How a Gulf Island almost became home to B.C.’s first LNG plant

Back in 2008, long before LNG became a soundbite, a few companies began quietly scouting locations for the province's first liquified natural gas plant. Here's the story of the plant that almost ended up in the Gulf Islands

Back in 2008, long before LNG became a soundbite, a few companies began quietly scouting locations for the province’s first liquified natural gas plant. Here’s the story of the plant that almost ended up in the Gulf Islands

Chuck Childress likes to tell people his Texada Island home is protected by three moats: Howe Sound, Jervis Inlet and Malaspina Strait – the three bodies of water that need to be crossed to get there from Vancouver. Like many of the 1,100 residents who call the biggest Gulf Island home, he enjoys the isolation of life on an island that’s a ferry ride away from Powell River and has only a couple of restaurants, a gas station and little else. “Most people move here because it’s affordable paradise and because this is the most pristine Gulf Island,” he says.

Viewed from the seat of a plane overlooking the area, his claim seems preposterous. Huge aggregate quarries scar the north end, like scabs of exposed rock. Further south monstrous BC Hydro power lines rise out of Malaspina Strait like giant-squid tentacles. The lifelines of Vancouver Island power cross the island in a buzz cut through the forest and disappear into the dark waters of the Strait of Georgia. In the same vicinity, below ground, is Terasen Gas’s buried natural-gas pipeline. Old mines litter the island. But on the ground, his claim seems true. More than half the island remains undeveloped. Healthy stands of second-growth forest surround almost all the rural properties. Retirees from Calgary, Vancouver and even Salt Spring Island, attracted by lax building codes and cheap land, are driving a boom on the island; finding a tradesperson is almost impossible. The island’s first million-dollar mansion was just finished. But some fear the idyllic life is in jeopardy, and the culprit is liquid natural gas, a.k.a. LNG.

Texada and Kitimat, near Prince Rupert, are both home to proposals to build LNG-import facilities – a new phenomenon to most of North America. Natural gas, or methane, is the cleanest-burning fossil fuel. It heats our homes and is increasingly being used in power generation as a greener alternative to coal and a chea­per alternative to oil. Western Canada’s Sedimentary Basin, spanning Alberta, Northern B.C. and most of Saskatchewan, has an abundant supply, which for decades has been transported to domestic and U.S. customers through a network of pipelines that spiderweb to almost every corner of the continent.

But that domestic supply can no longer meet increasing North American demand. One solution is to ship the gas by freighter from overseas suppliers, and the only practical way to ship natural gas is to turn it into a liquid by cooling it to -164 degrees Celsius (which also reduces its volume by 600 times). Import hubs then unload the tankers, convert the liquid back to gas and funnel it into pipelines.

Most import facilities include a natural-gas power-generation facility. Not only does a power plant provide a built-in customer for the off-loaded natural gas, the excess heat produced in power generation is used to warm the liquid methane back into a gas before it’s funnelled into pipelines.

Enter Texada and Kitimat. They’re just two of 64 sites proposed for LNG plants across North America, eight in Canada and 10 on the west coast of North America. In July 2007, Surrey-based WestPac LNG Corp. proposed a joint LNG -import facility and natural-gas-powered generator for Kiddie Point on Texada Island. Texada may seem an odd choice, but it’s actually LNG heaven. WestPac can tap into the BC Hydro power lines and Terasen Gas’s natural-gas pipeline to Vancouver Island and the Lower Mainland with a minimum of infrastructure development. The Texada Action Now Community Association (TAN), a group of island residents that bills itself as pro-sustainability (rather than anti-development), greeted the propo­sal with disgust. “People are building their dream homes here,” says Childress, TAN’s chair. “They didn’t move here to be around heavy industrialized development, and that’s the future if the project goes ahead. We don’t like it at all. It doesn’t make sense on a lot of fronts, and we’re going to fight it, and we’re fighting it with the backing of Texada Island.” Kitimat has the opposite problem of WestPac: its proposal is supported locally but faces significant infrastructure hurdles. The two plants represent a combined investment of more than $3 billion. The potential bonanza is fuelled by speculation about future natural-gas demands in North America. The U.S. Department of Energy is forecasting a 20-per-cent increase in natural-gas demand over the next 25 years, driven by demand for more power and cleaner power sources. Fifteen per cent of the natural gas used in the U.S. is already imported, mostly from Canada. By 2030 the proportion of imported natural gas will hit 21 per cent. In Canada natural gas is getting harder to find.The finds are smaller and national demand is growing, especially in Alberta’s booming oil-sands industry, where natural gas is burned to help extract oil from the sand. A supply-and-demand gap will grow, and importing LNG is the obvious way to fill it.

“LNG is inevitable,” says Robb Moss, an energy analyst for Calgary-based Acumen Capital Financial Partners Ltd., an investment bank. “In Canada the exploration costs are skyrocketing, manpower is harder to find and prices are low relative to the cost to drill, so there has been modest exploration for a number of years. Compare that to Qatar, Trinidad and Indonesia, where there’s lots of easily accessible natural gas. The problem there was how to get the gas to a global market, and that’s where LNG comes into play.”

So North America needs to import natural gas, and a quirk of pipeline technology makes B.C. an ideal west-coast import hub. Most pipelines in the U.S. only run one way; LNG unloaded in California can only be used in California. B.C., in contrast, sits at the top of a continent-wide pipeline system; from here, gas can go almost anywhere.

All of a sudden, B.C. looks like LNG Eden, a gateway to Pacific Rim LNG exporters linked into pipelines to all corners of the continent, complete with a business-friendly government. “We probably don’t need LNG in Canada – we have lots of natural gas – but North America does need it,” says Greg Stringham, VP of the Canadian Association of Petroleum Producers (CAPP). He says any B.C. LNG facility is eyeing markets outside the province, predominantly in the U.S. B.C. already produces plenty of gas to fill growth in demand at home.

According to CAPP, of the 2.8 billion cubic feet per day of natural gas produced in B.C. in 2006, 40 per cent went to the U.S. and another 40 per cent went to Alberta, primarily to feed the oil sands. The rest was used inside the province.

“Five years ago, there was a belief natural gas was going to fuel future power supplies, but so far it’s been a lot less than predicted,” Stringham says. “It’s too early to predict how big LNG will get. There’s a lot of uncertainty in Canada and the U.S. over government policy, costs and supply.”

Stringham, like most industry observers, believes that only one or two proposals, in addition to an import facility already under construction in Baja, Mexico, will be built on the West Coast in the next five to 10 years. He expects only one of them to be built in B.C. Of course, proponents for both of B.C.’s proposed import facilities think they should be the one. Kitimat LNG Inc. is the furthest along in the permitting stage and the only permitted LNG facility on the west coast north of Mexico. Kitimat LNG is a private Calgary-based company and a subsidiary of Galveston LNG Inc., a global LNG player also based in Calgary with projects in the Middle East and North America through its subsidiaries.

The province approved its environmental assessment in June 2006, two years after the project was first announced, with the local First Nations and community backing. The plan calls for a $500-million import facility capable of handling one billion cubic feet of natural gas a day, and its backers are negotiating with partners to build a separate power plant capable of producing 200 to 500 megawatts of power. The main prize, say Kitimat promoters, is the Alberta oil sands and its huge demand for natural gas, with other major gas markets coming second. “If you look at the map, it is absolutely pimpled with proposed LNG projects,” says Patti Schom-Moffat, Kitimat LNG ’s communication director. “It’s a race, and, while we didn’t come in as early as we would have liked to, we’re still first.”

But it’s not a sprint; it’s a marathon. To get the gas into the pipeline system, Kitimat LNG needs the proposed $1-billion Pacific Trail Pipelines, a new pipe between Kitimat and Summit Lake, to be permitted and built. The pipeline is a 50-50 joint venture between Galveston LNG and Pacific Northern Gas Ltd., which already operates pipelines in the area. It would allow gas to flow from the coast to Summit Lake, a gas-pipeline hub near Prince George. An environmental assessment application for the pipeline was filed in June 2007. On Texada, WestPac has the infrastructure, but it needs to deal with other problems.

“We’re the right one for B.C.,” says Stu Leson, president of WestPac and a 12-year LNG-industry veteran. “There’s no need to build new infrastructure.” WestPac originally proposed an LNG facility for Prince Rupert.

The idea was to unload the LNG there and then barge it to communities on the coast using Texada Island as a major hub. But early on, WestPac planners realized the economics didn’t work, so on July 31, 2007, the company announced its new plan for Texada Island with an endorsement from Geoff Plant, former provincial attorney general and now a WestPac board member. The $1-billion proposal includes a 500-million-cubic-foot-a-day-capacity LNG import facility and a 600-megawatt power plant to open in 2014, with a proposed second phase to up the power plant to 1,200 megawatts. The power and gas would go to the Lower Mainland and Vancouver Island.

Leson says backers – big institutions and banks – would need to be found for the private company’s project. But convincing the nearby communities that it’s worthwhile will be tough. Eighty-five per cent of Texada residents signed a door-to-door petition objecting to the LNG terminal in a campaign conducted by Texada Action Now volunteers. Leson says there’s more support for the project off the island, although the Comox Strathcona Regional District, across the strait, wrote a letter opposing it.

“We’re confident we can alleviate most of the concerns through education,” he says. “It seems to me WestPac is swimming against the tide,” says Richard Fletcher, TAN’s vice-chair and also a former director of the B.C. Utilities Commission. “Their project fails on political, economic and environmental grounds.”

The whole idea of LNG, on Texada or in Kitimat, is wrong-headed, he continues. According to WestPac, the power plant would spew two million tonnes of CO2 into the air per year, a major dent in the premier’s plan to reduce B.C. emissions by 33 per cent from 2007 levels by 2020. And Fletcher says if fossil-fuel-burning busi­nesses have to start paying the full cost of carbon emissions by buying offsets, the cost of the electricity generated would be prohibitive. On environmental grounds, he wonders why B.C. should suffer the consequences of tanker traffic and increased industrialization for natural gas that he believes is destined for the U.S.

“If the U.S. west coast needs the gas, let them build the plants there,” he says. But WestPac is adamant that it is not eyeing the U.S. market. Leson says transporting gas long distances is too expensive, and WestPac projects that by 2014 the Lower Mainland and Vancouver Island will need the gas and the power to meet growing demand. When there isn’t demand, as in the summer, Leson says, WestPac will send its LNG tankers to unload in California, where air conditioners are sucking up every available watt of natural-gas-generated power.

But that’s almost laughable to analysts such as CAPP’s Greg Stringham. “If you build a billion-dollar facility, you want to use it all the time,” he says. Fletcher and Childress echo that sentiment. “Running at capacity, it will be the largest single polluter in the Georgia Basin,” Childress says, shaking his head. “Fossil-fuel burning is yesterday’s technology.”

Local opposition is only one of the problems being faced by B.C.’s potential LNG industry. For starters, Japan, South Korea, Taiwan and several European countries have a big head start on North America. Asian markets have been importing the bulk of global LNG for more than 30 years to power their industries and homes; Japan is the world’s biggest importer.

The U.S. has four import facilities built in Gulf States in response to natural-gas supply crunches in the last century, with the first opening in 1971. “These never ran,” Stringham says. They reactivated them in 2000 with Trinidad-supplied LNG in an effort to steady natural-gas supplies at home and to become more energy self-sufficient, but they still ran at a fraction of capacity because of a lack of demand and, more recently, a limited supply.

The problem, and a significant future hurdle for both B.C. LNG proposals, lies in turning the gas into a liquid; worldwide liquefaction infrastructure is close to maxed out. There are 60 import facilities in operation in 18 countries but only 26 liquefaction and export terminals in 15 countries. Now China and India, potentially huge markets, are jumping onto the LNG -import wagon. Five years ago, there was a lot of talk about more liquefaction terminals being built, but the construction has been slower than expected. Landing a consistent supply means signing long-term contracts with exporters, but most are tapped out and don’t have the ships to meet any more demand. (Most exporting companies build the $200-million ships exclusively to work a contract.)

Even if the B.C. terminals could sign a long-term contract, it would mean committing some serious dough. Stringham says Japanese long-term contracts are pegged to the price of oil. In December they were paying about $85 for natural gas on an oil-barrel-equivalent measure, while North Americans were paying closer to $42 for a comparative amount. Paying those prices is not economical in North America today. The alternative is the spot market, but it is cutthroat.

“Sources move gas to where they can get the most money for it,” says Stringham. Ships have even been redirected mid-trip for a couple extra bucks. “We’ve always known supply will be a critical point,” Leson says. WestPac is too early in its proposal to have sourced its supply, but Leson is confident the supply crunch will be over by the time the Texada facility comes on stream in 2014. Beyond the supply problem, LNG still has a few other hurdles to clear.

The idea of a massive tanker loaded with natural gas steaming through the Strait of Juan de Fuca, past Victoria, the Gulf Islands National Park Reserve, Vancouver and onto Texada every 10 days has a few people concerned. It’s a story the LNG industry has heard for 40 years. They like to point to the perfect safety record of the industry – not one major accident – high safety standards and technology, and the fact that LNG is not under pressure; it’s just really cold. Theoretically, if the double-hulled ships were punctured right through to the refrigerated tanks, the liquid would evaporate and harmlessly mix with the air without exploding.

“Sure the industry has a good safety record, but accidents are inevitable. What happens if we have a major event?” asks Childress. “There’s not one U.S.-permitted LNG facility on the U.S. west coast,” he continues. “Why is that? People are scared of LNG tankers.” In Boston harbour, Childress says, LNG tanker traffic imposes a large security zone that halts traffic on bridges and clears the water. Even Prime Minister Stephen Harper, in 2006, said LNG tanker traffic bound for a proposed LNG import facility in Maine could not cut through Canadian waters.

When contacted by BCBusiness, Fiona McLeod, a spokesperson for Transport Canada, said that a U.S. facility did not provide enough benefit to Canadians to balance potential dangers, but LNG facilities in Canada do, as long as they jump through all the permitting hoops. Leson says WestPac did a shipping survey with ship pilots, Transport Canada and coast guard on both sides of the border. “There was no one fundamental concern we couldn’t overcome,” he says.

But WestPac is still proceeding slowly, mostly because of uncertainty over the future economics of running a natural-gas power plant. In his climate-change plan, Premier Gordon Campbell has said any new sources of power would have to emit net zero greenhouse gases. That would mean a natural-gas burning generator, like the ones proposed next to the Texada and Kitimat import facilities and their potential clients, would have to buy carbon offsets.

Now Campbell has appointed a climate-action secretariat to advise the province on a game plan to reach the goal. B.C. also joined western states in the Western Climate Initiative, a joint plan for dealing with climate change on a regional level that potentially includes setting up a carbon-trading market. Federal regulations on both sides of the 49th also come into play, as does talk of revamping the carbon-trading scheme in Europe. How all these plans shake out could determine if the market for natural gas will grow as forecast and ultimately whether an LNG facility in B.C. is even economically feasible. As for Terasen Gas, the biggest gas-delivery company in the province, the company says any LNG is good.

“We welcome any new sources whether they’re in B.C., California or the gulf,” says Cynthia Des Brisay, director of business development and resource planning for the utility. “More supply means less price volatility and more security. It’s like a balloon; the gas goes where it’s needed. If they bring it into California, then more B.C. gas stays in B.C.” But a B.C. facility would allow the company to make better use of its pipeline infrastructure, which is used at a fraction of capacity during summer when British Columbians turn off their furnaces, she said. During low-demand periods in B.C., gas would flow from a B.C. import facility through Terasen’s pipelines to get to summer markets south of the border or big industrial clients in the province and elsewhere. The importer and clients would pay for that service.

The province says it doesn’t plan to interfere in the LNG game. “This is not about natural gas for B.C.,” says Doug Caul, assistant deputy minister for energy, mines and petroleum resources. “It’s about B.C. playing its part as a gateway to North America. We’re not going to stand in front of any proposal. It’s about whether it makes economic sense or not.”

Back on Texada, Childress is certain WestPac’s plan doesn’t make economic sense. TAN has teamed up with the Dogwood Initiative and the Georgia Strait Alliance to continue to fight the proposal. And they’re planning on giving the province a history lesson as well. Childress says the provincial government squashed the planned Sumas II natural-gas-fired generating facility proposed in Sumas, Washington, over concerns about air quality and greenhouse-gas emissions in the Fraser Valley.

“Why is the province even entertaining a similar plan inside B.C.?” Childress asks. He can’t help but wonder if three moats make all the difference.