A Year of LNG Royalties/Taxes from a Single Pipeline Could Pay for …

Sitting on top of one of the world’s largest and richest natural resource warehouses is turning into quite a disconcerting distraction. While much of Canada’s population – the heavily urban […]

Sitting on top of one of the world’s largest and richest natural resource warehouses is turning into quite a disconcerting distraction. While much of Canada’s population – the heavily urban part for whom “rural” means Whistler, Muskoka, or Mont Tremblant – likes to view the country as something more sophisticated and tech-y, the fact remains that the country is nearly 10 million square kilometres filled with globally-critical raw materials/minerals/food/energy, and only 40 million people. Making these resources available to a world that is desperately in need is, by pretty much any measure, a good thing.

Not by every measure though. Consider the “intersectionality” of politics and modern, teenager-led energy thinking. Canada’s leadership team recently told a hungry, cold, and shivering Germany that our country could not supply it with LNG because there “was no business case” for exporting the stuff, and that we’d get them green hydrogen, someday. “Huh?” said Germany. “Huh?” said all the countries in a fruitless bidding war with Germany for said fuel.

To clear up any confusion, here are a few numerical observations to show what Canada is missing out on by not exporting LNG, and that the economic case for it is so big as to be cartoonish.

Let’s take one pipeline under construction to supply a few terminals of the nearly two dozen that were initially proposed a decade or two ago. Coastal GasLink is a huge pipeline being build across British Columbia that will haul up to 5 billion cubic feet per day (bcf/d) of natural gas for export as LNG. Initial liquefaction terminals at the coast will initially not be ready to take 5 bcf/d immediately, but that will change rapidly based on the world’s massive demand for LNG.

So, what would such a level of LNG exports do? Better sit down…

I calculated what that gas would be worth in Asia (using Japanese LNG pricing) over the past 12 months compared to the homegrown AECO price, less estimated liquefaction/transport cost (I used $4 US/mmbtu fairly bloated but erring on the side of cost overstatement – you’ll see why; no need to fudge anything), and a TC Energy 25-cent per GJ toll. The difference in proceeds is a net revenue gain for Canadian producers, and the governments’ take was assumed in two simplistic ways: a 30 percent royalty on the incremental revenue (high prices fetch high royalty rates, and again being conservative as the top royalty rate is 35 percent), and a 25 percent income tax (since producers would rapidly burn through any tax pools at these prices and quickly become fully taxable).

The Japanese index price over the past 12 months averaged $33.89 US/mmbtu, which at the past year’s average FX rate works out to $38.69 Canadian per GJ. AECO, net of transport cost, averaged $4.68/GJ.

Taking this price differential to 5 bcf/d of gas nets a gain to Canada of, are you sitting down yet, $5 billion – per month. Part of that gain would go to governments as royalties and taxes as outlined above to the tune of…$2.8 billion. Per month.

What would that buy, for the good of the nation?

At $2 billion per mega-hospital in a major Canadian city (based on examples in WindsorCalgary, and Vancouver), about 1 mega-hospital and a handful of smaller-center hospitals – per month. Canada could hire, at $120,000 per all-in cost with salary/benefits, about 23,000 nurses – per month.

Want to build low-income housing? Making a sizeable assumption of a price of $400,000 per housing unit – hardly a mud hut – Canada could build about 7,000 units – per month.

Hey Ottawa, you know how much you want to provide clean drinking water to every First Nation reserve in Canada? On the federal government website is a description of the current (-ish, 2019-20) federal plans to spend “$605.6 million over 4 years, starting in 2021 and 2021 and $184.9 million each year after” to improve FN water supplies.

One month’s worth of governmental LNG take would quadruple Ottawa’s four-year spending plan.

On top of that, the cash flow that remains in the hands of Canadian producers – about $2.2 billion (per month) would provide an incredible amount of dividends and re-investment capital for all the green energy initiatives being expected. Imagine the boost to “new energy” initiatives when all that extra cash flow can’t be allocated back to oil/gas drilling.

It could be even more spectacular – the LNG price in Europe was far higher than the Japanese index, which is why all that gas went to Europe so fast at the expense of Asia. Even at a slightly higher transport cost to Europe from west coast Canada, the haul would have been much larger selling to Europe. Maybe another 5,000 nurses per month in the shopping cart.

We in the energy world understand that the narrative runs counter to these stats though, which is why Canada has a Greenpeace hero in cabinet and wouldn’t let an oil/gas person work in the cafeteria. But the days of anti-hydrocarbon nonsense are numbered.

The hydrocarbon-hating media has had its way for too long, to the point that the arguments in favour of a rapid shift from hydrocarbons now sound like gibberish. Bloomberg author Stephen Stapczynski provides a case in point, in a typical Bloombergian attempt to validate the notion that hydrocarbons are yesterday’s fuel: “Natural gas demand growth is already slowing in the world’s poorest countries.” That’s a fairly typical statement about the apparently dwindling need for hydrocarbons. Yet within the same tweet, he points out that “Pakistan and Bangladesh can no longer afford the fuel. But they aren’t replacing it with renewables — instead, they’re triggering blackouts and industrial outages.”

A hydrocarbon shortage, in a world that is desperately bidding for every cargo of natural gas, somehow morphs into a “demand peak” simply because these poor countries are outbid for the stuff by rich Europeans. That, people, is nasty stuff.

In July, Pakistan laid out a $1 billion LNG purchase tender, and did not receive a single offer of supply. And that was the fourth time that happened in a month. Quite an interesting lab experiment that would be – let’s tape Bloomberg reporters’ mouths shut for a few weeks then muse to the world about their slowing food demand. Science!

Maybe “the climate” would love the LNG also. Five billion cubic feet of gas used to generate power is roughly equivalent to the CO2 emissions of 310,000 tons of coal (US EPA calculator) burned or about 1.3 percent of global coal consumption in a day.

To climate emergency adherents, the above analysis is moot; those that want to overhaul the world’s fuel system rapidly will not hear anything at all about any hydrocarbon benefits.

While this climate army appears to rule the world based on the media and our politicians’ attitudes, they really don’t. Consumers do. Consumers consistently, in poll after poll, state clearly what is important to them – the cost of living, health care, security, and, at a rapidly accelerating rate, energy security.

While the benefits of LNG may seem obvious to anyone that understands energy, it is not always so when disinformation campaigns tell the opposite. And no bigger disinformation campaign exists than the one to paint hydrocarbons as a problem without a single solitary mention of the overwhelming benefits those fuels provide. (It does not help when the grand patriarch of hydrocarbons, ExxonMobil, takes to the airwaves to say they are helping the average American weather massive inflation/huge utility bills by pointing out their rising dividend levels. Check in with anyone living paycheque to paycheque – of which there are countless millions – and ask if they are thrilled with anyone’s dividend policy. It will be a short conversation.)

On the most macro level, here’s the state of the global union: Economies are teetering as central banks try to fight inflation with higher interest rates, though that recipe made sense when economies were booming, not at risk of imploding. Their tightrope walk is unimaginable. Meanwhile Russia is oh-so-close from starting WWIII, and the west won’t back down. China is looking to retake Taiwan, and the west won’t ignore that either.

Fifteen years of ridiculously low interest rates fuelled an unparalleled economic expansion in not-always-wise ways. A half decade of hydrocarbon underinvestment, due to lower commodity prices and open government antagonism, have left the world short of fuel. Let’s spell that out for bystanders: running out of fuel is about as bad as it gets.

Tell your friends, tell your neightbours, tell your enemies: Voters have to decide – is dealing with a “climate emergency” their priority? OK then, just know that a path to quick (net zero 2050) emissions reduction entails massive human suffering on a global scale. Any impediment at all to the growth of the LNG industry can be seen as nothing other than a conscious move to keep fuel from a world that desperately needs it..

If voters decide they’d rather have reliable fuel and food and heat, and they’d like the rest of the world to join them in that state, then stop trying to kill the existing system by demonization, de-financing, demoralizing and uttering both veiled and not-veiled death threats.

It’s up to all of us, at the ballot box.


Terry Etam is a columnist with the BOE Report, a leading energy industry newsletter based in Calgary.  He is the author of The End of Fossil Fuel Insanity.   You can watch his Policy on the Frontier session from May 5, 2022 here.



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