Sound economic decisions require sound numbers

By Andrew Weaver, April 2014

The BC Liberals’ LNG dream needs a reality check.

Liquefied Natural Gas (LNG) development provides British Columbia with a “generational opportunity”—one that will create 100,000 new jobs, add $1 trillion to the provincial GDP and provide for a $100 billion prosperity fund that will be used to eliminate both the provincial debt and the provincial sales tax. Our opportunity is now; we must act quickly and invest immediately—before it’s too late.

If you think this hyperbole sounds too good to be true, I fear you might be right.

When you start looking closely at the LNG narrative and peer beneath the veil of hype, you’ll find a story built on questionable assumptions and absent evidence. A Hail Mary pass of hope, thrown during an apparently hopeless election campaign, turned into a win. And now the government has to deliver. My concern is that British Columbians are being sold a bill of goods full of unrealistic expectations around what we can honestly expect from LNG development and what that development will cost us.

It’s time for a reality check.

Promises of $1 trillion to the GDP and the creation of a $100 billion prosperity fund depend on private sector investment and on the provincial tax regime for LNG.

Let’s start with private sector investment. Not a single company has yet made a final investment decision in BC’s LNG industry. Until a final investment decision is made, we have no certainty that any company will even invest in the sector.

Companies have not made their final investment decision, in part, because they know that Australia, Russia, the USA, China, Qatar and many other countries are all vying for the same natural gas markets. The business case for BC’s LNG industry is dependent on relatively high natural gas prices in Asian-Pacific markets. With so many countries all vying for the same market, natural gas supply will rise substantially. Increases in supply will likely lead to decreases in price and if that happens, companies will have to consider if LNG development is even viable in BC.

Added to this, companies must also then factor in how much they will pay the BC government in tax revenue. With the announcement of the proposed tax regime last month, a spokesperson for Shell Canada raised concerns that the eventual seven percent tax was too high to be globally competitive. If the tax system isn’t competitive, companies won’t invest. The BC government has stated that it will introduce legislation for an LNG tax regime this fall. Until then, no company will make a final investment decision—period.

Yet even if private sector investment goes forward and we develop our LNG industry, the questions remain: How much will British Columbians benefit from our natural gas and how did the government arrive at the $100 billion promise for the prosperity fund?

We know that the government has based its promises on five LNG plants. We also know that many companies only expect between one and three plants to be built. In fact, even the BC government is now taking steps to reduce expectations. In a recent online LNG Quiz, the government asked people to identify what BC’s goal was for completed LNG plants by 2020. BC’s election promise was five; the correct answer on this quiz was three.

The discrepancy alone between promised and expected LNG plants would mean significantly less revenue. Some are saying that even with five LNG plants, a seven percent tax rate isn’t high enough to produce half of the promised $100 billion prosperity fund. The fact is, we do not know specifically how the government came up with their estimate for the prosperity fund. What tax rate were they considering when they developed that number?

Here’s another LNG dream that needs unpacking. For over a year now, the government has promised up to 100,000 new permanent jobs from an LNG industry. According to the government’s projections, the five LNG plants will generate 2400 direct full-time jobs. This estimate is nearly 36 percent higher than comparable estimates in Australia. Yet what is particularly interesting is the projection that these 2400 direct jobs will create 61,700 indirect jobs and 11,100 induced jobs. Put another way, the government is estimating that for every one direct job in LNG (e.g. working at a liquefaction plant), more than 30 other jobs will be created—a multiplier about ten times greater than is normally used.

To be sure, there is no question that some indirect and induced jobs will be created as a result of a new LNG industry. But where does that 1-to-30 multiplier come from? What assumptions is the government basing this calculation on?

The fact is, we don’t know and we can’t know the answer to these questions. Not enough information has been offered to British Columbians about the realistic expectations surrounding LNG development for anyone to properly assess the validity of the government’s claims.

What’s particularly concerning from a practical standpoint is that if these LNG promises are based on questionable data and problematic assumptions then BC is going to pay the price, particularly as we have no backup plan if the LNG dream does not materialize. Accurate employment and revenue projections are vital for sound economic policy and planning. These numbers are being used today, throughout our province, to inform investment decisions that will reverberate throughout our communities.

Natural gas is a provincial resource—it belongs to British Columbians—and British Columbians have a right to know what they will honestly get for it. They also have a right to decide how much of their tax money will go to support the LNG industry either directly, or indirectly via the construction of roads, highways, transmission lines and other public infrastructure. To make this decision British Columbians need the necessary information. I hope they get it.

The author or coauthor of over 200 peer-reviewed scientific papers, and a Lead Author for the Intergovernmental Panel on Climate Change, Dr Andrew Weaver was elected as the first Green Party of BC Member of the Legislative Assembly in 2013 in the riding of Oak Bay – Gordon Head.