Finally, Canada scores its LNG pay day

Via Reuters:

A massive liquefied natural gas (LNG) export project in Canada has been given the final go-ahead by project partners, LNG Canada said on Tuesday, making it the first major new project for the fuel to win approval in recent years.

First gas from the project is expected before 2025, aiming to feed an expected surge in demand for the cleaner, super-chilled fuel from hungry Asian buyers, mainly China.

LNG Canada is the single largest private sector investment project in Canadian history, Prime Minister Justin Trudeau said in a statement issued by LNG Canada. Overall investment for the whole project wasn’t disclosed in statements on Tuesday, but was previously put at about C$40 billion ($31 billion).

…In its own statement, Mitsubishi said the total estimated development cost of the planned Kitimat LNG plant is about $14 billion. The cost for the liquefaction plant and a 670 kilometre pipeline to connect gas to the plant will exceed 2 trillion yen ($17.6 billion), a company official said.

Shell said the project will initially export LNG from two processing units or trains totalling 14 million tonnes per annum (mtpa). The project may add two more trains totalling 14 million tpa, Mitsubishi said, adding the project will diversify its LNG supply portfolio.

Canada has a domestic reservation policy so it will enjoy exports without exploding its local prices. Lot’s more where that came from:

This is good news for Australia. It means lower regional prices than otherwise to drop the Aussie gas price and decreases the likelihood of more LNG extraction investment here.

As we know, owing to its self-destructive domestic reservation regime, Australia is better off when the gas price falls, as modelling by Victoria University showed clearly:

Construction of the new LNG facilities stimulates national employment, but when building is complete, the direct stimulus ends. In the long-run, the new LNG production has a negligible impact on employment, but lowers the real wage rate.

The explanation of macro effects begins with the impacts on the national labour market. Figure 2 shows percentage deviations away from base case values in national employment (persons employed) and in the national real wage rate.

The LNG projects are expected to increase real GDP.

Figure 3 shows percentage deviations away from base case values in real GDP. The solid line shows the overall impacts. Initially, because of the LNG construction real GDP increases by around 0.3 per cent relative to its base case level (i.e., its level without the new LNG projects). This increase dissipates over time, with the long-run impact being an increase of a little less than 0.2 per cent.

The outcomes for real GDP reflect the balance of two offsetting forces. The expansion in LNG exports at the high global price results in a terms-of-trade increase for the economy. This tends to reduce the real cost of capital, leading to increased capital and increased real GDP. We call this the quantity effect. It is shown in Figure 3 by the upper dashed line. By 2020, the quantity effect adds around 0.8 per cent to real GDP. The annual increment persists thereafter.

Offsetting this, though, is the increase in gas prices for domestic use. The increase gas price allows for larger than normal profit for the local gas producers, but it also raises the cost of production for gas-using industries. Many of these industries cannot pass on these increases, and so cut production. Thus for these industries the increase in cost of gas means reduced production, employment and capital utilisation, resulting in a loss of real GDP for the economy generally. In Figure 3, this adverse price effects is shown by the lower dashed line. By 2020, the price effect subtracts around 0.6 per cent from real GDP.

Low-price (Baseline) compared to full-price (Baseline)

There is some uncertainty about the future international LNG price. The price assumption for the full-price (Baseline) is shown in Figure 1. To gauge the sensitivity of the modelling to changes in that assumption, we have simulated an alternative Baseline in which the price rises from the current average price of $4.50 per Gj to $7.75 per Gj, which is half the increase assumed in the full-price (baseline). Figure 7 shows percentage deviations in real GDP implied in both simulations. In the years to 2018, the absolute difference in results is relatively small, with the full-price (baseline) being less stimulatory than the low price (Baseline). The difference is magnified in the long-run. Roughly, with half the price increase, we get nearly twice the increase in real GDP.

This rule follows for most of the other results. For the long-run, in the low price (Baseline) scenario relative to the full-price (Baseline) scenario the sign of the deviations is the same but the magnitude of the deviations is roughly doubled.

Go Canadia!