Who will be on the hook if the largest private-sector investment project in Canadian history hits the rocks?

The news cycle over the past two weeks has been dominated by acts of civil disobedience by supporters of Wet’suwet’en hereditary chiefs,

Their goal, by and large, has been to uphold the hereditary chiefs’ authority over their unceded territory by thwarting a pipeline project.

But not much has been said about who will be left holding the bag if the Coastal GasLink pipeline ends up being cancelled.

B.C. taxpayers had better hope that Premier John Horgan’s eagerness to woo this investment hasn’t made them financially liable in any way.

That’s because if this pipeline is halted, the corporation’s lawyers will likely be examining whether the province misled investors.

As just one example, they could allege in court that the province falsely asserted legal authority to approve a pipeline on lands where Aboriginal title was not extinguished.

At a cost of $6.6 billion, the Coastal GasLink project is expected to deliver returns for decades to come to its investors—TC Energy, KKR, and Alberta Investment Management Corporation.

If that income is suddenly cut off—due to demonstrations or due to market conditions or due to a political change of heart, or a combination of all three—it could turn into a legal quagmire.

That pain for provincial taxpayers could conceivably be multiplied several times if the LNG Canada plant, which will receive natural gas through the pipeline, is also kiboshed.

Imagine the impact on the provincial treasury if the B.C. government was held liable for the loss of future profits for that corporate behemoth.

The LNG plant, terminal, and pipeline have been described as the largest private-sector infrastructure project in Canadian history.

On second thought, don’t imagine this—it will only make you want to leave the province.

Did Shell and government misread the market?

Two years ago, the federal and B.C. governments rolled out the welcome mat to persuade Royal Dutch Shell make a final investment decision approving the LNG Canada plant in Kitimat.

Shell’s partners are Mitsubishi and three Asian state-owned energy giants—Petronas, PetroChina, and KOGAS.

Prime Minister Justin Trudeau says it’s a $40-billion investment if one includes the export terminal and the $6.6-billion Coastal GasLink pipeline that will bring fracked natural gas from northeastern B.C. to the LNG Canada plant.

To sweeten the pot, the feds waived tariffs on Asian steel imports and the province provided $6 billion in incentives to lure these energy giants.

In early 2018, Shell released a rosy report about rising Asian demand for LNG, just as spot prices in Asia were around $12 per million British thermal units.

Since then, prices have crashed to below $3 per million British thermal units. That’s due in part to the COVID-19 outbreak but also due to warmer than expected winter weather and a growing appetite for solar and wind power.

And the long-term outlook for LNG in Asia may be far bleaker than people believed in 2018, thanks to China’s rapid moves to become a renewable-energy colossus.

There’s a new twist to the story that could render Canada’s relatively high-cost LNG—according to the Carbon Tracker Initiative—even less competitive.

The U.S.-based Center for LNG said this week that China’s Customs Tariff Commission of the State Council has given a one-year exemption to LNG imported from the United States, beginning in March.

The Center for LNG’s executive director, Charlie Riedel, hopes that this exemption on a 25 percent tariff will be extended into the future.

LNG Canada

LNG glut threatens big players

As of this writing, Royal Dutch Shell shares are trading at US$50.21 on the New York Stock Exchange. That’s only slightly above its 52-week low of US$49.95.

But there’s even more bad news for the LNG titan, thanks to an article in Oilprice.com.

Long-time energy market analyst Cyril Widdershoven reported that a glut of LNG—triggered by booming U.S. exports and sagging Asian demand—”is a major recipe for disaster”. He noted that it will have an impact on Shell, among other producers.

“All eyes are currently on China, as the Asian giant has accounted for 40% of the global growth in LNG demand since 2015,” Widdershoven wrote.

He added that LNG producers’ strategies were “decided on demand projections for China to exceed 82 million tons per year by 2023”.

“The same was expected, at lower volumes, for India and possibly other areas in Asia and even Europe,” Widdershoven wrote. “The current slump and the coronavirus effect has put all in doubt. A main concern will be that the LNG glut spirals out of control, pushing major operators over the edge too.”

Last September before prices crashed, McKinsey forecast demand for LNG to grow by 3.6 percent per year to 2035, with the market rebalancing in 2027-28.

“China will be a major driver of LNG-demand growth, as its domestic supply and pipeline flows will be insufficient to meet rising demand,” the international consulting firm stated at the time. “Similarly, Bangladesh, Pakistan, and South Asia will rely on LNG to meet growing demand to replace declining domestic supplies.”

That assumes this fuel will remain competitive with renewable energy, which can be more easily stored nowadays, thanks to dramatic advancements in battery technology.

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Renewables and more renewables

International economic consultant Jeremy Rifkin pointed out in his recent book, The Green New Deal: Why the Fossil Fuel Civilization Will Collapse by 2028, and the Bold Economic Plan to Save Life on Earth, that China is investing heavily in solar and wind energy.

“The Brattle Group published a nuanced report on the future prospects of LNG back in January 2016—two years and eight months prior to the formal announcement of the project—raising serious concerns about Canada shipping LNG to China, in light of the blitzkrieg competition there from solar and wind energies,” Rifkin writes in his book. “Its reticence should have raised some red flags but apparently was either ignored or not taken seriously.”

Meanwhile, Forbes contributor Daniel Araya pointed out in October that China has six of the world’s 10 largest solar-panel manufacturing companies and generates one-quarter of the world’s solar power. It also has four of the top 10 wind-turbine manufacturers.

The International Renewable Energy Agency has said that no country in the world has “put itself in a better position to become the world’s renewable energy superpower than China”.

Solar power is also gaining ground in India, according to an article this week in the Wall Street Journal.

It remains to be seen whether this will bring B.C.’s nascent LNG industry crashing down

But watching this saga unfold, it’s a reminder of the risks of the province betting its future on Asian demand for energy.

Back in the early 1980s, the Social Credit government led by Bill Bennett invested $400 million into a 300-kilometre rail line to support a northeast coal project. Electricity and other services were provided for a new town, Tumbler Ridge, to serve this industry.

Coal prices collapsed and the province took a financial bath.

This time around, postsecondary education programs have been retooled to support the LNG industry. British Columbians have been encouraged to move to northwestern B.C. Indigenous communities are being told that LNG will offer them a way out of poverty.

Fuelling the frenzy several years ago was a Fraser Institute report, “Laying the Groundwork for BC LNG Exports to Asia”, which stated that in Japan, LNG was selling for $15.45 per thousand British thermal units.

Reports like these led former premier Christy Clark to predict a $100-billion windfall for B.C., wiping out the entire provincial debt.

B.C. public pension plans may have sidestepped disaster

Fortunately, the overseers of B.C.’s public pensions haven’t appeared to have bought into the hype.

The B.C. Investment Management Corporation manages $153.4 billion in assets for municipal, provincial, college, B.C. Hydro, and WorkSafe B.C. employees’ pension plans, as well as for members of the Teachers’ Pension Plan.

BCI’s 2018 “Responsible Investing” annual report showed that it had investments that year in a long list of fossil-fuel corporations—including ExxonMobil, Chevron, Imperial Oil, Kinder Morgan, Marathon, and Suncor.

However, it may come as a relief to current and future pensioners that BCI had no exposure in 2018 to any of the partners in the LNG Canada plant or Coastal GasLink pipeline.

No Royal Dutch Shell. No Mitsubishi. No TC Energy. And no KKR.

So even though the premier and the prime minister are excited by the prospects of B.C.’s LNG industry, this enthusiasm doesn’t appear to be shared to the same degree by the guardians of B.C. public-sector workers’ retirement savings.

Fortunately, these money managers, unlike Horgan and Trudeau, appear to have taken Warren Buffett’s golden rule to heart:

“Rule No. 1 is never lose money. Rule No. 2 is never forget Rule No. 1.”

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