A Changing Tide. British Columbia s Emerging Liquefied Natural Gas Industry

Transcription

1 A Changing Tide. British Columbia s Emerging Liquefied Natural Gas Industry REPORT FEBRUARY 2016

2 A Changing Tide: British Columbia s Emerging Liquefied Natural Gas Industry Allison Robins, Prince Owusu, Dan Munro, and Len Coad Preface There are currently 21 proposed liquefied natural gas (LNG) facilities vying to be a part of a future LNG industry in British Columbia. The objective of this report is to quantify the economic and labour market impacts associated with a 30 million tonnes per annum (MTPA) LNG industry in the province. An LNG industry in B.C. would create new markets for Canada s natural gas, generating income and jobs for governments and citizens. The findings in this report, however, are subject to uncertainty, as none of the proposed projects have entered the construction phase, with many still attempting to obtain required government and investor approval. To cite this report: Robins, Allison, Prince Owusu, Dan Munro, and Len Coad. A Changing Tide: British Columbia s Emerging LNG Industry. Ottawa: The Conference Board of Canada, The Conference Board of Canada* Published in Canada All rights reserved Agreement No *Incorporated as AERIC Inc. An accessible version of this document for the visually impaired is available upon request. Accessibility Officer, The Conference Board of Canada Tel.: or accessibility@conferenceboard.ca The Conference Board of Canada and the torch logo are registered trademarks of The Conference Board, Inc. Forecasts and research often involve numerous assumptions and data sources, and are subject to inherent risks and uncertainties. This information is not intended as specific investment, accounting, legal, or tax advice. The findings and conclusions of this report do not necessarily reflect the views of the external reviewers, advisors, or investors. Any errors or omissions in fact or interpretation remain the sole responsibility of The Conference Board of Canada.

3 The Conference Board of Canada. All rights reserved. Please contact cboc.ca/ip with questions or concerns about the use of this material. CONTENTS i EXECUTIVE SUMMARY Chapter 1 1 LNG Industry Overview 2 The Global Context 3 British Columbia s Emerging LNG Sector Chapter 2 6 LNG Industry Investments 8 Liquefaction Terminals 8 LNG Support Activities Chapter 3 21 Economic Impacts 22 Key Assumptions and Methodology 26 Economic Impact Results 30 Implications of Possible Expansion 32 Economic Impact Summary Chapter 4 33 Labour Impacts 34 Employment, Unemployment, and Labour Market Participation 36 Lagging Population Growth and Rising Retirements 37 Slow Labour Force Growth and Rising Labour Needs 38 High-Demand Occupations 39 A Challenging Labour Market for LNG Development 43 Opportunities, Challenges, and Strategies Chapter 5 49 Conclusions Appendix A 53 Bibliography

4 Acknowledgements The authors of this report would like to gratefully acknowledge Progress Energy Canada Ltd. for the funding that it provided, which made this report possible. We would also like to extend our sincere thanks to the external reviewers, who wish to remain anonymous, for providing insightful feedback on earlier drafts of this report. Notwithstanding these contributions, the analysis and conclusions of this report are those of The Conference Board of Canada. Any errors or omissions that remain are those of the Conference Board.

5 The Conference Board of Canada. All rights reserved. Please contact cboc.ca/ip with questions or concerns about the use of this material. EXECUTIVE SUMMARY A Changing Tide: Canada s Emerging Liquefied Natural Gas Industry At a Glance This report quantifies the impact of a 30 million tonnes per annum LNG industry in British Columbia. Between 2015 and 2045, total annual spending would average $7 billion per year. Canada s economy would grow by an average of $7.4 billion per year, with $5.3 billion in growth taking place in British Columbia. An increase in economic activity would increase national employment by an average of 65,000 jobs, with 46,800 occurring in British Columbia. Find Conference Board research at

6 A Changing Tide British Columbia s Emerging Liquefied Natural Gas Industry The development of an industry of this size requires a significant level of investment. The projects that could form British Columbia s future liquefied natural gas (LNG) industry are currently at various stages in obtaining required government and investor approval. At this time, there are 21 proposed LNG projects in B.C., which are the largest private sector investments to occur in the province. The objective of this report is to quantify the potential economic and labour market impacts associated with a 30 million tonnes per annum (MTPA) LNG industry in British Columbia. 1 The development of this size of industry would result in the production of an additional 5 billion cubic feet per day (bcf/d) of natural gas, approximately doubling 2014 production levels. For the purposes of this report, BC s future LNG industry consists of three hypothetical projects that come into service between 2021 and These projects consist of two larger-scale projects that include two liquefaction trains with a capacity of approximately 6 MTPA each and one smaller-scale project that includes a single train with a capacity of 5 to 6 MTPA. The capacity of the reference case projects are representative of currently proposed LNG projects in British Columbia. As a sensitivity case, the report also considers an additional 23 MTPA of expansion capacity, which could occur if market and regulatory conditions were conducive to additional development. The development of an industry of this size requires a significant level of investment. (See Table 1.) This report finds that the majority of investment spending would occur in the upstream sector of the natural gas value chain, to produce a sufficient quantity of natural gas to supply liquefaction terminals with feedstock and fuel. Compared with initial 1 One tonne of LNG is approximately equal to 1.38 million cubic metres, or 51.4 petajoules of natural gas. Find Conference Board research at ii

7 The Conference Board of Canada. All rights reserved. Please contact cboc.ca/ip with questions or concerns about the use of this material. Executive Summary The Conference Board of Canada Table 1 Investment Totals (2015 C$ millions) Upstream Wells 17,623 21,521 18,669 18,214 18,163 18,156 18,155 18,155 Gathering 8,812 3,228 2,800 2,732 2,724 2,723 2,723 2,723 Initial total 26,435 24,749 21,469 20,946 20,887 20,879 20,878 20,878 Wells 10,374 17,245 15,153 14,225 14,674 14,667 14,667 Gathering 5,187 8,623 7,576 7,363 7,337 7,334 7,333 Expansion total 15,561 25,868 22,729 21,588 22,011 22,001 22,000 Midstream Initial total 3,602 2,201 Expansion total 2,400 2,200 Transmission Onshore pipelines 6,094 1,607 Offshore pipelines 937 Compressor stations Initial total 7,572 1,876 Expansion total 1, Liquefaction terminals Initial total 27,559 5,668 Expansion total 9,761 8,014 Grand total (excluding expansions) 65,168 34,494 21,469 20,946 20,887 20,879 20,878 20,878 Expansion total (including expansions) 65,168 63,704 58,090 43,675 42,475 42,890 42,879 42,878 Source: The Conference Board of Canada. investment requirements, expansion investment requirements (excluding upstream investments) are significantly lower. Much of the existing infrastructure would not need to be replicated; increasing capacity would involve either adding additional trains to existing liquefaction terminals or adding compressor stations to natural gas pipelines. Find Conference Board research at iii

8 A Changing Tide British Columbia s Emerging Liquefied Natural Gas Industry These expenditures will have a multiplier effect on B.C. and Canada s economies. (See Table 2.) This report expects that total annual spending across the upstream, midstream, and downstream sectors will average $7 billion. Over the next 30 years, these investments would increase real Canadian GDP by an average of $7.4 billion per year, of which $5.3 billion would occur in British Columbia. This increase in economic activity would also have significant employment impacts; on a national level, employment would increase by an average of 65,000 jobs, 46,800 of which would occur in British Columbia. (See Table 2.) The bulk of these jobs would materialize in the construction, manufacturing, and resource sectors. Induced economic impacts, such as increased household spending, would also create employment opportunities in the wholesale and retail trade industry. The employment opportunities resulting from an LNG industry in B.C. would decrease the province s unemployment rate by 0.5 percentage points. Table 2 Annual Economic Impact of a 30 MTPA LNG Industry Canada Upstream Transmission Midstream LNG terminal Total GDP at market prices (2015 C$ millions) 4, ,751 7,385 Employment (000s) B.C. GDP at market prices (2015 C$ millions) 3, ,080 5,281 Employment (000s) Source: The Conference Board of Canada. In terms of the fiscal impacts of a B.C. LNG industry, an increase in labour income and corporate profits would result in additional provincial and federal personal and corporate income tax revenues. Indirect taxes would contribute $808 million and $577 million in revenue annually to the B.C. provincial government and federal government, respectively. Finally, Find Conference Board research at iv

9 The Conference Board of Canada. All rights reserved. Please contact cboc.ca/ip with questions or concerns about the use of this material. Executive Summary The Conference Board of Canada B.C. s LNG tax would result in an additional $208 million in revenue and increased drilling activity would result in an additional $686 million in royalty payments to B.C. s provincial government over the lifetime of the projects. 2 In total, between 2016 and 2045, a B.C. LNG industry would boost average annual revenues for the provincial and federal governments by $3 and $3.2 billion, respectively. (See Table 3.) Table 3 Annual Fiscal Impact of a 30 MTPA LNG Industry (millions of current $) Upstream Transmission Midstream LNG terminal Total B.C. corporate income tax Federal corporate income tax B.C. personal income tax ,096 Federal personal income tax 1, ,060 B.C. indirect taxes Federal indirect taxes B.C. royalty revenue B.C. LNG tax revenue Source: The Conference Board of Canada. In developing an LNG industry, in addition to significant benefits, there are challenges with which stakeholders will need to contend. Proposed LNG projects are located in small, isolated communities, whose working populations are often not sufficient to fully staff a project or which may lack necessary skill sets. Aboriginal residents, a population that often exhibits lower labour market participation than non-aboriginal residents, could fill these jobs. To effectively engage with these communities, however, governments and firms will need to develop strategies to mobilize and train these individuals. Governments and firms will 2 Assuming that the feedstock for these LNG facilities is sourced in British Columbia. Find Conference Board research at v

10 A Changing Tide British Columbia s Emerging Liquefied Natural Gas Industry also need to dedicate time and attention toward supporting intra and interprovincial migration, and ensuring that workers are set up for success in post-lng employment opportunities. The findings in this report are subject to a great degree of uncertainty, given that none of the proposed projects have progressed to the construction stage. What is certain, however, is that in recent years, Canada s net natural gas export volumes to the United States has declined and the North American market remains constrained on demand. A future LNG industry would create new markets for Canada s natural gas, which would generate revenues and employment opportunities that would not otherwise exist. Find Conference Board research at vi

11 The Conference Board of Canada. All rights reserved. Please contact cboc.ca/ip with questions or concerns about the use of this material. CHAPTER 1 LNG Industry Overview Chapter Summary Global liquefied natural gas (LNG) trade has continued to grow, reaching record volumes in Approximately 80 per cent of additional planned capacity is located in North America, driven by the rapid development of shale gas plays. Natural gas supplies in B.C. currently exceed demand in available pipeline markets. There are currently 21 proposed LNG facilities in B.C. that are at various stages in obtaining required government and investment approval. Find Conference Board research at

12 A Changing Tide British Columbia s Emerging Liquefied Natural Gas Industry In 2014, the global LNG supply chain handled nearrecord volumes. The Global Context Natural gas liquefaction technology has been in use globally for more than 50 years. As natural gas changes from gas to liquid, it shrinks volumetrically by a factor of almost 600, making it economical to ship large volumes over great distances. This allows for the development of stranded natural gas resources that otherwise would not have market, providing a source of income and employment to the producing jurisdiction. In 2014, the global LNG supply chain handled near-record volumes. 1 Global LNG trade reached million tonnes per annum (MTPA) in 2014, with import prices in Japan averaging $15.6 million British Thermal Units (MMBtu). 2 Of the total, 64.7 MTPA (27 per cent) were delivered under spot contracts and the remainder under long-term contracts. Liquefaction capacity has been growing modestly since 2011, reaching 301 MTPA in Regasification capacity totalled 724 MTPA in 2014, indicating substantial flexibility in the overall supply chain. Current plans include a total of 750 MTPA of additional liquefaction capacity, of which 80 per cent would be located in North America. Although not all of this capacity will be constructed, the expectation is that the industry will continue to expand. Much of the projected growth in LNG capacity has resulted from development of Australia s natural gas resources, the prolific growth of shale gas in North America, and potential development of deepwater natural gas offshore of Africa. 1 All data for global LNG are taken from International Gas Union, World LNG Report 2015 Edition. 2 The average spot price of LNG imported to Japan averaged $7.5/MMBtu in November Find Conference Board research at 2

13 The Conference Board of Canada. All rights reserved. Please contact cboc.ca/ip with questions or concerns about the use of this material. Chapter 1 The Conference Board of Canada Although the current global crude oil price downturn has cast a shadow over LNG markets (with LNG typically priced relative to crude oil), the outlook remains positive. Continued growth of energy demand in Asia, particularly mainland China, has generated a competitive race to market, based on long-term fundamentals; by 2035, Asian import requirements are expected to increase by approximately 33 billion cubic feet per day (bcf/d), with over half of this growth occurring in China. 3 British Columbia s Emerging LNG Sector B.C. has been an active participant in the development of North America s unconventional gas industry. 4 At the end of 2013, remaining natural gas reserves stood at 1,197.2 billion cubic metres (bcm), or 42.3 trillion cubic feet (tcf). 5,6 Growing reserves in the Montney formation have been the main driver of reserve increases for several years. Further, the ratio of reserves to production in B.C. has increased from 20 years in 2008 to 27 in Although B.C. has access to North American markets by pipeline via the Spectra Gas Transmission system, Nova Gas Transmission, and their interconnections, shale gas development has created supplies that exceed demand in available pipeline markets. There have been numerous LNG projects proposed to carry B.C. natural gas to offshore markets. A current list of those projects is presented in Table The Conference Board of Canada, Canadian Outlook, According to Natural Resources Canada, the term unconventional gas encompasses tight gas sands, coalbed methane, shale gas, and gas hydrates. 5 Remaining reserves refer to natural gas that is recoverable under current economic and technical conditions, including undeveloped reserves that have a reasonable probability of existing, less cumulative production. 6 BC Oil and Gas Commission, Hydrocarbon and By-Product Reserves. 7 Compiled from Government of British Columbia, LNG in BC. Find Conference Board research at 3

14 A Changing Tide British Columbia s Emerging Liquefied Natural Gas Industry Table 4 Proposed B.C. LNG Projects Location Project Sponsors Capacity (MTPA) In-service Campbell River Discovery LNG Quicksilver Resources Delta Wespac Westport Midstream Kitimat Cedar LNG Cedar LNG Export Development Ltd Kitimat Douglas Channel LNG Altagas Ltd. and Partners Kitimat Kitimat LNG Woodside Energy and Chevron Canada 10 TBD Kitimat LNG Canada Shell Canada and Partners 24 TBD Kitsault Kitsault Energy Project Kitsault Energy Ltd Nasoga Gulf Nisga a LNG Nisga a Nation TBD TBD Prince Rupert Pacific Northwest LNG Petronas and partners Prince Rupert Prince Rupert LNG BG Group Prince Rupert Aurora LNG Nexen and partners 24 TBD Prince Rupert Grassy Point LNG Woodside Energy Prince Rupert New Times Energy Ltd. New Times Energy Ltd Prince Rupert Orca LNG Orca LNG Ltd Prince Rupert Watson Island LNG Watson Island LNG Corporation TBD TBD Prince Rupert WCC LNG Ltd. Imperial Oil/ ExxonMobil Canada Squamish Woodfibre LNG Project Woodfibre LNG Project Stewart Canada Stewart Energy Project Stewart Energy B.C TBD Triton LNG Altagas and partners TBD = to be determined Source: The Conference Board of Canada. The information in the table illustrates the high level of interest in LNG projects in the province, but should not be considered indicative of the number of projects that might proceed or their potential timing. Some of the smaller projects will serve local markets along the B.C. coastline, with the larger projects targeting export markets. Given that no project has yet begun its construction phase, which will take a minimum of four years to complete, the projects identified before 2020 will likely Find Conference Board research at 4

15 The Conference Board of Canada. All rights reserved. Please contact cboc.ca/ip with questions or concerns about the use of this material. Chapter 1 The Conference Board of Canada see their timing adjusted. Further, the projects are at various stages of evaluation and not all have even applied for the necessary project and environmental approvals. However, the potential for a strong, vibrant LNG industry continues to be explored by the companies involved. Find Conference Board research at 5

16 CHAPTER 2 LNG Industry Investments Chapter Summary Supporting a 30 MTPA LNG industry would require a 5 bcf/d increase in B.C. s natural gas production, more than doubling 2014 production levels. This natural gas would be sourced from the Montney tight gas region and the Horn River shale gas region, whose gas is sweet and requires minimal processing. A dedicated natural gas transmission pipeline would supply each of the LNG facilities. Investment expenditure patterns and timing differ across the upstream/ midstream/downstream value chain segments. Find Conference Board research at

17 The Conference Board of Canada. All rights reserved. Please contact cboc.ca/ip with questions or concerns about the use of this material. Chapter 2 The Conference Board of Canada B.C. s emerging LNG industry is at a critical stage in its development, as decisions to move forward with projects are being taken or considered in a global context of uncertain energy pricing and a local context of cost uncertainty. The B.C. government carried out initial impact studies based on a range of liquefaction capacities of from 80 to 120 MTPA of LNG. 1 This analysis is substantially more conservative, and considers the potential collective impacts of the initial phases of three projects totalling approximately 30 MTPA of LNG capacity. There are several projects that propose an initial configuration of two trains of 6 to 7 MTPA each, and other projects that propose one initial train at 5 to 6 MTPA. Two large projects and one small project could easily be configured to produce 30 MTPA of LNG, which would require approximately 5 bcf/d of natural gas for feedstock and fuel. An upside sensitivity case considers an additional 23 MTPA of expansion capacity. This expansion is less costly to develop than the initial capacity because it involves adding new trains to existing LNG terminals and adding compression stations to pipelines, both of which are less expensive than the original projects. This report examines the level of investment, GDP, and employment for B.C. and Canada that would result from a 30 MTPA industry, with the projects coming into production between 2021 and Each LNG project will require significant investments to build the liquefaction plants, investments in new transmission pipeline projects, and upstream investments to drill wells, install gathering systems, and build natural gas processing plants. This chapter summarizes these investments. The following chapter traces the economic impact of those investments. 1 See Ernst & Young, Potential Revenues; Grant Thornton, Employment Impact Review; Grant Thornton, Potential LNG Revenue. Find Conference Board research at 7

18 A Changing Tide British Columbia s Emerging Liquefied Natural Gas Industry Liquefaction Terminals LNG Terminal Investment Requirements The timing of the investments shown in Table 5 is uncertain. Favourable regulatory decisions and investor decisions will be required in order for the projects to proceed as shown. To date, only one project has received a conditional final investment decision. Several others have received natural gas export approvals, and await other regulatory decisions that would be expected to lead toward financial commitments by project proponents. Table 5 Downstream Investments During Construction and Operations Phases (2015 C$ millions) Initial phase 27,559 5,668 Expansion phase 9,761 8,014 Source: The Conference Board of Canada. LNG Support Activities Upstream In order to supply 30 MTPA of liquefaction capacity with sufficient natural gas to meet natural gas feedstock and fuel requirements, B.C. s natural gas production must be increased by approximately 5 bcf/d. This compares with 2014 raw gas production of 4.6 bcf/d. 2 2 Raw natural gas production refers to the volume of natural gas as measured at the point of production. Marketable natural gas available reflects losses from natural gas processing (to remove impurities and by-products) as well as receipts from Alberta, Yukon, and the Northwest Territories. All numbers are from Government of British Columbia, B.C. s Natural Gas & Oil Statistics. Find Conference Board research at 8

19 The Conference Board of Canada. All rights reserved. Please contact cboc.ca/ip with questions or concerns about the use of this material. Chapter 2 The Conference Board of Canada The LNG projects or their upstream partners for several of the proposed projects have received National Energy Board approval for the natural gas export volumes associated with their projects. The export licensing process requires the applicant to demonstrate that the volumes to be exported are surplus to foreseeable Canadian requirements, but it does not require the applicant to demonstrate the source of the natural gas in any detail or to verify that there is sufficient production capacity to meet projected needs. For the purposes of this report, we have assumed that the natural gas supply will come from British Columbian sources, and that it is incremental to existing supplies rather than a diversion of those supplies. As a result, the incremental natural gas production associated with the three projects (initial phase only) would amount to at least a doubling of provincial natural gas supply. The upstream investments required to supply 30 MTPA of LNG projects are shown in Table 6. For the initial 10 years, as the LNG projects are implemented, annual upstream investments are expected to average just over $5 billion per year. These investments will put in place the wells, gathering systems, and field processing facilities to supply 5 bcf/d of marketable natural gas for delivery to the liquefaction plants, as well as the pipeline fuel required for the transmission lines (assumed at 2 per cent of throughput). Additionally, because both Montney and Horn River wells show high initial production rates but very steep initial decline rates, significant long-term drilling activity will be required to maintain the targeted production level. The investments shown in the upper half of Table 6 are for the initial projects only and would increase by the amounts in the lower half of the table (labelled expansion phase) should additional liquefaction trains be constructed at those terminals. There are two major areas in B.C. that are expected to supply natural gas for the proposed LNG projects: the Montney tight gas region and the Horn River shale gas region. 3 The Montney region is close to Dawson 3 This discussion is based on three documents from the BC Oil and Gas Commission that provide further details: Hydrocarbon and By-Product Reserves in British Columbia; Horn River Basin Unconventional Shale Gas Play Atlas; and Montney Formation Play Atlas NEBC. Find Conference Board research at 9

20 A Changing Tide British Columbia s Emerging Liquefied Natural Gas Industry Table 6 Upstream Investments During Construction and Operations Phases (2015 C$ millions) Initial phase Wells 17,623 21,521 18,669 18,214 18,163 18,156 18,155 18,155 Gathering 8,812 3,228 2,800 2,732 2,724 2,723 2,723 2,723 Initial total 26,435 24,749 21,469 20,946 20,887 20,879 20,878 20,878 Expansion phase Wells 10,374 17,245 15,153 14,225 14,674 14,667 14,667 Gathering 5,187 8,623 7,576 7,363 7,337 7,334 7,333 Expansion total 15,561 25,868 22,729 21,588 22,011 22,001 22,000 Source: The Conference Board of Canada. Creek, B.C., and includes a range of low permeability formations that contain a mix of hydrocarbons. A significant portion of the region produces natural gas with attractive components of propane (C3), butane (C4), and pentanes plus (C5+), which refers to a raw mix of pentanes and heavier hydrocarbons. Some areas within the Montney produce oil. Other areas produce natural gas with lower liquids content. The importance of the natural gas liquids is that they provide a revenue stream to supplement the natural gas value. They also require more extensive processing before putting the natural gas into a transmission pipeline. The raw natural gas in the Montney region contains only small volumes of sulphur compounds, carbon dioxide (less than 1 per cent), and water that must be removed before the gas is delivered to a transmission pipeline. The Horn River shale region is located farther north than the Montney, in the general region of Fort Nelson, and adjacent to the Liard region that has been producing natural gas for decades. Horn River natural gas contains very small amounts of C3 through C5+ and has much higher carbon dioxide content (typically 10 per cent). (See Exhibit 1.) Find Conference Board research at 10

21 The Conference Board of Canada. All rights reserved. Please contact cboc.ca/ip with questions or concerns about the use of this material. Chapter 2 The Conference Board of Canada Exhibit 1 Natural Gas Plays in British Columbia Liard Basin Fort Nelson Horn River Basin Cordova Embayment Montney Fort St. John Dawson Creek Kelowna Victoria Source: BC Oil & Gas Commission. The required investments shown in Table 6 were developed based on a combination of Montney and Horn River supplies. Both the Pacific NorthWest (PNW) LNG and LNG Canada projects are expected to rely heavily on Montney supplies, with Kitimat LNG supplied primarily from Horn River. 4 4 Based on the current land holdings and drilling programs of the project partners. Find Conference Board research at 11

22 A Changing Tide British Columbia s Emerging Liquefied Natural Gas Industry The investments are based on the total natural gas supply required from each region, the number of wells that must be drilled annually to maintain production, and the costs of drilling and completing wells, plus gathering system expenditures. For each region, the BC Oil and Gas Table 7 Montney and Horn River Performance Assumptions Montney tight gas Horn River shale Initial production rate (000 cubic metres per day) Initial 12-month decline (per cent) Average drilling and completion costs (2015 C$ millions) Wells drilled per year during initial LNG preparation phase Wells drilled per year during LNG operations phase Source: The Conference Board of Canada. Commission has published typical well performance data for the initial rate of production as well as production through time. 5 Well drilling and completion costs are based on the Petroleum Services Association of Canada (PSAC) well cost studies for The well-level assumptions are shown in Table 7. The relatively larger well counts for Montney supplies result from two factors. First, Horn River is assumed to supply only 20 per cent of the initial liquefaction capacity. Second, the higher initial production from Horn River wells more than offsets a steeper initial decline so that fewer wells are required to establish and maintain a given production level in the Horn River region compared with the Montney region. The well counts and investment numbers shown in the tables should be considered conservative because they are based on a limited drilling 5 These type curves are published in BC Oil and Gas Commission, Hydrocarbons and By-Product Reserves in British Columbia. We have adopted the p-50 type curves for this work. 6 Petroleum Services Association, 2015 Well Cost Study. Find Conference Board research at 12

23 The Conference Board of Canada. All rights reserved. Please contact cboc.ca/ip with questions or concerns about the use of this material. Chapter 2 The Conference Board of Canada history and performance of a well that is typically achieved with a 50 per cent probability. Increasing that to 90 per cent probability of occurrence would reduce the initial production assumption and increase the required well count. Although the expected drilling levels to support 30 MTPA of liquefaction capacity are large at 600 wells per year for the initial phase, followed by 510 wells per year in the longer term, the projected activity levels are consistent with those seen in the past in British Columbia. Chart 1 illustrates historical drilling levels in the province over the past 25 years. From 2000 to 2010, there were only three years where fewer than 600 natural gas wells were drilled. More recently, activity has been Chart 1 Historical Drilling Activity in British Columbia (wells drilled 1990 to 2015 through September) 1,600 Gas Oil Cased Service Abandoned 1, Sources: BC Oil & Gas Commission; The Conference Board of Canada. somewhat volatile in response to lower natural gas prices, with two of the four years from 2011 to 2014 reporting above 500 natural gas wells. The year-to-date performance for 2015 has been strongly and negatively influenced by low prices. Supplying the liquefaction terminals will require a return to the drilling levels of the decade. Find Conference Board research at 13

24 A Changing Tide British Columbia s Emerging Liquefied Natural Gas Industry Natural Gas Processing Facilities The natural gas production that will support the LNG industry will include Table 8 Natural Gas Processing Investments During Construction and Operations Phases (2015 C$ millions) Initial phase 3,602 2,201 Expansion phase 2,400 2,200 Source: The Conference Board of Canada. both Montney and Horn River. This means that a portion of the gas (Montney) will be liquids rich with low carbon dioxide content and a portion (Horn River) will have higher carbon dioxide content with limited liquids. Both sources will require processing to meet the specifications for inlet to a transmission pipeline. Table 8 shows the expected investment for natural gas processing to accompany the initial and expansion phases of the liquefaction plant capacity. The natural gas processing facilities must be constructed so that they are able to operate when the natural gas production begins from new wells. The initial five-year period will include natural gas that will be sold to other markets while the liquefaction plants are being constructed. Because natural gas processing plants can operate for decades with regular maintenance, large-scale investments beyond the initial construction period will not be required until the liquefaction plants expand. The investments shown in Table 8 are based on the costs of recent sweet gas processing facilities built in British Columbia. The facilities built to process Montney natural gas will include the capacity to extract at least a raw mix of natural gas liquids, store them temporarily, and load them into trucks that will carry them to their destination. This report has not considered how those liquids will be Find Conference Board research at 14

25 The Conference Board of Canada. All rights reserved. Please contact cboc.ca/ip with questions or concerns about the use of this material. Chapter 2 The Conference Board of Canada marketed or the potential economic impact on the liquids industry. Based on the liquids production reported for 2013 and the marketable gas requirements of the three LNG projects of 51.7 bcm (1.825 tcf), the processing facilities treating natural gas before transport to the liquefaction plants could produce as much as 2.1 million cubic metres (13 million barrels) of pentanes plus, 0.6 million cubic metres of propane (95 million barrels), and 0.6 million cubic metres (95 million barrels) of butane per year. The production of natural gas liquids would likely decline through time because the most liquids-rich prospects would be targeted first as the natural gas resource is developed. These volumes are for total liquids production. However, natural gas processing does not typically remove all of the liquids in the natural gas stream. The portion of liquids that is not extracted at the processing plants will be separated by the refrigeration process at the liquefaction plant, then sold, used at the liquefaction plant, or re-injected into the LNG according to project requirements and market opportunities. Pipelines Each of the LNG plants considered in this report is expecting that it will be supplied by a dedicated natural gas transmission pipeline. Two of the three pipeline projects that have been advanced to date will be owned by TransCanada. The pipelines will be built with a 36-inch or 48-inch diameter pipe, designed with a capacity to match the initial liquefaction requirements of the size of liquefaction plant they will supply. Each pipeline will initially include compressor stations sufficient to move the required volume of natural gas. Expansions of the pipeline projects to accommodate additional liquefaction trains will be accomplished by adding compressor stations and compressor units; no additional pipe is expected. The investment requirements for the initial pipelines and for potential expansions are shown in Table 9. These investments represent the construction phase only. Ongoing maintenance capital over the operating years is excluded. Further, the investments in compressor stations provide an indication of the potential future investments should expansions be required to supply additional liquefaction trains. It is Find Conference Board research at 15

26 A Changing Tide British Columbia s Emerging Liquefied Natural Gas Industry Table 9 Transmission Pipeline Investments During Construction and Operations Phases (2015 C$ millions) Initial phase Onshore pipelines 6,094 1,607 Offshore pipelines 937 Compressor stations Initial total 7,572 1,876 Expansion phase Expansion total 1, Source: The Conference Board of Canada. also possible that should additional LNG terminals be built, some of these proposed pipelines could be expanded to meet the needs of those terminals. The remainder of this chapter provides a brief profile of the three major pipeline projects put forward to date. Prince Rupert Gas Transmission Project The Prince Rupert Gas Transmission (PRGT) project will supply natural gas to the PNW LNG project. PRGT is a wholly owned subsidiary of TransCanada, which will own a majority interest in the project and act as operator. PRGT is structured with TransCanada as the master partner, which allows for other investors to participate. PRGT will carry natural gas 900 kilometres from Hudson s Hope to Lelu Island. 7 It is the most advanced of the pipeline projects, having recently received all of the final permits it needs from the BC Oil and Gas Commission; it also has received a B.C. Environmental Assessment Certificate. 8 (See Exhibit 2.) 7 The project description in this chapter relies on the project s Application for Environmental Assessment Certificate as filed with the BC Environmental Assessment Agency. 8 TransCanada, Prince Rupert Gas Transmission Project. Find Conference Board research at 16

27 ALBERTA The Conference Board of Canada. All rights reserved. Please contact cboc.ca/ip with questions or concerns about the use of this material. Chapter 2 The Conference Board of Canada Exhibit 2 Prince Rupert Gas Transmission 37 Pink Mountain Wonowon Fort St. John ALASKA Stewart Cranberry Junction 37 Hazelton New Hazelton 97 Mackenzie Taylor Hudson s Hope Chetwynd Dawson Creek BRITISH COLUMBIA Terrace Prince Rupert Port Edward Kitimat Smithers Telkwa Granisle 16 Houston Burns Lake Fort St. James 27 Tumbler Ridge Fraser Lake Vanderhoof Prince George Prince Rupert Gas Transmisson Prince Rupert Gas Transmission (PRGT) Proposed Route Initial Build Compressor Station Potential Future Compressor Station Other Proposed Pacific NorthWest LNG Export Facility (3rd party) TransCanada s NOVA Gas Transmission Ltd. (NGTL) Existing System Proposed North Montney Mainline Project Highways Cities and Towns Source: TransCanada. The initial pipeline will use a 40-inch diameter pipe for the onshore portion (780 kilometres) and twin 36-inch lines for offshore segments (110 kilometres). It will include three compressor stations and provide 2 bcf/d of natural gas delivery capacity. Should expansion be required, Find Conference Board research at 17

28 A Changing Tide British Columbia s Emerging Liquefied Natural Gas Industry PRGT will construct five more compressor stations to increase the capacity to 3.6 bcf/d without installing any additional pipe. It will be operated at traditional pressure (1,440 pounds per square inch) and will require the inlet natural gas to be processed to meet a conventional pipeline specification. This means that liquids-rich natural gas will require processing to remove most of the liquids before the gas enters the PRGT system. The applied-for schedule showed construction beginning in early 2015 and the pipeline coming into service in late 2018, a construction period of just under four years. This was predicated on all of the necessary approvals being received before the end of Having received all of the necessary approvals, the project now awaits a go-forward decision from the PNW LNG project. That decision will not be final until PNW LNG receives a positive decision from the federal government pursuant to the Canadian Environmental Assessment Act. 9 The four-year timing for construction may be adjusted depending on seasonal and other factors once the PNW LNG decision is finalized and the in-service date for the liquefaction plant is determined. Coastal GasLink The Coastal GasLink project is also owned by TransCanada and will supply natural gas to the LNG Canada liquefaction terminal, a joint venture led by Shell. 10 This pipeline will receive natural gas at Groundbirch (just west of Dawson Creek, B.C.) and deliver it to the LNG Canada facility near Kitimat, B.C., a distance of 650 kilometres. It will be a 48-inch pipe, with two compressor stations, delivering an initial volume of 1.7 bcf/d. Should expansion be required, up to five more compressor stations could be built, raising the delivery capacity to 5 bcf/d without installing any additional pipe. The pipeline inlet will be interconnected 9 Ibid. 10 The information for Coastal GasLink is based on the project description from the Coastal GasLink Pipeline Project, Project Description filed with the BC Environmental Assessment Agency in October 2012, as revised and updated. Find Conference Board research at 18

29 The Conference Board of Canada. All rights reserved. Please contact cboc.ca/ip with questions or concerns about the use of this material. Chapter 2 The Conference Board of Canada with TransCanada s Nova Gas Transmission Limited (NGTL) line at Groundbirch, providing potential flexibility in natural gas supplies for the LNG project and in markets for local natural gas production. The Coastal GasLink project structure is similar to that of PRGT in that is a wholly owned subsidiary of TransCanada, which will act as general partner, own at least 50 per cent of the project, and act as operator. It differs in that the project has been divided (at a point near Vanderhoof, B.C.) into east and west segments, each with its own partnership structure. This will enable NGTL to contract with Coastal GasLink for capacity on the eastern segment of the project. This project is less advanced than PRGT, but has applied for the necessary environmental approvals with the BC Environmental Assessment Agency and for facilities approvals with the BC Oil and Gas Commission. Coastal GasLink expects a four-year construction period, with initial natural gas deliveries to coincide with the in-service date of LNG Canada. (See Exhibit 3.) Pacific Trails Pipelines This project would supply the Kitimat LNG facility. It is a 463-kilometre, 42-inch diameter pipeline from Summit Lake, B.C., to the Kitimat LNG site. The project is at application stage, with only a limited number of the 161 required approvals having been issued to date. The original project application anticipated one compressor station with an initial delivery capacity of 1 bcf/d. Should both trains of the Kitimat LNG project be constructed, Pacific Trail Pipelines would add compression. The original plan was based on a four-year construction period after all approvals had been granted. The current plan is to maintain the original four-year construction program and to coordinate the pipeline in-service date with the start-up of Kitimat LNG. Find Conference Board research at 19

30 ALBERTA A Changing Tide British Columbia s Emerging Liquefied Natural Gas Industry Exhibit 3 Coastal Gas Link 37 Pink Mountain Wonowon Fort St. John ALASKA Stewart Cranberry Junction 37 Hazelton New Hazelton Hudson s Hope 97 Mackenzie Chetwynd Taylor Dawson Creek BRITISH COLUMBIA Terrace Prince Rupert Kitimat Smithers Telkwa Granisle 16 Houston Burns Lake Fort St. James 27 Tumbler Ridge Fraser Lake Vanderhoof Prince George Coastal Gaslink Pipeline Project Coastal Gaslink Pipeline Project Study Corridor Proposed Coastal Gaslink Metering Facility Proposed Coastal Gaslink Compression and Metering Facility Proposed Future Coastal Gaslink Compression Facilities Other Proposed LNG Canada Facility (3rd party) TransCanada s NOVA Gas Transmission Ltd. (NGTL) Existing System Proposed North Montney Mainline Project Proposed Merrick Mainline Project Highways Cities and Towns Source: TransCanada. Find Conference Board research at 20

31 The Conference Board of Canada. All rights reserved. Please contact cboc.ca/ip with questions or concerns about the use of this material. CHAPTER 3 Economic Impacts Chapter Summary Between 2016 and 2045, the average annual investment required to support a 30 MTPA LNG industry in B.C., across all value-chain segments would average $7 billion per year, adjusted for inflation. These investments will increase Canadian GDP by $7.4 billion annually over the course of 30 years, with $5.3 billion of this growth occurring in British Columbia. Increased economic activity will lead to growth in employment; on a national level, employment will increase by 65,000 jobs, with 46,800 occurring in British Columbia. Annual government revenues, including corporate, personal, and indirect taxes and royalty revenues, would increase by approximately $6 billion annually, of which $3 billion would accrue to the provincial government. Find Conference Board research at

32 A Changing Tide British Columbia s Emerging Liquefied Natural Gas Industry Key Assumptions and Methodology This chapter quantifies the economic impacts of developing a 30 MTPA LNG industry in British Columbia. As discussed previously, this report uses an estimated detailed breakdown of investment spending across upstream, midstream, and downstream sectors. Between 2016 and 2045, the total investment required to produce a sufficient quantity of natural gas and to construct and operate the necessary infrastructure and facilities will average $7 billion per year, adjusted for inflation. (See Table 10.) Table 10 Average Annual Spending for 30 MTPA LNG Capacity (2015 C$ millions) Time Amount Upstream ,509 Transmission Midstream LNG terminal ,647 Total spending ,971 Source: The Conference Board of Canada. This report relies on macroeconomic models of B.C. s economy to produce the economic impact analysis. Statistics Canada s inter-regional input-output model of Canada s economy is used to produce detailed industry and employment impacts for B.C., as well as to produce supply chain impacts across other provinces. These results are then used as input into the Conference Board s own econometric model of the B.C. economy. While the Conference Board model contains a Find Conference Board research at 22

33 The Conference Board of Canada. All rights reserved. Please contact cboc.ca/ip with questions or concerns about the use of this material. Chapter 3 The Conference Board of Canada The Conference Board s provincial forecasting model captures the sum of the direct, indirect, and induced impacts on B.C. s economy. more aggregated industrial sector, it has the benefit of assessing the impact of additional income, generated through changes in wages and profits, on the economy. In addition, the Conference Board s model can produce impacts on a broad range of economic indicators on a year-byyear basis. The Conference Board s provincial forecasting model captures the sum of the direct, indirect, and induced impacts on B.C. s economy, based on its estimated historical relationships. The model also incorporates a detailed modelling of prices, households, and businesses, and provides economic impact results for a wide range of economic indicators. In addition, it contains a detailed accounting of government revenues. (See What Is the Difference Between Direct, Indirect, and Induced Impacts? ) What Is the Difference Between Direct, Indirect, and Induced Impacts? Direct impact measures the value added to the economy from the increased infrastructure spending from those firms employed to either build structures or manufacture equipment. Because much of the equipment is expected to be imported, the direct effect on B.C. s economy from machinery and equipment investment is muted. Indirect impact measures the value added from supply chain effects as demand for intermediate inputs or other support services is lifted. Increased demand for construction and machinery will bolster activity in transportation, financial, insurance, and other services. Moreover, imported materials and machinery will bolster activity in transportation and warehousing. Induced impacts are derived when employees of the aforementioned industries spend their earnings and owners spend their profits. These purchases lead to more employment, wages, income, and tax revenues, and can be felt across a wide range of industries. Source: The Conference Board of Canada. Find Conference Board research at 23

34 A Changing Tide British Columbia s Emerging Liquefied Natural Gas Industry Consequently, increased production from specific industries will not only have direct impacts on the economy, but will also spread through the economy via a series of multiplier effects. Indirect effects in the form of increased demand are first felt by industries that are direct suppliers. Second-round induced effects produce a widespread impact (albeit usually smaller) on all sectors of the economy, largely through a general increase in consumer spending. The overall economic multiplier is calculated as the sum of all value-added impacts (direct, indirect, and induced) divided by the initial constant dollar spending generated by the investment. It is important to note that the constant dollar value of the investment does not necessarily result in a one-to-one increase in real GDP on B.C. s economy. This is because a good portion of the investment is assumed to go toward the purchase of machinery and equipment, which is imported either from other provinces and territories or overseas. For Canada, the overall multiplier is greater than 1 because of the positive supply chain impact on other provinces and territories. (See Table 11.) For B.C. alone, the multiplier is less than 1 due to the leakages through imports from overseas and from other provinces and territories. (See Table 12.) Table 11 Average Economic Impact of 30 MTPA LNG Capacity on Canada s Economy Upstream Transmission Midstream LNG terminal Total Economic multipliers GDP at market prices (2015 $ millions) 4, ,751 7,385 Employment (000s) Source: The Conference Board of Canada. Find Conference Board research at 24