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More U.S. LNG exports mean B.C. is in a race against the clock: Erica Alini

Developing B.C.’s liquid natural gas (LNG) export potential was a big part of Premier Christy Clark’s electoral pledge on the economy. And the promise of being a good steward of the province’s economy, every pundit agrees, was a big part of the reason why she was able to deliver a resounding electoral defeat to the punditry’s favourite, the NDP’s Adrian Dix.

But keeping the LNG vow will be no easy task for Clark. The competition to sell the stuff to energy-starved countries like Japan, South Korea, China and, increasingly, India is fierce. There’s Australia, for one, which is roughly as far away from Asia as Canada’s West Coast and which is already exporting. There are also old hands like Qatar and Malaysia.

And last week the U.S. Department of Energy (DOE) gave the green light for LNG exports to Asia to Freeport LNG’s terminal in Quintana Island, Texas, making that competition tighter still. It was only the second such permit DOE has given out so far and the first in nearly two years, but it does pose a serious challenge to B.C., especially if more approvals will follow. The Pacific Basin “could well be oversupplied sooner than people in the marketplace generally think,” a recent report by Citi Research warned.

Still, “B.C. is very much in the race,” TD economist Leslie Preston told Canadian Business. The Asian market is growing fast, and some estimate it will double in the next few years. Also, prospective buyers have an interest in diversifying their supply, so it’s not a winner-take-all situation. For example, Japan, which lost a sizable slice of its domestic energy production capacity in the Fukushima nuclear disaster of March 2011, has been signing a flurry of contracts and leading exploratory talks on both sides of the border. Even with the Freeport terminal approval, it seems, there’s room for Canada.

The crucial question is how many more permits DOE might dole out, and how quickly. Both the U.S. and Canada would be competing to export shale gas, a type of natural gas trapped in underground rock formations that can be recovered through horizontal drilling and hydraulic fracturing. And thanks to the recent supply surge, North America’s natural gas is currently fetching much lower prices than the ones Asian and European importers are accustomed too, which are usually pegged to oil rates.

The U.S.’s shale gas industry, though, is more developed than Canada’s, and much of the infrastructure needed to deep-freeze the gas and load it in liquid form onto tanker ships already exists. Back when Uncle Sam thought it would have to import increasing volumes of natural gas from abroad (which was only a few years ago), it built a number of LNG import terminals on the Gulf Coast, including the Freeport facility and the only other one with the same export permit, the Cheniere Energy’s Sabine Pass Liquefaction project in Louisiana. Retrofitting those for export purposes isn’t exactly a piece of cake, but it’s faster and cheaper than building new terminals from the ground up, as B.C. has to do.

Canada’s westernmost province would also have to build new pipelines to connect its shale plays to its planned LNG terminals, mostly clustered around the ports of Prince Rupert and Kitimat. That will likely mean higher fixed-costs for B.C. producers, according to Moody’s Investors Service.

Still, Canada’s unquestionable edge is geography: A tanker takes nine to ten days to reach Japan from Northeastern B.C., says Preston, whereas from the Gulf Coast it takes about three weeks.

Another advantage for B.C.’s natural gas exporters is supportive lawmakers and generally favourable attitudes among the public. Both the provincial and federal governments have pledged to secure an LNG niche for B.C. in Asia, and British Columbians, including First Nations have been a lot friendlier to natural gas than to Alberta’s oilsands. LNG is as clean as a fossil fuel can get and would come from the province’s own underground.

South of the border, by contrast, the White House seems to be undecided about whether or not ramping up LNG exports is a good thing. The country’s manufacturers vehemently opposed the idea, which they fear will put an end to the extraordinarily low domestic natural gas price they’ve enjoyed for the past few years. There are 19 existing and planned terminals awaiting an export permit, according to the Wall Street Journal, one of which has been waiting for over two years.

And even the OK to Freeport came with big caveats. “Agency intervention may be necessary to protect the public in the event there is insufficient domestic natural gas for domestic use,” the DOE approval reads, adding that “There may be other circumstances as well that cannot be foreseen that would require agency action.” That must sound eery to prospective foreign buyers.

But the B.C. natural gas industry is having to jump through its fare share of bureaucratic hoops too. In a 2012 study, Gerry Angevine and Vanadis Oviedo of the Fraser Institute described “outdated regulatory processes and procedures, unnecessary duplication of federal and provincial government project reviews, and an unwieldy environmental review process.” So far, only three of the projects proposed on B.C.’s West Coast have received an export permit.

Ottawa and Victoria might wish to up their ante.

Erica Alini is a California-based reporter and a regular contributor to CanadianBusiness.com, where she covers the U.S. economy. Follow her on Twitter: @ealini.