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The Staple Theory @ 50: Marc Lee

As part of our continuing series of commentaries celebrating the 50th anniversary of Mel Watkins’ classic article, “A Staple Theory of Economic Growth,” we present the following commentary by Marc Lee, economist with the B.C. office of the Canadian Centre for Policy Alternatives.  Marc considers the implications — both economic and environmental — of the current infatuation with export LNG in his province.

LNG: BC’s Quest for a New Staple Industry

Marc Lee, Economist, Canadian Centre for Policy Alternatives

In British Columbia, the top economic priority of the provincial government is the development of a new liquified natural gas (LNG) industry. The recently re-elected Liberals, led by Premier Christy Clark, made LNG the centrepiece of their election platform, claiming that the resulting boom would be worth $1 trillion, create 75,000 direct jobs, and leave the province debt-free and without a sales tax (free puppies may be involved as well). It’s very possible this vision of a new staple industry will “vaporize” (pun intended), due to the tough economics of LNG and the cumulative environmental impacts it would entail. But nevertheless it already seems to have been a political winner: relentless commitment to resource development was at least part of the reason Clark’s Liberals defied a 20 point deficit in the polls before the election campaign, to achieve victory over a shell-shocked NDP.

Post-election, the BC Liberals have now created an entire ministry dedicated to getting LNG deals signed. There are as many as 12 proposed projects for LNG terminals, most of which would be located around the north coast city of Kitimat – although the provincial government expectation is that only 3 to 5 terminals would eventually be built. That said, the grand total of projects underway so far is zero, and it’s possible no LNG facility will ever get off the ground. Each is a multi-billion investment that requires a firm supply of gas from the Northeast of BC (a doubling to tripling of production, plus new pipelines to the coast), and multi-decade contracts to Asian buyers.

Securing those long-term contracts is proving to be difficult given the volatile gas commodity landscape. Going back a decade, it was supposedly just a matter of time before BC (and everyone else) ran out of natural gas. The advent of hydraulic fracturing and horizontal drilling has been a game changer, making available abundant new sources of reserves. (In BC, this is mostly shale gas trapped in rock a couple kilometres below the surface.) Gas production in BC and across North America ramped up, and before long prices had fallen dramatically. BC exports most (85%) of its gas via pipeline to Alberta (where much is used to fuel tar sands production) and to the United States. The lure of LNG is that it would supposedly tap thirsty new Asian markets via cross-ocean exports, achieving a substantial mark-up over depressed prices in the North American market. But others are in this game as well: Australia is making big new investments in export capacity; Qatar, Malaysia and Indonesia already are in the big leagues. Even the US is now looking at LNG exports. Why would Japan or China lock in BC supplies for three decades, when prices may drop, or new developments may change the energy outlook?

So BC is not alone, and if anything is late to enter this game. Its strategy fits with the classic pattern of Canadian staples development: seek foreign investment to tap our resources for export markets, secure jobs and income for Canadian workers, and use royalty and corporate tax revenue to help pay for public services (in lieu of personal taxation). The two giants at BC’s LNG table are Shell and Chevron, with combined global profits in 2011 worth more than a quarter of BC’s GDP; Shell alone has annual revenues more than double BC’s GDP. To get the LNG industry off the ground, BC is going to be in some tough negotiations. Clark in the election campaign promised a super-tax on LNG profits to build an Alberta-style Prosperity Fund. I’m betting the industry’s negotiating position is stronger, and Clark would cave in order to get a deal signed.

In the early days of LNG, the Haisla First Nation near Kitimat agreed to be partners is a small LNG development, predicated on powering the facility with their own renewable energy (wind and hydro) sources. The scope creep of current talks risks leaving the Haisla with the short stick in the face of bigger proposals. For BC, getting in bed with Shell also comes with the company’s dubious distinction of being the world’s number one corporate criminal in 2013 according to American NGO, Global Exchange (“based on issues like unlivable working conditions, corporate seizures of indigenous lands, and contaminating the environment”). Chevron did not make the top ten, but it is fair to say it’s got game when it comes to human rights abuses. For those concerned that Canada is becoming a petro-state, this is deeply troubling.

The path to LNG riches has some other BC-specific obstacles. Clark’s predecessor, Gordon Campbell, brought in a range of climate action policies in 2007-08, including the province’s well-regarded carbon tax, and legislated greenhouse gas reduction targets. While some insider champions of LNG do not care about climate change, the province is wrestling with its own cognitive dissonance: how to stick to past commitments to reduce greenhouse gases, while substantially growing production of a key fossil fuel. BC’s media savvy Premier now talks about “the cleanest natural gas” or “cleanest LNG” in the world.

The problem is the math: in order to move ahead with LNG projects while still meeting the government’s own GHG targets, every other sector of the BC economy would need to make radical and unprecedented reductions in its emissions. One option under examination is purchasing carbon offsets, but this could be expensive and BC’s offset regime has been much criticized. Another issue is accounting conventions that do not count embodied GHG emissions in exports (instead, they count in the importing country’s GHG inventory). On a lifecycle basis, total GHG emissions into the air that originated below ground in BC would double or even triple, depending on the number of LNG plants. It would be the emissions equivalent of putting between 24 to 64 million cars on the roads of the world.

Related to, and compounding this, is that liquifying gas for export is itself massively energy intensive. BC’s 2010 Energy Plan committed to 93% of electricity production in the province coming from clean or renewable sources. Were it to be met by new renewable supply, BC Hydro modelled an increase in demand from three LNG equivalent to one-third of its total current production. Renewables are more expensive, and existing commitments to private power producers for new supply are already creating pressure for price hikes. To get around this, the BC government conveniently declared that burning natural gas for LNG production would be considered to be clean energy.

Upstream, the environmental problems only get worse. Huge volumes of water, plus sand and chemicals, are needed to engage in fracking activities, typically rendering the water unfit for any other purpose, effectively taking it out of the water cycle. Local landowners and First Nations are rightly concerned about leakages of gas and chemicals into their water supplies – the fracking industry has become synonymous with images of ranchers lighting their tap water on fire – not to mention small earthquakes (my colleague Ben Parfitt reviews the range of issues here). In terms of GHG emissions, field studies have shown high leakage rates of methane (the main component of natural gas). A much more potent greenhouse gas than carbon dioxide, methane leakages are disproving any claims that natural gas is the cleanest burning of the fossil fuels. Field research in BC is lacking, but if US results hold then BC gas would be worse in terms of its GHG emission profile than dirty old coal.

These problems might seem to strike up a classic jobs versus environment problem for LNG, except for one thing: there are very few jobs. The lofty numbers being floated by government are simply not credible. At its inception, BC’s Natural Gas Strategy (based at the time on 3 LNG plants) estimated about 800 permanent jobs and up to 9000 jobs during construction. This is a very capital intensive industry, and even with five LNG plants on stream, modelling suggested about 2,500 permanent jobs (this assumed workers would otherwise be unemployed, as these models often do). And it is reasonable to assume that additional upstream jobs from fracking would lead to another 2,000 to 3,000 jobs. But these fall way short of public claims being made by the government, which originally stated an unsupported 40,000 new jobs in an infographic. Then that number was inflated to 75,000 permanent jobs over 5 LNG plants on the basis of a consultant’s report (which is loaded with caveats that distance itself from its own numbers).

On the other hand, Shell has commented that it will take an Ikea approach to LNG plant construction, with plans to “ship large pre-built modules to Kitimat to reduce the number of construction workers needed.” Nor is it clear that BC workers will get the work available: pipeline building crews move around the continent to where the work is, and the growing reliance in BC and Alberta on temporary foreign workers is cause for concern.

Far from being a description solely of Canadian economic history, Mel Watkins’ staples theory of economic growth clearly applies to this 21st century BC story. Watkins’ critique of multinational corporations and foreign ownership, and more recently his concerns about climate change, are also relevant. The resource development mindset is particularly strong in Western Canada, deeply institutionalized in government and business circles. They understand well the concept of staples – but they are not concerned at all about the pitfall of a “staples trap.”

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Comment from Kevin Logan
Time: October 22, 2013, 2:59 am

Good piece Marc, thanks.

I am surprised however to see no mention Petronas and Coleman’s promise of delivering the long awaited means of filling that prosperity fund with a new “special” royalty regime.

The Petronas deal is being boosted as the “biggest deal of its kind in history” and Coleman is haunting the tallest twin towers on earth as I write finding clever ways to hand over 20 million tonnes a year for the next 25 years at rock bottom prices. How much more rock bottom is difficult to conceive since your analysis of a few months back suggesting we are already giving it away.

Comment from Murray Reiss
Time: October 23, 2013, 1:53 pm

All of which makes me wonder what it would take to change things so that “a relentless commitment to resource development” was not a winning proposition election after election in BC & Canada as a whole.

Comment from Travis Barker, MPA GCPM
Time: October 27, 2013, 6:36 pm

The LNG industry represents just one model for addressing the government’s goal of increasing jobs and prosperity in the province. Unfortunately the probability of the LNG strategy reaching these goals, while simultaneously producing escalating costs and environmental risks (in addition to potentially violating aboriginal rights), presents a strategic framework for jobs and revenue development that is inefficient.

Combined with recent accusations from China that Canadian LNG exports are priced higher than delivered locally, and the recent claim that international investment in the BC LNG industry would be derived from a company that incidentally has also been enabling terrorism, the LNG model for jobs and revenue creation presents a complex policy field ripe for partisan influence.

With an economy historically dependent on resource exploitation and exportation it is no surprise that the LNG industry represents, albeit on paper (no pun intended), a viable economic theory for improving metrics in the province.

Education and training represent another two critical factors that are consistently targeted in order to improve the prosperity of the province. The dependence of these two strategies on resource development and exploitation is arguably rooted, in part, on the inefficiencies realized in the corporate sector’s utilization, leveraging, and execution of these assets.

Economic prosperity is not realized through the execution of a ‘one-size-fits-all’ provincial strategy. The economic theory espousing that a ‘trickledown effect’ occurs as a result of corporate and province wide gains is both false at worst and greatly overstated at best. International investment harvests profits for overseas corporations.

Similarly, corporate and provincial wide gains are realized through the stock market, profit sharing, dividends, asset investments, and ventures that contribute to the larger systems bottom-line but not necessarily that of the individual family.

Regulatory and policy frameworks are required if gains are to be realized at the individual family level while simultaneously mitigating risks to acceptable levels.

Acquiring profits through price gouging is neither efficient nor competitive. Acquiring profits from one international industry while failing to plan for the long term consequences of that industry is both short sighted and financially reckless. Disproportionately emphasizing the provincial development and support for large scale corporate projects fails to recognize the limited causal benefit of such projects as well as fails to recognize the potentially unlimited causal risks resulting from such projects. .

Risks are shared by everyone. Profits are not.
The Canadian West Coast’s economic dependence on resource extraction means that this model of economic development is unlikely to be diminished in the short term. The nation’s competitive advantage requires policies, projects, and initiatives that are implemented in all quadrants of society.

Ignoring the impact of one quadrant on another quadrant, or failing to leverage the potential of one quadrant in a larger series of initiatives that involves other quadrants, risks inequitable returns for everyone. The LNG industry represents an economic development model in the making that can only foreseeably realize inequitable returns.

The LNG industry represents a ‘potentially’ viable mechanism for provincial growth but a definite mechanism for corporate growth. Whether the individual family benefits from this experiment will depend on the province’s development of other policy and economic alternatives that both supplements the likely limited beneficial impact of the LNG project but also recognizes the limits of the project’s reach.

Travis Barker, MPA GCPM

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