BC: LNG troubles – Petronas (Malaysia) says labour costs are too high

The legislators of British Columbia have convened this week for an autumn session, something that only happens when there is a really pressing item on the agenda. This time, the stakes could hardly be higher, as the government’s plans to turn the province into a significant gas exporter, bringing handsome returns to the public exchequer, hang in the balance.

At least 17 projects to produce and ship Liquefied Natural Gas (LNG) from British Columbia are in various, early stages of development, but in no case has a final investment decision been made. All of them involve bringing gas to overseas markets, mostly in Asia. The Liberals who run the province say a healthy LNG sector is at the centre of their plan to restore its fiscal health. They hope that LNG will bring it between C$130 billion ($116 billion) and C$260 billion ($232 billion) in new revenue over the next 30 years.

All that, so the theory goes, should help make up for the fact that the province’s other big energy export, coal, is in crisis because of falling world prices. Four coal mines have been idled recently because they are no longer viable. The latest was the Trend facility in northeastern BC, owned by Anglo-American, which last year produced 1.5m tonnes of coking coal. The price of that product has tumbled to US $120 per tonne, down from an historic high of $300, reached in 2011. Back then, a Canadian coal company, Grande Cache, was bought by Asian interests for C$1 billion; last week, a controlling share was sold for just C$2.

That grim background makes the idea of an LNG bonanza more attractive, but not necessarily easier. Relations with one of the main potential investors in LNG, Petronas of Malaysia, have become very tense as each side accuses the other of unrealistic expectations. On October 6th, the chief executive of Petronas, Shamsul Azhar Abbas, said plans to build a new C$11 billion facility in BC might be delayed by 15 years unless the provincial government offered better terms.

One of the Malaysians’ complaints is beyond the remit of the provincial government: the high cost of Canadian labour and the impossibility, under Canadian federal law, of importing temporary foreign workers whose pay would be lower. Christy Clark, the BC premier, has said the Conservatives who dominate Canadia’s federal government are “tragically misdirected” in their refusal to show greater flexibility on this point.

Meanwhile at home in Vancouver, the provincial government faces criticism for putting too much emphasis on gas. “LNG has been the only thing this government has focused on at the expense of everything else,” says Mike Farmworth, a leader of the New Democrat opposition party. Andrew Weaver of the Green party has also complained that “it is folly to go all in one area.”

Later this month, the government will bring to the legislature the tax collection regime that it wants from LNG producers, a move that potential investors have been anticipating. Earlier this year it laid out a two-tiered tax rate of 1.5% at the start of projects, rising to 7% once the plants are running and capital costs deducted. The threats from Petronas were clearly designed to press the BC government to improve on that offer. With coal revenues tumbling, this is a game of chicken that the provincial government cannot afford to lose.

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