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BC Natural Gas Reserves Inflated, Revenues Overstated, Report Finds

May 28, 2015

Analyst David Hughes offers another challenge to the province’s nascent industry.

By Andrew Nikiforuk, The Tyee.

Oil refinery image via shutterstock.

Oil refinery image via shutterstock.

A new report on liquefied natural gas prospects for British Columbia challenges government claims that gas exports will lower greenhouse gas emissions, or generate $100 billion in profits for the province.

The report published today by David Hughes, one of Canada’s foremost energy analysts and a former federal government geoscientist, also contends that the provincial government has vastly overestimated the amount of gas available for export.

The National Energy Board has approved 12 export licences to Asia or the United States with another seven under review along the B.C. coast.* The provincial government, which has lowered taxes and royalties to promote the new industry, expects only three to five terminals may be eventually built.

Due to depressed oil prices, global competition and cost over-runs in the capital intensive industry, not one project has yet announced a final investment decision.

Government fact sheets claim, for example, that "British Columbia’s natural gas supply is estimated at over 2,933 trillion cubic feet," or enough gas to last 150 years.

But Hughes notes the B.C. Oil and Gas Commission estimates raw gas reserves (gas that can be drilled and recovered based on existing economics and well data) for the province at 42.3 trillion cubic feet.

The commission calculates "marketable resources," or what industry might be able to find, drill and frack — a highly uncertain figure, due to high decline rates and the spotty nature of unconventional shale resources — at 442 trillion cubic feet.

As a result, Hughes calls the government’s inflated figure of 2,933 trillion cubic feet, or 70 times more than proven reserves listed by the commission, "a false and irresponsible statement."

Windfall profits questioned

Government claims about earning windfall profits from gas exports also have no basis in real economics, Hughes argues in his report.  

The B.C. government has argued that industry could extract gas at $6 per million BTU and sell it in Asia, say, for more than $14 a unit and capture the difference with a liquefied natural gas tax. (The BTU is a standard unit of energy which represents the amount of heat energy needed to raise the temperature of a pound of water by one degree Fahrenheit.)

But landed LNG prices in Japan and Korea, reports Hughes, "were estimated at $7.45 per [million BTU] in June 2015, and $7.30 in China."

Meanwhile, North American gas prices could easily rise beyond $6 in the medium term and erase any potential for windfall profits "as sweet spots in U.S. shale gas plays are drilled off and production must come from lower quality, higher cost regions," Hughes reports.

The narrower the gap between B.C. and international prices, "the longer it takes to pay off capital costs before the maximum LNG tax rate is invoked and the smaller the returns to government. Hence the B.C. public absorbs much of the downside risk through reduced revenues," he reports.

Hughes, who lives on Cortes Island, last year challenged oil industry promotional estimates that California had enough shale oil to trigger an economic boom.

Based on his findings, David Hughes, who has mapped many of Canada’s unconventional coal and gas deposits, said that British Columbians should ask their MLAs two basic questions:

"Knowing that fossil fuels are finite and will likely be needed domestically in the future — and come with collateral environmental impacts — why aren’t you developing a long-term energy plan beyond short-term liquidation for potentially illusory financial returns?"

His other key question concerns energy revenues.

"How much will the province actually make from the reduced LNG tax given forseeable LNG prices and when will that money accrue?" — Andrew Nikiforuk

After reviewing the math and real well production data, Hughes concluded that the potential of the Monterey shale had been "highly overstated." The U.S. federal government later downgraded its estimates. (Hughes’s work has been widely quoted in the Economist, Forbes, Bloomberg and the Tyee.) 

‘Extremely aggressive’

According to Hughes, the B.C. government has also diminished the environmental impact of fracking shale gas fields to fill LNG terminals.

"The literature offered by the B.C. government to the public is somewhat disingenuous when it comes to estimating the amount and intensity of land disturbance and water consumption in the development of upstream supply for LNG exports," claims his report.

The government, for example, rarely includes the impact of roads, pipelines and seismic lines when assessing land disturbance by the fracking industry. Yet these account for the majority of the land disturbance — the growth in wells, roads, and pipelines could extend across a 17,000 square-kilometre area in northeastern B.C.

"LNG exports would necessitate a major ramp-up in drilling, ranging from 14,200 wells "just to fill one large terminal," claims Hughes, and rise to 37,800 wells to fill the government’s desired scenario of five terminals by 2040.

Land fragmentation by the oil and gas industry has already endangered woodland caribou in the region.  

The water impacts could also be significant. B.C.’s hydraulic fracturing industry uses 25.6 million gallons a well to crack rock in the Horn River shale, and 3.5 million gallons for the Montney shale. (Conventional gas wells consume much less water.)

To feed five liquefied natural gas terminals, the hydraulic fracturing industry would require 55 million cubic metres of water per year by 2021. According to Hughes, that "is equivalent to 22,000 Olympic-sized swimming pools, or roughly half the consumption rate of the cities of Vancouver or Calgary."

"By any measure, the LNG exports planned by the B.C. government are extremely aggressive, and they are based on tenuous assumptions of available gas resources and the ability of the industry to ramp up and sustain production at the levels required," concludes Hughes.

Better than coal?

The B.C. government has long contended in fact sheets distributed to the province’s high schools that exporting "clean" natural gas to China would reduce the use of dirty coal and therefore reduce greenhouse gas emissions.

But the fact sheets are based on questionable numbers, Hughes argues. For example, the 1.5 per cent methane leakage rate from shale gas fields cited by the government is an underestimation, he says. The U.S. Environmental Protection Agency now uses a leakage rate of three per cent.

Using the three per cent figure on methane leakage, "burning imported B.C. LNG in China would produce 27 per cent more greenhouse gas emissions from the various processes in the LNG supply chain on a 20-year time frame," Hughes claims.

As a consequence, he reports, "building modern coal plants in China is likely to be superior on a 20-year timeline to building new gas plants to burn imported B.C. LNG."

Hughes’s report, funded by the Vancouver Foundation and the Canadian Centre for Policy Alternatives, echoes the findings of a recent study on natural gas extraction in Canada by the Oxford Institute for Energy Studies.

It found that the window for exporting gas to Asia has closed for at least a decade due to global price volatility and fierce global competition.

Asian firms investing in LNG terminals, pipelines, and the fracturing of shale formations face considerable risks, because "long-term supplies of gas at low prices are by no means assured, hence neither are the profits necessary to reimburse the very large capital investments required," Hughes says.

It costs about $10 billion to build a liquefied natural gas terminal.

*Story corrected May 26 at 9:50 a.m. A previous version of this story incorrectly identified the number of National Energy Board approved licenses.