Canadians lucky to dodge Pacific Northwest LNG project, just ask Australia

LNG facility in B.C. Photo: bcgovphotos/flickr

On July 25, after years of waffling, Malaysia's state-owned Petronas finally pulled the plug on its Pacific Northwest LNG project. The company blamed the dismal economics facing global LNG: a glut of world supplies and stagnant demand have driven prices well below the cost of constructing and operating the enormous facilities required to process, liquefy, and ship the gas.

Of course, that didn't stop some from reprising familiar complaints about Canada's supposedly anti-business policy climate. High taxes (including carbon taxes), interminable environmental reviews and Indigenous land claims make it impossible to do business here, they say. Most ludicrous was the attempt to blame British Columbia's new NDP government for the debacle. It's amazing that precisely one week of leftist rule could do more damage to this massive but shaky business plan than years of unfavourable economics.

In fact, far from blaming government red tape for the collapse of this misguided project, we should be collectively grateful. Those rules likely saved us from wasting tens of billions of dollars on the biggest white elephant in Canadian history. In effect, Canada's regulatory and fiscal processes function as an opportunity for sober second thought -- like an economic Senate. And in this case, sobriety was desperately needed.

To better understand the bullet that Canada dodged, consider Australia, a place where resource developers face far less onerous regulatory constraints. When gas prices in Asian markets surged past $15 per MMbtu in 2009, and again in 2012, gas producers everywhere salivated; but in Australia's case they could act on that greed quickly. Several massive LNG projects were built, virtually simultaneously, all aiming to cash in on premium Asian prices. Environmental and fiscal hurdles were modest; and Indigenous populations in Australia have little leverage to negotiate. A new right-wing government sweetened the pot by cancelling a modest carbon tax in 2014.

The outcome was a madcap construction boom that puts the Klondike gold rush to shame. Close to $200-billion (Australian) was spent on LNG projects over the next several years. In Queensland, three massive plants were built at the same time, on the same island. The impact of this mayhem on construction costs was both enormous, and predictable. The mother of all cost overruns was racked up at Chevron's Gorgon plant offshore Western Australia. Its final price-tag (a whopping $72-billion) was almost 50 per cent over budget. (Just imagine the recriminations if any public sector agency ever blew through its budget by a similar margin.)

The short-lived boom affected the whole course of Australia's economy, generating inflation, putting upward pressure on interest rates, and contributing to a skyrocketing currency -- that in turn sparked massive deindustrialization (including the complete shutdown of Australia's auto industry). The plants are now on stream (though most have suffered repeated operational breakdowns), long before a single shovel hits dirt in Canada's LNG play. A triumph of free-market efficiency, right?

Well, not exactly. Because after construction started, Asian gas prices fell by two-thirds (not surprising given all that coming new capacity), way below break-even levels. All the plants are bleeding red ink; writedowns already exceed $10-billion for the Queensland plants. With construction work done, just a few hundred workers remain to operate the plants. One-time boom towns have been left with a massive hangover, including collapsed housing prices.

But it's not just gas producers paying for this enormous miscalculation. Every Australian energy consumer is also paying. Unlike Canada, gas exporters don't have to prove that exports are surplus to domestic needs. Hence domestic prices more than doubled with the diversion of so much supply to exports; electricity prices also skyrocketed (because of gas-fired generation costs). Government isn't reaping any benefit, since the sweet royalty deals inked to accelerate LNG projects require virtually no royalty payments until capital investments have been paid off. That will likely never happen -- meaning Australians effectively gave away this gas (without royalties) to Asian consumers, many of whom now pay less for it than Aussies do.

In fact, it's hard to find anyone who benefited from this fiasco. And Australia's pro-development mindset greased the wheels. Taking more time to review the costs and benefits of major projects; empowering Indigenous communities to negotiate fair deals; and establishing a fiscal regime that's fair to both taxpayers and the climate, would have put enough sand in the wheels to at least slow down the bandwagon, and possibly stop it altogether. Canadians should thank our lucky stars we did it better.

Jim Stanford is Harold Innis Industry Professor of Economics at McMaster University, and currently lives in Sydney, Australia. This column was first published in The Globe and Mail

Photo: bcgovphotos/flickr

Like this article? rabble is reader-supported journalism. 

Related Items

Thank you for reading this story...

More people are reading rabble.ca than ever and unlike many news organizations, we have never put up a paywall – at rabble we’ve always believed in making our reporting and analysis free to all. But media isn’t free to produce. rabble’s total budget is likely less than what big corporate media spend on photocopying (we kid you not!) and we do not have any major foundation, sponsor or angel investor. Our only supporters are people and organizations -- like you. This is why we need your help.

If everyone who visits rabble and likes it chipped in a couple of dollars per month, our future would be much more secure and we could do much more: like the things our readers tell us they want to see more of: more staff reporters and more work to complete the upgrade of our website.

We’re asking if you could make a donation, right now, to set rabble on solid footing in 2017.

Make a donation.Become a monthly supporter.

Comments

We welcome your comments! rabble.ca embraces a pro-human rights, pro-feminist, anti-racist, queer-positive, anti-imperialist and pro-labour stance, and encourages discussions which develop progressive thought. Our full comment policy can be found here. Learn more about Disqus on rabble.ca and your privacy here. Please keep in mind:

Do

  • Tell the truth and avoid rumours.
  • Add context and background.
  • Report typos and logical fallacies.
  • Be respectful.
  • Respect copyright - link to articles.
  • Stay focused. Bring in-depth commentary to our discussion forum, babble.

Don't

  • Use oppressive/offensive language.
  • Libel or defame.
  • Bully or troll.
  • Post spam.
  • Engage trolls. Flag suspect activity instead.