PPA) for the Los Angeles Department of Water and Power. The project beat out natural gas. This milestone, the Eland Solar and Storage Center, is a sign that natural gas is now losing out to renewables. The ground-breaking price came in at 1.99cents/kilowatt hour for 400 megawatts of solar energy and 1.3c/kWh for stored solar power from a co-located 400MW/800MWh battery storage system. By comparison, a natural gas plant would come in at twice the price.

Meanwhile in Asia

In India, a major Asian coal consumer, auctions for new power capacity have seen renewables come in at cheaper rates than coal. Accordingly, 547 gigawatts of coal plant production have been shut down between 2010 and 2018.

China, which represents half of global coal consumption, has the world’s most aggressive renewables strategy, accounting for 50 per cent of new global installations of renewable power capacity in 2017. While coal represented 80 per cent of China’s electrical power sources in 2011, it declined to 60 per cent of the power share in 2017. It’s expected to descend to 40 per cent by 2030.

The combined impacts of China’s mind-boggling transition to renewables — which are now among the cheapest sources of power generation — plus China’s war on coal have resulted in 40 per cent of China’s coal plants losing money. Half of the decline in U.S. coal export revenues is attributable to a reduction in demand from China.

While China’s climate plans do include the contradiction of increased reliance on LNG, a new natural gas pipeline from Russia is scheduled to come online in 2020 and another is in the works for a few years later. Hence, the Canadian LNG export market associated with China appears dim.

As well, Quebec’s Premier François Legault is suggesting new natural gas exports will replace fuel oil but China’s intention is to reduce its dependencies on importing petroleum.To this end, China’s sales/credits quotas for plug-in vehicles became effective in 2019 and will become increasingly stringent in the coming years. The country will also soon begin implementing the world’s largest national cap and trade carbon pricing system.

The signs of the natural gas market decline apply to Europe as well, Europe being one of the most dependent areas of the world on fossil fuel imports. A case in point is the $3.4-billion MidCat pipeline to connect Spain and France gas grids. In January 2019, regulators denied approval for the mid-portion of the pipeline on the grounds of high costs and a failure to prove its necessity.

When supply exceeds what the market can handle

Failing to predict the impact of declining renewables prices contributing to an extraordinary rapid descent of gas turbine and coal power plant construction markets, GE lost $193 billion (USD) in the three years leading to 2018.

Concurrently, while LNG demand and prices declined, U.S. shale gas exports are supplying more than the global market can handle. More supply is also coming from Australia, Russia and Egypt. This has resulted in LNG being stored in ships awaiting better market prices.

A new report from the Global Energy Monitor, a group following coal plant developments in Asia, concluded that the $1.3 trillion (USD) in global gas infrastructure is risky. This same report indicates that $2 trillion (USD) of LNG plants are planned and at least 202 LNG terminal plants are under development, primarily in the U.S. and Canada. These new projects could triple LNG production.

Boom and bust

The economics of shale gas seem headed toward a boom and bust cycle. This is because the production capacity of a shale gas well is only profitable for the first three years, declining 85 per cent in three years. Consequently, shale gas firms’ cash flows tend to be negative and financed with debt.

Even Wall Street is having second thoughts. According to the Institute of Energy Economics and Financial Analysis, a cross-section of 33 publicly traded U.S. shale oil and gas companies collectively had negative cash flows in the first six months of 2018, spending $3.9 billion more than they got back from revenues.

Falling renewables costs suggest that any new dependencies on a fossil fuel will delay the moment when substitutions with clean energy replacements can be introduced, assuming fossil fuel initiatives offer lifecycle returns on investments.

In effect, natural gas is the fastest-growing source of CO2 emissions, having risen 4.6 per cent between 2017 and 2018. The lifespan of a LNG plant is 40 to 60 years.

As noted by Pierre-Olivier Roy of the Centre international de référence sur le cycle de vie des produits, procédés et services (CIRAIG), once the LNG leaves the ports of destination, there are “uncertainties” as to how the gas will be used and whether it will replace higher emission sources.

About Quebec

Against this global backdrop, what is now going on in Quebec over LNG projects seems all too familiar given what happened in B.C. with LNG Canada and the Coastal GasLink. In that project, LNG Canada is moving ahead with the development of its export facility in Kitimat, B.C., and the Coastal GasLink, to bring shale gas to the facility from Dawson Creek, approved by the B.C. government four years ago. BC Hydro has allotted at least $10.7 billion (CDN) in contracts up to 2017 for the Site C dam, two years into the construction of this nine-year project, to supply the energy needs of the LNG plant.

The Quebec projects comprise an LNG facility, Énergie Saguenay (210 kilometres north of Quebec City) and an interprovincial gas pipeline, Gazoduc. The latter is to connect with Alberta shale gas supplies via a connection in Ontario. These projects are collectively known as GNL Québec.

In a letter signed by 160 Quebec scientists and published June 3, 2019, in Le Devoir, new LNG supplies would preempt immediate shifts renewables. Bloomberg New Energy Finance has drawn the same conclusion.

The 160 scientists concluded that the two Quebec LNG projects would contribute further to the climate crisis by way of a daily extraction of 44 million cubic metres of natural gas from Western Canada, which would increase Canada’s exportation of natural gas by 27 per cent and represent 2.6 times the daily natural gas consumption of Quebec. The scientists’ estimation of GHGs, from extraction to liquification, to be of the order of 7.8 mega tonnes (Mt).

The preceding GHG estimates may be too conservative, since leakages from the LNG supply chain or fugitive gases, methane from drilling and shipping in particular, may be worse than originally estimated, rendering shale gas as bad as coal.

But Jonathan Julien, the Quebec minister of energy and natural resources, qualified the GNL Québec LNG facility and pipeline proposals as good projects to the effect Quebec “is very favourable” to $14 billion in investments in a northern region and create “thousands of jobs.”

The LNG global portrait, in contrast with Canada’s inability to make the transition from a resource-based economy to that of a green economy, is but one more example of Canada being in a coma regarding rapid changes in the world’s fossil fuel markets. Our federal and provincial leaders would like us to believe they are taking climate change seriously, but apart from token measures, Canada is holding on tight to the old economy.

[Top photo: Photo of LNG tanker from Shutterstock]