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Where Have the LNG Revenues Gone?

The Strange Saga of Liquid Natural Gas

by PAUL FINCH

While the last provincial election in British Columbia hinged on a promise by the governing party to restore provincial finances with a massive windfall of Liquefied Natural Gas (LNG) revenues, a critical question remains: why have profits plummeted in the meantime?

The answer lies in a geostrategic struggle over energy prices between the United States and Russia, one that has seen the world’s superpower make increasingly strident moves to increase its own energy security while severely damaging the economies of its key rivals. The impact itself has been felt around the world – across Southeast Asia, Europe, and even highlights the ongoing conflict in the Central Asian Caucasus mountain republics that have come under close attention since the Boston terrorist attack in April.

The last decade yielded uneasy results for US dominance abroad. Russia, having recently installed a proxy regime of ruthless and loyal clansmen from Tsenteroi in the rebellious Chechen Republic of Ichkeria, had seemingly pacified the vital oil and gas corridor between the Black and Caspian seas. The state energy firm, Gazprom, quickly took advantage of the situation to force its virtual monopoly on natural gas to support friendly regimes, toppling the so-called “Orange Revolution” in the Ukraine and more or less stabilizing the situation in the Balkans and Eastern Europe. Latin America witnessed the emergence of a powerful series of nationalist regimes that rejected foreign exploitation of their natural wealth on the cheap, and were largely led by the consolidation of Venezuelan energy resources to the benefit of the region following a failed CIA-backed coup attempt.

The shining light of success for the US had been the broad insertion of military forces across the Middle East during the Afghan and Iraq invasions and subsequent civil wars. The US had achieved what the British set out to do when they first moved from powering their economy and war machine from coal to oil in the early 20th century: geostrategic dominance over the vast majority of oil production centres, effectively dictating the price and currency of exchange.  The clever division of the region into majority/minority Sunni and Shi’ia populations, artificial ruling elites enforced by centuries of tribal and religious hostility in each British-authored nation state, has finally witnessed the resulting tripartite emergence of Arab Sunni nationalism, Iranian power projection, and the extension of Ottoman influence.

(Residents of British Columbia will take note – the Crown Colonies on the west coast of Canada used to be vital coal ports for the Royal Navy, and the move from coal to oil as the dominant energy source changed the nature of the BC economy, and shifted regional power centres to their present locations. Nanaimo is no longer considered a major hub of economic activity.)

Despite this success, the problem of energy independence remained not just for the US itself, a net importer, but also for Europe, Japan, and a host of allies that were threatened by the new global shifts in energy dominance. The ability of Russia to dictate LNG prices had a profound impact on European politics. The US’s historic strategic promise to guarantee Japanese energy needs placed a severe pressure on Chinese demands for energy in light of their high-growth economy, threatening regional conflicts to spill into the highly charged South China Sea.

The US response was a masterful stroke that simultaneously cut down their opposition while strengthening their own internal economic position. While the British switch from coil to oil had “outsourced” imperial energy requirements from Europe and North America to the Middle East, the US development of hydraulic fracturing (or “fracking”) and horizontal drilling of shale gas deposits insourced a great deal of them back to North America. And while some of called the dubious accessibility and full extent of US shale gas reserves a “Ponzi scheme”[1], their immediate and real impact on world energy prices are undeniable. Its continual growth hints at a decoupling of oil-linked LNG pricing as US exports to global markets accelerate rapidly[2].

Russia’s lock on natural gas was quickly broken as the US reserves flooded the market with a historic glut, driving down the cost of natural gas[3]. Gazprom, the Russian state monopoly on gas production and distribution, saw the writing on the wall and watched its profits slide, recently moving from the first to third most profitable company in the world[4]. The problem was compounded by the profit-centric nature of their prior operations: no one had thought to invest in the squalid and decaying Soviet-era infrastructure while every Ruble was being ruthlessly siphoned in the pockets of oligarchs.

Meanwhile in Latin America, the move to US energy independence has weakened Venezuela’s leverage as a key oil exporter. The country narrowly retained its nationalist government over a US-backed comprador alternative, as large sectors of the population bemoaned the sudden drop in economic growth that mirrored falling oil prices. More timid regimes in the region have opted to loosen their alliance with Caracas, and have opened up their natural resources to extensive western mining operations. Canadian firms, applying their extensive expertise in resource extraction derived from home soil, have been foremost in this endeavour.

The Canadian response to the new reality of Natural Gas has been mixed. While Quebec read the economic tea leaves and (in a measure of sensible regard for the health of rural communities and their water tables) banned “fracking”, BC balanced its budget on the promise of LNG revenues. The results were predictable as shockwaves from the massive US gas glut hit their closest trading partner (us) with the longest stretch of undefended border in the world (also us) first.  The BC budget showed a massive deficit, and projected LNG revenues into the future seem largely based on a fantasy of price scaling that ignores the last five years of global investment and development in the industry.

While the future profitability of LNG is secure, competition is understandably intense. The oil-linked pricing regime is already floundering heavily[5], giving way to intense global competition. Hence the rush to build massive export hubs to Asia: the US is essentially a global LNG competitor, rather than a potential export market. And this illustrates the volatility but also the national control of commodities markets, and how their exercise gives lie to ardent believers in the transnational nature of capital. The US will continue to dictate the terms and conditions of resource exploration to Canada, much as they did with the software lumber industry.

In contemplating this imbalanced trade relationship with the US, I’m reminded of a conversation with a lumber industry operative on a flight to a remote BC community. Flying up to negotiate timber sales to the US state of Georgia, where he was now headquartered, he explained how the operation worked. The mills down south use crude and antiquated technology, but are staffed with cheap, non-union labour hovering around the prevailing Canadian minimum wage. Once milled, the logs are shipped from a southern Gulf port, through the Panama Canal, and across the Pacific to lucrative and expanding Indian and Chinese markets. Canada, and BC in particular, are reminded of their place in the US order: as a source for the extraction, rather than the development of, natural resources.

The point evinced from the saga of LNG development and export is a clear and repetitious one: capital is fundamentally rooted in nation-states. And while capital can be transnational, just like any other distributive medium, it operates along a rigidly defined hierarchy. It is not free to roam and develop markets, but rather adheres to a strict neo-feudal pecking order, one enforced by a myriad of trade agreements or, if necessary, direct military intervention. British Columbia is no exception to this rule, and without a broader strategy for economic diversification, goes against the grain to its inevitable loss.

Paul Finch is Vice President of the B.C. Government and Service Employees’ Union.

 

Notes.

[1] http://www.forbes.com/sites/ericagies/2011/06/27/industry-insiders-call-shale-gas-a-ponzi-scheme-invoke-enron-nyt-report/

 

[2] http://interfaxenergy.com/natural-gas-news-analysis/lng/us-exports-to-accelerate-decline-of-lng-prices-deloitte/

 

[3] http://www.eia.gov/naturalgas/weekly/

 

[4]http://rt.com/business/gazprom-profit-decline-lng-demand-615/

 

[5] http://business.financialpost.com/2013/03/27/asian-push-for-lower-prices-could-hurt-canadian-lng-projects/?__lsa=668a-b1a1