Liquified Natural Gas: Dream Fuel or Pipe Dream?

Facts about natural gas as a "bridge fuel"
Natural gas is proposed as a "bridge fuel" to mitigate climate change in the short term, but methane's global warming potential as well as methane leaks in natural gas systems problematize this proposal.

Despite the social, economic and environmental implications of the Liquified Natural Gas (LNG) Canada project, the BC provincial government continues to show support for the project and for a wider expansion of the industry in general.

For this support to be justified, several aspirational and difficult conditions would need to be met, suggest graduate students Mauricio Carvallo Aceves (IRES), Nigel C. Deans (IRES), Cristian Hernandez (UBC Graduate Program in Science and Technology Studies), and Muhyee Nyera Bakini (UBC School of Public Policy and Global Affairs).

These conditions are:

  • an effective social license to ensure a productive and respectful relationship with relevant First Nations groups;
  • technologies and measures to ensure GHG emissions savings and the control of fugitive methane emissions;
  • And commitments from countries in the Asia-Pacific target market to displace high-emission coal with Canadian LNG.

In a 2021 course report, the graduate students analyze how Canada, and more specifically the province of British Columbia, have pushed for the development of LNG infrastructure. They focus on the implications of the LNG Canada project at Kitimat, BC, presenting the potential obstacles, including social acceptance, economic performance, and environmental impact, as well as current and future uncertainties in each of these areas. Based on this information, they present final policy recommendations stating the conditions under which continued development of future LNG projects in BC could be enabled.

A summary of their findings is found below.

The views expressed in this article are not necessarily those of UBC IRES or other UBC departments.

Natural gas (NG) has gained global traction in recent years as a potential “bridge fuel” in the transition towards renewable energy systems and decarbonization. It is seen by some as an alternative to coal given that the burning of NG releases significantly less CO2 and other greenhouse gases and air pollutants than coal. To transport the gas by sea, it must be turned into a liquid by cooling it to a temperature of -162 °C, through an energy-intensive process called liquefaction. It is this process that allows Liquified Natural Gas (LNG) to be stored and transported via boat carriers.

Canada boasts significant NG reserves, is better located than some competitors to supply markets in the Asia-Pacific region and presents a stable socio-economic context for investors. This rationale led to the development of the LNG Canada project (helmed by five overseas global energy companies). Located at Kitimat, BC, the project is currently under construction, slated to begin operations in 2025. At around $40 billion it is the largest private investment in Canadian history. Beyond the on-site facilities for liquefaction, storage, and shipping, additional infrastructure projects are needed for the upstream process, most notably the 670 km Coastal GasLink pipeline (crossing the province through both public and First Nations lands), and a new 50 km transmission line to connect the facilities to the BC Hydro electrical grid.

BC Hydro argues that existing capacity is sufficient to meet roughly 20% of the project’s demand, with the rest of the electricity being generated through turbines powered by combusting the gas itself. Decreasing the emissions associated with this step would require additional renewable energy from the public grid, driving demand for new infrastructure such as the Site C dam (also currently under construction).

Both the federal and provincial government have announced measurers to support the LNG industry. At a federal level, the government has pledged $220 million for the purchase of high efficiency gas turbines and $680 million for the electrification of the LNG industry. Provincially, several mechanisms have been brought forward, including:

  • Access to the subsidized “industrial” energy rates, at roughly half the costs of production;
  • Rebates on the provincial carbon tax. As BC increases the carbon tax from $ 30 to $ 50, LNG Canada will continue to pay the previous price;
  • Implementation of tax-deferral mechanisms to spread the upfront costs of construction for up to 20 years.
  • Ability to claim tax credits associated with the cost of gas that would allow a reduction of the corporate income tax from 12% to 9%;
  • Reduced royalty payments to the province through subsides aimed at offsetting costs of drilling and through long-term agreements with companies, establishing a fixed royalty rates as a proportion of market value.

Although work on the Kitimat LNG Canada facilities and related infrastructure is nearing completion, there are concerns about the economic viability of Canadian LNG on the global market. While the Asia-Pacific region is expected to move away from coal, there is no guarantee that it will be replaced by LNG. High capital costs and the fact that prices in destination countries are linked to oil are significant challenges for Canadian competitiveness. An existing supply glut has been worsened by a slump in energy demand following the COVID-19 pandemic, driving prices well below an economic break-even point. Nevertheless, the provincial government has pushed on and provided significant support in the form of subsidies for electricity prices, tax deferrals, and royalty credits. Despite the high cost of these measures to British Columbians, the impact of these measures on production costs is expected to be small, leaving the industry and province relying on an eventual increase in prices for LNG to become competitive.

Environmental, health, and safety concerns, too, may outweigh the advantages of an uncertain displacement of coal. The extraction, processing, transport by pipeline, liquefaction, and shipping of NG, and subsequent shipping are energy intensive activities that add to the “carbon cost” of LNG. NG itself is mostly methane, a potent greenhouse gas, and leakages throughout the system could potentially offset the benefits of displacing coal. In the context of Canada’s commitments to the Paris agreement and its updated climate policy, the cost of addressing these concerns may prove prohibitive to further development of the industry in BC. As such, it may be premature to draw conclusions on the potential of NG for global reduction in GHG emissions.

The construction of the LNG Canada project, and more specifically the Coastal Gaslink pipeline, has also had significant social impacts, most notably the existing conflict with the Wet’suwet’en, one of the First Nations whose land is crossed by the project. At the core of these issues are disputes over jurisdictional authority within the affected Indigenous communities, as well as legal conflicts with the Crown regarding Indigenous rights, title, and law. Disagreement exists between proponents of the project who seek opportunities for critical economic development, and opponents who advocate for the legal recognition of pre-colonial Indigenous stewardship of unceded Wet’suwet’en land. The conflict eventually led to a series of protests against the project and railway blockades. An injunction from the BC Supreme Court, enforced by the Royal Canadian Mounted Police, finally allowed the project to move forward, damaging perception of Canada’s commitment to reconciliation and climate justice. For many, the Coastal GasLink pipeline has come to represent Canada’s fraught relationship with First Nations and the failures of reconciliation.

Yet the government’s support for the industry remains strong, as demonstrated by a renewed commitment to LNG in the platforms of all main political parties in the 2020 provincial elections. This support is based on continued optimism that demand for Canadian LNG will continue to grow to displace coal, and that the economic opportunity given the country’s vast reserves is too good to pass. The government seems to have gradually introduced policy measures and related infrastructure projects, creating an environment friendly to the gas industry, incentivising future investments. Notably, the global context related to supply, demand, and technological alternatives has changed over the years since the government started to set the stage for LNG development, and it will likely continue to do so in the coming decades during which the projects are expected to operate.

For this support to be justified, several conditions would need to be met. First, in order to ensure that there are GHG emissions savings, significant developments in carbon capture and storage (CCS) technologies would be needed, as well as effective measures to minimize and control fugitive methane emissions.

Additionally, target countries would need to commit to reduce and displace coal with LNG. For LNG to remain a competitive alternative, the development of renewable energy systems (RES) would need to experience slower than historical growth, and international regulations would be required to establish a global price.

Finally, an effective social license would need to be established and maintained to ensure a productive and respectful relationship with relevant First Nations groups. Different measures could be taken, such as restricting the use of commercial law to interpret Aboriginal rights, improving transparency of resource contracts, developing alternative dispute resolution processes to avoid reliance on injunctions, replacing or modernizing the Indian Act, and affirming Indigenous Law, seeking integration with the Canadian legal system through a nation-to-nation relationship.

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When re-using this resource, please attribute as follows: Developed by Mauricio Carvallo Aceves, Nigel C. Deans, Cristian Hernandez and Muhyee Nyera Bakini at the University of British Columbia.