Howestreet.com - the source for market opinions

ALWAYS CONSULT YOUR INVESTMENT PROFESSIONAL BEFORE MAKING ANY INVESTMENT DECISION

November 14, 2018 | LNG: Measuring its Impact on the British Columbia Economy

Stewart Muir is founder and executive director of the Resource Works Society, a Vancouver-based group open to participation by British Columbians from all walks of life who are concerned about their future economic opportunities. He is an author, journalist and historian with experience on three continents including a financial editor of The Vancouver Sun responsible for mining and markets coverage. Since Resource Works was established in 2014, the group has gained international recognition for its practical approach to the public challenges of responsible natural resource development and use.

Natural gas, liquefied so it can be shipped to distant markets, will be produced by the LNG Canada terminal in north west British Columbia. This new study sets out to find out what impact is created by building the unprecedented, $40 billion project.

HIGH_IMPACT_(1).png

Philip Cross, Resource Works senior research fellow and 34-year veteran of Statistics Canada specializing in macroeconomics, has shared the following paper analyzing the impacts of the liquefied natural gas (LNG) projects in British Columbia. He also updates the Resource Works 2014 High Impact study that looked more generally at the impact of resource sectors in the province.

 

pcross9662_(1).jpg

Executive Summary

LNG projects under development in B.C. by LNG Canada and Woodfibre LNG will reach throughout the province’s entire economy – right into downtown Vancouver and Victoria.

This paper updates a Resource Works study on the importance of natural resources to BC’s economy completed four years ago, now with a particular focus on the impact of the recently-announced LNG Canada project and the Woodfibre project.

The recently-announced LNG Canada project demonstrates that large gains in resource output are not hypothetical. The gains will stem from investments in what the natural gas industry calls the upstream, the midstream, and the downstream parts of the business – where the gas originates, the pipelines used to move it, and the coastal terminals where it is prepared for export.

Building a pipeline from Dawson Creek to Kitimat will allow Canada to increase its natural gas production by about 10 per cent, boosting income by at least $519 million annually at current natural gas prices. Further, we estimate RGE Group’s planned Woodfibre natural gas terminal near Squamish, scheduled for completion in 2023, will generate an additional $44.5 million in income annually. While not yet quantifiable, as sufficient details have not been made public, we should also keep in mind there will be one-time benefits generated by the actual construction of the pipelines, from the construction of the Kitimat terminal, and from anticipated higher prices for LNG that will come with increased access to the Asian market.

BC’s natural resources generate $24.2 billion of income in 2014, the most recent year for which Statistics Canada data is available, up approximately 10 percent from $21.4 billion in 2010, which we studied in 2014.

BC’s resource industries continued to expand and deepen their connection to the rest of the economy in that four-year period. This increased interplay with other sectors can be seen in the fact this 10 percent increase in resource output generated $5.3 billion of GDP in 2014, 18 percent more than in 2010, according to Statistics Canada. BC’s resource industries created almost 39,000 new jobs in that four-year period.

 

Impact of the LNG Canada Project

The long-awaited announcement that a consortium is proceeding with the development of an LNG project in British Columbia promises considerable economic benefits to BC and Canada. In fact, just building the pipeline alone and the ensuing 10 percent boost to natural gas production will have a greater impact than the 10 percent increase in all of BC’s natural resource output from 2010 through 2014 discussed in the executive summary. This does not account for the additional benefit of other project elements.

This section of the paper documents the magnitude of these benefits, both directly in the natural gas industry and the spin-offs from more investment spending and jobs for other sectors of the economy. This is done using a simulation by Statistics Canada of the impact of higher natural gas output and building the Coastal GasLink natural gas pipeline from Dawson Creek to Kitimat.

The simulation is based on a limited assessment of the benefits of the LNG project. This includes investing $6.2 billion in a natural gas pipeline between Dawson Creek that results in a permanent 10 percent increase in natural gas production to meet Asian demand. At the moment, these are the only quantifiable benefits of the project. There will be other benefits, notably from the construction of an LNG terminal in Kitimat and higher prices for BC’s natural gas when exported to Asia. However, since these details are not yet quantifiable, we do not speculate on their benefit but stick to the certainty of building a pipeline and more natural gas output valued at prices currently prevailing in North America. It is worth keeping in mind, however, that those will also generate benefits.

Total exports from the Kitimat terminal will amount to 14 million tonnes per annum. If all of this came from new production of natural gas, the value of exports would be $5.863 billion (using the 2014 average natural gas price of $5.02 in Canadian dollars). However, industry sources expect new production to rise by only 10 percent, as most of the increase in exports to Asia will be diverted from exports to the United States. A 10 percent boost to BC’s natural gas production generates $519 million of income every year for Canada’s GDP. We anticipate higher prices will be gained from diverting gas to Asia, but are not yet able to quantify that benefit. When additional project details are announced it will be worth revisiting this analysis to include those inputs.

While the benefits related directly to building a pipeline are a one-time event, higher natural gas output is a recurring benefit generating at least $5.2 billion over 10 years. The actual benefit will likely be higher, as this does not account for the probability of receiving higher prices in the Asian market. Higher prices are likely, since they are a important motivation for undertaking the expense of building a new pipeline and terminal instead of shipping more product on existing pipelines to markets within North America. This is why the industry expects most of the increase in the volume of exports to Asia to be offset by lower export volumes to the US, with a net increase of 10 percent in BC natural gas output.

Of the $519 million in higher annual income from natural gas output, nearly 80 percent (or $419 million) will remain in the BC economy. Just over three-quarters of this benefit, or $321 million, reflects higher production of natural gas. The other $98 million flows to other industries in BC, mostly services. Services benefit from increased demand for inputs from various industries needed to boost natural gas production, including everything from engineering to accounting services, as well as more consumer spending from the jobs and incomes that natural gas production creates. Alberta and Ontario garner most of the benefit to other provinces; Alberta’s natural gas production benefits from higher demand from BC, while Ontario supplies many of the business and financial services needed as inputs into designing and financing more natural gas production.

The importance of higher prices is easily demonstrated. If the increase in natural gas exports is limited to a 10 percent net gain in export volumes because most exports to Asia are simply a diversion of US exports at the North American price, the net gain to Canada is $519 million a year, still a significant sum. However, if higher prices are obtained, then the gains increase sharply because higher prices apply not just to the increase in net exports but to all the exports diverted from the US. For example, if the prevailing price for exports to Asia was $10 instead of the price of $5.02 posted in 2014, the net gain is $5.804 billion instead of $519 million. This underscores the importance of reaching new Asian markets where prices are considerably higher than in North America.

 

Impact of the Woodfibre LNG Project

Soon after the announcement of the Coastal GasLink project, the Woodfibre LNG project was approved by RGE Group. By building a 47 kilometre pipeline to an LNG terminal near Squamish, it increases Canadian natural gas exports to Asia by 2.1 million tonnes per annum. As with the Coastal GasLink project, we assume most exports to Asia will be diverted from the US, with a net increase in BC natural gas output of 10 percent. Simulating the impact of a 10 percent increase in natural gas production at an average of $5.02 per MMBTU (the average price for natural gas prevailing in 2014), the total value to Canada would be $44.5 million a year. Construction is expected to begin in early 2019, involving $1.6 billion invested in the project. However, since the details of construction have not yet been finalized, the impact of this capital spending for a pipeline and the terminal are not included in the simulation results.

As with the LNG Canada project, the largest benefit would come from higher prices for all exports to Asia. If all the 2.1 million tonnes of natural gas exports through Woodfibre received a price of $10 instead of $5.02, the net increase in exports would be $498.6 million.

 

BC’s Natural Resource Sector Continues to Grow

The LNG investments detailed above are occurring in the context of BC’s overall resource economy, so it is important we detail that context here.

In absolute terms, the natural resource sector in BC generated $24.2 billion of GDP in BC in 2014, up from $21.4 billion in 2010. Resources accounted for 10.8 percent of BC’s GDP in 2014, slightly less than 11.2 percent in 2010. This dip reflects how growth in natural resources failed to keep up with prices in BC’s housing industry.[1]

The growth of the resource sector in absolute terms and an increase in its linkages with the rest of the economy mean that a 10 percent boost in resource sector output added $5.3 billion to Canada’s overall GDP in 2014, more than the $4.5 billion a 10 percent hike in resource output generated in 2010. These increases include both the baseline boost to resource output, higher demand for resource industries to meet this growth (such as more utility power and transportation to support higher mining output) and the consumer spending generated by higher incomes earned from more production.

Comparing the results for 2010 and 2014 reveals a number of structural shifts occurred in BC’s resource sector over the four years since the original study. First, the natural resource sector has increased its linkages to the rest of the BC economy, raising its multiplier for every $1 of higher output from 2.12 to 2.21. In 2010, the natural resource sector accounted for 47.3 percent of the increase in output. In 2014, the resource sector contributed only 45.7 percent, implying the benefits accruing to the non-resource sector of BC’s economy rose from 52.7 percent to 54.3 percent. This increase represents $3.795 billion of higher incomes earned by the rest of BC’s economy. Overall, the 10 percent increase in natural resource output created 38,835 more jobs, up from 37,177 in 2010. The bulk of these jobs were full-time, high-paying jobs in the primary and manufacturing industries.

Table 1 Total Increase in GDP from 10% more output in the BC resource sector, by province, 2014 (000$)

Total Canada$5,347,710
By Province
BC$4,378,625
Alberta$408,071
Ontario$360,462
Quebec$110,119
Saskatchewan$39,601
Manitoba$29,922
New Brunswick$7,531
Nova Scotia$5,853
North$3,501
Newfoundland$3,414
PEI$611

Table 2 Total Increase in GDP from 10% more output in the BC resource sector, by industry, 2014 (000$)

By Industry
Mining$1,190,069
Manufacturing$827,152
FIRE$690,363
Utilities$581,554
Transportation$345,489
Forestry$344,483
Trade$333,738
Professional Service$188,597
Agriculture$173,412
Other primary$152,159
Business Service$112,783
Construction$103,198
Info & culture$78,060
Other services$56,916
Accomod&food$45,248
Public Admin$40,338
Health$37,939
Education$23,030
Art & recreation$12,823

Along with more linkages to other industries in BC, the resource sector has also increased its linkages to the rest of Canada. In 2010, 15.7 percent of the income generated in BC’s resource sector benefited the rest of Canada. By 2014, this share had increased to 18.1 percent, with Alberta and Ontario the primary recipients. Most of this external demand was for goods, as BC’s natural resource sector purchases most of its financial and business services from Metro Vancouver-based companies.

What drove the increased multiplier effects between the natural resource in BC and the non-resource industries in BC and the rest of Canada over the four years? Some of it reflects increased specialization by firms in the resource sector, which had to find more efficient ways to produce in order to survive and grow in a period of low commodity prices, notably for natural gas. This search will only have intensified after the crash in oil prices, which began late in 2014. As well, the high impact of natural resource activity reflects higher consumer spending by workers in the resource sector, who continue to earn above-average incomes of about $82,823 per employee. It is also possible that firms in BC faced growing supply constraints, notably labour shortages, that forced them to outsource work to other provinces with more excess capacity. This problem likely became more pressing in 2016 and 2017 when BC’s unemployment rate fell below 5.0 percent, the lowest in Canada.

[1] MLS data show housing prices in BC rose 17.1 percent in 2014, while resource GDP was up 13.1 percent.

 

View the powerpoint presentations of the four panelists at the Nov. 14 2018 lunch event where this study was released:

Philip Cross

Matthew Klippenstein

Patricia Mohr

Brian Yu

STAY INFORMED! Receive our Weekly Recap of thought provoking articles, podcasts, and radio delivered to your inbox for FREE! Sign up here for the HoweStreet.com Weekly Recap.

November 14th, 2018

Posted In: Resource Works

Post a Comment:

Your email address will not be published. Required fields are marked *

All Comments are moderated before appearing on the site

*
*

This site uses Akismet to reduce spam. Learn how your comment data is processed.