December 12, 2013
LNG and Job Growth"Teach a parrot to say 'supply and demand,' and you have an excellent economist."
"Typically when it comes to energy exports, it has been the seller that sets the prices."
Premier Christy Clark quoted by Justine Hunter in December 10 Globe and Mail
We could all get a good chuckle out of Premier Clark's failure to understand economics 101 if the consequences weren't so severe for BC. She has staked her credibility on delivering liquefied natural gas (LNG) for BC on sufficient terms so as to pay-off all of BC's government debt, including the debt of BC Hydro, BC Ferries and the Port Mann Bridge. All of that is to be done in my lifetime (less than 30 years)!
British Columbians need to be concerned that Premier Clark may be so desperate to deliver on LNG that she will cave on royalties and taxation while offering companies discounted hydroelectric power from a yet to be built Site C dam. Instead of paying off BC's debt, the province could find itself like Western Australia, going deeper and deeper in debt over LNG. Western Australia lost its AAA credit rating this year even though 84% of Australia's LNG exports originate in Western Australia.
Reports from consultants Ernst & Young and Grant Thornton commissioned by the BC government before the May 2013 election projected provincial revenues based on the assumption that BC would produce 82 million tons per year of LNG (MTA) over a twenty year operation period. That would be about 25% of the total world supply of LNG in 2017, according to estimates from the International Gas Union. Other than Premier Clark and her cabinet, it is hard to find credible analysts who believe BC will become a dominant world LNG player, surpassing such producers as Qatar, Malaysia, Australia, Nigeria, and Indonesia. BC will probably have some LNG production by 2020 but it is not likely to produce 25% of global supply.
Just as a parrot can pose as an economist, Clark answers most questions by parroting one line: LNG will solve all problems. In a yearend interview with CBC's Rick Cluff on December 10, Clark dismissed the loss of 15,500 jobs over the past year saying the numbers aren't good this month but in other months they have been. She went on to say economic growth is sluggish and BC is not unique in that. Her answer to sluggish growth is for BC to develop a new LNG industry. That sidesteps the fact that for over a year BC has ranked in the bottom three provinces for job growth and in November BC claimed the tenth position, dead last, amongst the provinces. Forecasters have lowered their estimates for BC's GDP growth in 2013, but we won't see preliminary estimates for actual 2013 provincial GDP until April 2014.
A key document in Clark's jobs plan is titled "Labour Market Outlook 2010-2020". It says: "Demand for workers in B.C. is expected to grow by an annual average rate of 1.4 percent over the ten-year period." BC had 2.3 million jobs in November 2013; annual growth of 1.4% would yield 32,000 new jobs per year. That puts the loss of 15,500 jobs between November 2012 and November 2013 in perspective; BC is about 37,000 jobs behind where it should have been if growth had not stagnated. It also puts the job claims for LNG in perspective.
The BC Jobs Plan website says: "The BC Jobs Plan commits to bring at least one LNG pipeline and terminal online by 2015 and have three in operation by 2020, assuming all environmental and permitting applications are granted." It goes on to say:
The BC Jobs Plan target of three LNG facilities by 2020 is on track. Independent studies show that if five LNG facilities were operating in B.C. by that year it could mean:
- Over $98 billion in new capital investment
- 75,000 permanent new jobs
- More than 39,000 average annual jobs over a nine-year construction period
- Potential new government revenues in excess of $100 billion over the next 30 years.
The 39,000 annual jobs over a nine-year construction period is about equal to the gap in how many jobs BC had in November 2013 compared to what it should have had if growth had not stagnated. The promise of "at least one LNG pipeline and terminal online by 2015" will not happen; however, construction of one, perhaps two, natural gas pipelines to feed LNG trains could start in 2015 with completion in 2019. It takes between five and nine years to build a LNG train; a pipeline isn't going to be built too many years before it is needed.
So far two environmental approvals have been granted. The Kitimat LNG Terminal Project began its pre-approval on September 14, 2004. On June 6, 2006 it received provincial approval with a note that federal approval was also required. The Pacific Trails Pipeline Project, a new 470 km, 36" natural gas pipeline between Summit Lake and Kitimat, began its pre-approval on November 23, 2005. On June 27, 2008 it received its provincial approval with a note that it also requires federal approval.
Another two pipeline proponents have submitted detailed documents to BC's Environmental Assessment Office and they have held public hearings on their pre-application information. The Spectra Energy and BG Group Natural Gas Transportation System, operating as 0948090 B.C. Ltd., submitted its pre-application documents on November 9, 2012. Its project, called Westcoast Connector Gas Transmission Project, would run an 851 km pipeline into the Prince Rupert area. A public notice for a second pipeline began by saying: "Prince Rupert Gas Transmission Ltd. (Proponent), a wholly owned subsidiary of TransCanada PipeLines Limited, is proposing the Prince Rupert Gas Transmission Project (proposed Project), an approximately 900 km natural gas pipeline from near the District of Hudson's Hope to the proposed Pacific NorthWest LNG liquefied natural gas export facility on Lelu Island, within the District of Port Edward." Prince Rupert Gas Transmission Ltd. submitted its pre-application documents June 6, 2013.
No one is going to spend a billion dollars or more on a pipeline until customers are lined up to pay for shipping gas. It will be interesting to see if the formal environmental reviews on the pipelines get underway before any final investment decisions are made to build LNG trains. If all goes well for the projects, thousands of construction jobs could be created starting in 2015, but no gas will be shipped until 2019 or 2020. Those dates are important for those hoping the gas play will give BC job growth a needed kick start.
Until contracts are signed between potential LNG producers and their customers and between potential LNG producers and pipeline companies, nothing is certain. The price in purchase agreements will be a function of both supply and demand, as well as of the system of taxation and royalties BC sets. In the meantime job growth has stalled in BC and saying wait for LNG doesn't work for the thousands fleeing BC for jobs in Alberta.
December 5, 2013
Hydro Rates and Liberal ErrorsThe Liberal platform from the May 2013 election is still on their website and it is easily searchable. BC Hydro was mentioned seven times. Hydro rates only received passing reference by way of a paragraph header:
"Reducing pressure on ratepayers"
"As the BC Prosperity Fund reduces public debt, this will include reducing the debt for BC Hydro and the Port Mann Bridge by allowing us to accelerate the paydown of debt for capital projects that are helping build the province."
Five of the seven references to Hydro in the Liberal platform were in the context of paying down its debt through the use of LNG revenues. (The other two were to continue to purchase private power and a boast about implementing audit recommendations regarding executives and their compensation.) Having opened Pandora's box, the principle of reducing Hydro’s debt through the use of resource or other government revenue needs to be fully explored. Reducing the debt pressure on rate payers through such payments can be thought of as little more than repaying what amounted to a shift of debt from government to Hydro; that is what happened when Hydro paid water rentals and dividends to the province when those funds could have been used to reduced Hydro's debt.
BC Hydro's total revenue in the 2012-13 fiscal year was $4.9 billion. In that fiscal year, Hydro paid $348 million in water rentals as well as $509 million in dividends to the province, which amounted to 17.5% of the corporation's total revenue.
Many families who use natural gas to heat water and their homes have very low electric bills. Reasonable attention to turning off the lights can result in monthly bills of under $40 for such families, but those who use electric baseboard heaters and electric hot water tanks face much higher bills, averaging over $200 per month. For those families a rate increase of 9% on April 1, 2014 and another 6% on April 1, 2015 hurts. If they have wage earners who work in industries that will be facing millions in increased costs because of the 15% two year rate hike, they could be looking at job losses. Boards of education and hospitals were told by the government to find "savings" elsewhere in their budgets to pay higher Hydro rates; schools and hospitals may have to cut services and layoff staff to pay the higher electric bills! Premier Clark's Liberals would have you believe the rate increases are necessary in order to make up for decisions made by the NDP more than twelve years ago. Even their strongest supporters can't believe that nonsense. After more than a decade the Liberals must accept responsibility for their decisions and many of those decisions were massive mistakes that inflicted billions in unnecessary costs on Hydro.
BC Hydro's power distribution was stripped away into BC Transmission Corporation in 2003 only to see the experimental company dissolved and reabsorbed by Hydro in 2010 under the inappropriately named "Clean Energy Act". Will McMartin described how many Liberal friends benefited from that failed experiment which cost rate payers $65 million. That was small potatoes as Liberal waste at Hydro goes.
The Clean Energy Act excluded many pet projects from independent review by the BC Utilities Commission (BCUC). Energy economist Marvin Shaffer warned that the Act would cost BC billions, and he has been proven right. The Act essentially required Hydro to buy high and sell low. In the fiscal year ended March 31, 2013 Hydro paid Independent Power Producers (IPPs) $760 million (annual report page 45) for 10,675 gigawatt/hrs of power, an average cost of $71.23/MW/hr. Average power cost for Hydro was $17.96/MW/hr for 62,529 gigawatt/hrs of power. The Liberal's concept of "self-sufficiency" required Hydro to buy expensive IPP power as if every year were a drought, even if it didn't need the power.
The Clean Energy Act was really an Act to promote the profits of IPPs and to strip BCUC of its regulatory role in protecting ratepayers. Section 7 of the Act removed the following projects from BCUC scrutiny:
- the Northwest Transmission Line, a 287 kilovolt transmission line between the Skeena substation and Bob Quinn Lake, and related facilities and contracts;
- Mica Units 5 and 6, a project to install two additional turbines and related works and equipment at Mica;
- Revelstoke Unit 6, a project to install an additional turbine and related works and equipment at Revelstoke;
- Site C, a project to build a third dam on the Peace River in northeast British Columbia to provide approximately (i) 4 600 gigawatt hours of energy each year, and (ii) 900 megawatts of capacity;
- a bio-energy phase 2 call to acquire up to 1 000 gigawatt hours per year of electricity;
- one or more agreements with pulp and paper customers eligible for funding under Canada's Green Transformation Program under which agreement or agreements the authority acquires, in aggregate, up to 1 200 gigawatt hours per year of electricity;
- the clean power call request for proposals, issued on June 11, 2008, to acquire up to 5 000 gigawatt hours per year of electricity from clean or renewable resources, and
It is hard to say whether some of the projects listed above would have proceeded if they had to satisfy BCUC. If some had not, ratepayers might not be looking at a 15% rate increase over the next two years. Smart meters cost over $1 billion and there is no evidence of any significant savings. The cost of site C is anyone's guess but some suggest it could reach $10 billion. Even Hydro's 2011 estimate pegged it at $7.9 billion. Remember all that power is designated for producing LNG in BC and we've yet to see whether LNG can be sold at a profit for the province, let alone at rates that will pay off all provincial, Port Mann and BC Hydro debt. Nevertheless, the Liberal platform promised to accelerate the paydown of debt at BC Hydro, BC Ferries and the Port Mann Bridge once the core provincial debt is paid down.
While not acknowledging their mistakes, the Liberals could argue that (except for Site C) they are mostly water over the dam, or is that water under the bridge. One way or another, the promised pay-down of Hydro's debt is a long way in the future and it needs money now. Of course part of the reason it needs money now is to continue paying the government almost a billion dollars a year in combined water rentals and dividends. A background note to the government's news release on the rate increase said government would be: "Reducing dividend payments to the Province over five years starting in Fiscal 2018 to allow BC Hydro to keep more cash for infrastructure investments." Those paying 9% more next year and another 6% more in 2015 might notice that the government's promise to stop draining so much from Hydro doesn't take effect until after the 2017 provincial election. When you think about it, much of what the Liberals promised for the May 2013 election won't be seen or proven until after the 2017 election. It all requires a great deal of faith.