Pacific Northwest LNG

By: Brian Livingston
A key decision is looming for the federal government in the next few weeks.  The feds have said many times that the environment and the economy both matter, and that one does not have to choose one to the exclusion of the other.  The upcoming decision as to whether to approve or not approve the proposed Pacific Northwest Liquefied Natural Gas (LNG) project will test that statement.

Some background is in order.  In the past ten years, there has been significant development of shale gas in the interior of British Columbia, primarily in a field known as the Montney formation.  The price of natural gas in North America is at rock bottom levels below $2 per thousand cubic feet (MCF), in large part due to shale gas production in the United States.  As a result, the gas industry has sought to create a means for export to the markets of Asia.  Asian markets tend to use natural gas pricing based on the energy equivalent to oil (a ratio of about 6 MCF to one barrel of oil).  Even with the recent drop in oil prices, this implies a price of about $6/MCF for natural gas, or more than three times the current North American price.

The challenge is to get the gas to Asia.  The method to do so is to produce gas from the interior of British Columbia, ship it by pipeline to the Pacific coast, cool it to negative 162 degree Celsius to a liquid state (reducing volume to 1/600 of the gaseous state), and ship the LNG in ships bound for Asia.  A company named Pacific NorthWest LNG Limited Partnership is proposing to construct and operate a Project containing such an LNG facility, located primarily on federal lands and waters approximately 15 km south of Prince Rupert, British Columbia.  At full production, the LNG facility would receive approximately 3.2 billion cubic feet (BCF) per day of natural gas pipelined from the interior of BC, and produce up to 19.2 million tonnes per annum of LNG for over 30 years. The Project would include the construction and operation of a marine terminal for loading LNG on to vessels for export to Pacific Rim markets in Asia.

The British Columbia government has strongly supported the Pacific Northwest LNG Project.  It sees it as a source of jobs for construction and operation, a source of royalties on the natural gas produced from the interior of BC, and a source of tax revenue on the income of the Project.

As with any large project, there is a regulatory review.  In this case, the review is done pursuant to the by the Canadian Environmental Assessment Agency (the Agency) as established by the Canadian Environmental Assessment Act (CEAA).    The original review by the Agency started in April 2013, and concluded in December of 2015.

The Agency also collaborated with the British Columbia requirement for an environmental assessment under BC legislation.  On November 25, 2014, the Government of British Columbia showed its approval of the Project by issuing an Environmental Assessment certificate for the Project.

Although the provincial approval is done, the federal approval process is more involved.  The Agency under CEAA is required to use the information obtained by hearings to assess the Project and determine if it will have any significant adverse environmental effects.  It then must report any such findings to the federal Minister of the Environment and Climate Change.  The Agency issued a draft report for comment on February 10, 2016, with comments due by March 11, 2016.  To date, more than 4,000 comments have been received, both in support of and against the Project.

The draft report dealt with a variety of environmental issues as well as Aboriginal issues.  The proposed Project is on Lelu island, located at the mouth of the Skeena River.  There is significant salmon and other fishing there, along with eelgrass vegetation in the Flora bank located next to Lelu island.  The Project has proposed the construction of a 1.6 km suspension bridge to move the tanker loading dock away from these sensitive environmental areas.  In addition, harbour porpoises are present in the area.

For Aboriginal rights, the draft report concluded that the mitigation measures outlined in the draft report would serve as accommodation for any potential effects on Aboriginal rights.  This conclusion is reached notwithstanding that the Lax Kw’alaams Band has claimed aboriginal title to Lelu Island, occupied the island in the fall of 2015, and rejected a benefits package totaling over $1 billion over a 40 year time period.

There were a variety of environmental issues considered by the draft report.  The draft report states that most of the issues (such as salmon and eelgrass) can be dealt with by appropriate mitigation measures, although a number of the public comments take issue with this.  However, the draft report states that the Project is likely to cause significant adverse environmental effects on harbour porpoises and as a result of increased greenhouse gas (GHG) emissions.

The draft report states that total GHG gas emissions at full operations would be 5.28 million tonnes (MT) CO2 per year. Most emissions are land-based and generated by the compressor drivers for LNG production (4.25 MT of CO2 per year).  The draft report also notes that the GHG emissions from the upstream operations to produce the natural gas (a new requirement for consideration just implemented by the federal government) would be an addition 5 to 8 MT of CO2 per year.  The draft report noted the commitment by the government of Canada to reduce GHG emissions by 200 MT by 2030.

The B.C. government determined that the project would have significant residual adverse effects on GHG emissions, particularly considering the magnitude of the Project’s GHG emissions in relation to B.C.’s reduction targets. The B.C. government, however, determined that the benefits from the Project outweigh the potential significant adverse effect.

In response, Pacific Northwest argued that these amounts were not significant in a global context.  In addition, the use of natural gas in Asia would likely displace coal as a source of energy, thereby reducing global emissions.

A quick review of some of the 4000+ comments shows that many environmental groups have noted these GHG emissions, and strongly urge the federal government to turn down the Pacific Northwest LNG Project to show that the federal government is serious about meeting its GHG emission targets.

Assuming that the final Agency report is similar to the draft report, it will state that the Project will cause two significant adverse environmental effects due to harbour porpoises and increased GHG emissions.  The next steps would be as follows.

The Minister can choose to use the report to either:

(1) make a finding that there is no significant adverse environmental effect, and approve the project, with or without conditions.  This in effect would require the Minister to override the recommendation in the Agency report, or

(2) make a finding that there is a significant adverse environmental effect, and turn the decision over to the federal Cabinet.  This in effect changes the matter from a regulatory matter to a political decision, and a federal one at that, not a provincial political decision.

The federal Cabinet can either decide that

(a) the significant adverse environmental effects are justified in the circumstances and approve the project, or

(b) reject the project.

There are time limits requiring the Minister and the Cabinet to make these decisions, but they can be extended by the Minister or by the Cabinet.  Some media reports (Globe and Mail March 16, 2016) have indicated that the deadline for the Minister’s decision is March 22.  Media reports have also indicated that the Minister may make a finding that there would be a significant adverse environmental effect and therefore refer the matter to the federal Cabinet for final decision.  Late breaking news from March 21 stated that the Minister has given the Agency a three month extension before the Minister has to decide, taking the deadline to about the end of June.

So there we have it.  A political decision for the federal Cabinet, with several potentially sensitive political issues.  If the Cabinet approves the Project, it risks severe blowback from environmental groups (angry that the feds are increasing GHG emissions, not decreasing them), and from Aboriginal groups concerned about Aboriginal issues.  These are two groups that the federal Liberals have been courting in their first 5 months in office.  If the Cabinet rejects the Project, it will anger the BC provincial government, not to mention many truckers in Fort St John who recently staged a large demonstration of 18 wheelers in support of the Project.   The federal government would also have to explain why it is rejecting a $36 billion infrastructure project that does not involve any federal government spending.

Stay tuned to this show.  It is well worth watching.