Value Added Natural Gas Development for B.C.

Year: 
2016

Background

B.C. has an abundance of natural gas in the North East portion of the province. The BC Oil and Gas Commission record of reserves remaining, as of 2014, is 1,443.9 billion m3 of raw gas (51.0 trillion cubic feet (TCF) raw),[1] which was an increase of 20.6% from 2013. Prospective Potential Resource as estimated at Montney 1,965 (TCF), Horn River 448 (TCF), Liard 210 (TCF), Cordova 200 (TCF) for a total of over 2823 TCF.[2]

Production from B.C. in 2014 was 1.575 TCF or 45 billion m3 with the reserves to production ration estimated at over 30 years.[3]

The natural gas reserves and the prospective potential resources in B.C. represent a very significant economic resource. Natural gas used to be exported east from B.C. and Alberta to markets in the north eastern U.S. and south from B.C. to western coast markets in the U.S. Increasingly, these markets are now being served by the abundant and inexpensive U.S. natural shale gas supplies. Also, B.C. gas is extensively used in various oil sands production processes. However, with the collapse of oil prices, the future prospects for the oil sands market are significantly diminished. In B.C., the proposed liquefied natural gas (LNG) industry is expected to become a major export outlet for B.C. natural gas to world markets. It appears that the LNG developments could be delayed and perhaps less significant than hoped for as a consequence of a collapse in the LNG export market prices and significant supply availability from elsewhere.

The result of these market reduction pressures is that the economic value of B.C. gas could be increasingly locked out from access to markets.

B.C. is a net importer of oil refined products (diesel, gasoline & jet fuel), primarily from Alberta refineries and B.C. has two refineries which produce approximately ½ of B.C.’s requirements.

The prices for natural gas used to be aligned with the prices for oil refined products, but several years ago natural gas became so abundant and inexpensive to produce that it began to compete with coal for production of electricity.

Prices for oil have collapsed from well over $100/barrel into the range of $30/bbl to $40/bbl

Prices for natural gas have collapsed from well over $8/GJ to $2/GJ.

Business Issue

B.C.’s natural gas resources are used to serve residential, commercial and industrial purposes in B.C., but these uses are small by comparison to the total B.C. reserves and prospective potential resource.

For economic development purposes, it would be useful if B.C. were able to develop alternative value added uses for the B.C. natural gas resources in order to unlock the economic value of the resource for B.C. and for the benefit of the economy and communities in B.C.

Value added to production of natural gas could enable the resource to compete in other markets and provide an outlet for a commodity and reserve resource, which may otherwise stay locked in with no economic value to B.C.

Monetizing the natural gas resource in B.C. should be a key priority for the B.C. government to augment its LNG strategy and other economic development initiatives.

Potential Solution

One such potential solution would be to develop a gas-to-liquids (GTL) industry in B.C. A GTL industry would expect natural gas to compete against oil refined products to access such markets as the diesel and gasoline product markets. These markets are very substantial world-wide markets, which are growing significantly year over year as the global economy continues to develop.

The GTL process involves the conversion of natural gas to diesel 80% and naphtha 20% through a process called the Fischer Tropsch (FT) process. First, the natural gas is reformed into synthetic gas (Syngas), which is composed of carbon monoxide (CO) and hydrogen (H2). Second, the syngas is converted into longer chain hydrocarbons or waxes. Third, these waxes are refined by hydrocracking with hydrogen into lighter distillate, shorter carbon chain fuels, such as diesel and naphtha.

Also, CO2 along with hydrogen can be turned into Syngas and then into diesel and naphtha, with the result being a carbon neutral diesel for that percentage of CO2 absorbed into the process.

The end product of the GTL process would be a synthetic diesel with very clean post combustion properties versus oil refined diesel. For example, synthetic diesel has an 89% reduction in particulate matter and 99% reduction in aromatic hydrocarbons, which are both cancer causing. There is also a 90% reduction in sulphur versus a low sulphur European standard. 

The product can be seamlessly utilized in the existing fuel infrastructure. It has virtually no negative impact on engine performance, but provides some significant improvements due to a fast clean burn rate and lack of soot.

This process is expected to be able to produce a synthetic diesel, which can compete with oil refined diesel at current prices of oil and natural gas. 

New technology developments in the FT process, and with other processes, are making it feasible to commercialize this approach to adding value to natural gas at a smaller scale than some of the existing synthetic fuel plants owner by Shell and Sasol.

B.C. could locate such a natural gas value added plant in B.C. and provide significant economic development for the province. While not on the scale of the LNG projects, GTL projects could provide significant economic development for the province.

Such a GTL project would potentially offer economic development investment in the range of a $1 to $2 billion initially and could potentially grow into an export industry for B.C. Such a project would potentially employ 100s of people and produce additional government revenues with a present value of $2 to $6 billion, based on the market conditions throughout the project life.

Such economic development would be a welcome response to declines in the natural gas industry development expected in northeast B.C.

Government Assistance or Incentives

The government has a process for working with major project proposals in B.C. and is able to focus on providing assistance to parties contemplating developments in B.C. Typically, these processes may result in a project development agreement with the Government of B.C. to help secure the economics of a project.

Such agreements have been signed for LNG developments and provide a precedent for projects to be assured of a reasonable context within which to make their investment.

Governments can be helpful in establishing markets for products, ensuring that government taxation does not change to a point of crippling the economics of the project, deferring taxes for a period of time to enable timely capital investment recovery, providing supportive infrastructure such as transportation, ensuring smooth regulatory and permit approval processes, supporting working relationships with First Nations, recognizing externality benefits of products in markets financially and providing support for innovation and technological development which advance key interest for the B.C. economy.

Government incentives should be commensurate with the future benefits for governments and should focus on the elements of the project economics, which would not be delivered without the project, such as royalties, income taxes, property taxes and market values delivered. 

Other Examples of Government Assistance for Economic Development

FortisBC Energy Inc., in developing its Natural Gas Transportation (NGT) business was supported by the B.C. government in approving a subsidy of $100 million for providing LNG into the heavy duty transportation markets, displacing diesel and resulting in a cleaner combustion emissions profile as well as reduced carbon dioxide emissions.

The LNG industry was supported by the provincial and federal governments with specific income tax provisions, such a lower tax rates and advanced depreciation rates enabling faster capital investment recovery.

The B.C. and federal governments are supporting the development of a demonstration plant for technology which can capture CO2 from the air and recycle it back into a fuel. These are initial research and development investments.

The B.C. government has on a number of occasions used electricity pricing, or terms and conditions, to provide support to a sector of the economy, which has experienced significantly challenging economic circumstances and needs support to continue operating under those conditions. These initiatives have been undertaken to enable security for the local economies of affected towns.

Government support for economic development in the province is a common function of government, which is done for the greater benefit of the provincial economy and the future robustness and performance of the B.C. economy.

THE CHAMBER RECOMMENDS:

That the Provincial Government:

  1. Support Value Added Development for B.C.’s Natural Gas; and

  2. Provide reasonable cost effective benefits & incentives to help secure the economics of a GTL industry in B.C.

Footnotes

[1] BC Oil & Gas Commission, Hydrocarbon and By-product Reserves in BC 2014, Table 1, Page 4

[2] BC Oil & Gas Commission, Hydrocarbon and By-product Reserves in BC 2012, Appendix B

[3] BC Oil & Gas Commission, Hydrocarbon and By-product Reserves in BC 2014, Figure 5, Page 8

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