Bravo LNG Canada, Encore, Encore

Hallelujah! British Columbia finally caught itself an LNG export project. The first in a new global wave, and a nice big one at that.

Now it’s important the B.C. and federal governments parlay Royal Dutch Shell plc-led LNG Canada into favourable final investment decisions (FIDs) for additional liquefaction projects, and sooner rather than later as natural gas may not be quite the bridging fuel to a low carbon future as anticipated by organizations such as the International Energy Agency (IEA).

In particular, long-haul LNG could be priced out of the both the base load and peaking power market in Asia by the middle of next decade — on a full-cycle basis — due to rapidly declining prices for renewables like solar and for battery storage. This in turn has the potential of retarding expected growth in gas consumption for space heating and cooling in the commercial and residential sectors in the region.

Under the New  Policies Scenario in World Energy Outlook 2017, the IEA projects global gas consumption to rise by an average of 1.6 per cent per year to 5,304 billion cubic metres (512 billion cubic feet per day) by 2040, versus one per cent annual growth in total primary energy as a whole. The Asia-Pacific region is projected to be the major driver for global growth, with gas demand increasing 44 per cent over the period, and China alone for almost a quarter. The power and building sectors are expected to account for almost half of overall growth in gas consumption — 32 per cent and 17 per cent, respectively.

But, frankly, it is a rookie mistake to take an IEA long-term base case “forecast” as gospel. The IEA is a political, conservative organization, and as a result, no more than a trend follower. In my more than 30 years as an energy analyst, I cannot think of a single time when IEA base case numbers have successfully anticipated a major turning point in energy markets, despite the organization’s many excellent analysts warning of such turning points in the accompanying text. Apologists for the organization love to point out that even the IEA does not claim its base case “forecast” is a forecast.

Over my career, my forte has been foreseeing major turning points, not just in energy markets but in the economic, financial and geopolitical spheres as well. And the primary reason for this is not because I’m smarter than most everyone else, but simply because I’m good at spotting, believing and applying great theories by really smart people.

A prime example is my belief in the Soviet economist Nikolai Kondratiev’s theory on long business cycles — he died in one of Stalin’s gulags in the 1930s for contradicting Karl Marx with this theory — leading me to successfully predict the 2008-09 Global Financial Crisis in the summer of 2007, once the Sub-Prime Crisis hit the U.S.

The theory that makes me think the IEA’s New Policies Scenario is too optimistic about global gas consumption was put forth in a 2014 book, “The Second Machine Age,” by MIT professors Erik Brynjolfsson and Andrew McAfee. In this book they argue the world has reached a second inflection point in terms of human progress that is supercharging technological advancement already propelled by the Industrial Revolution.

They wrote: “Now comes the second machine age. Computers and other digital advances are doing for mental power—the ability to use our brains to understand and shape our environment —what the steam engine and its descendants did for muscle power. They're allowing us to blow past previous limitations and taking us into new territory.”

Two major examples that Brynjilfsson and McAfee gave to support their theory were autonomous vehicles and artificial intelligence.

The cost of solar power and battery storage have been dropping like a rock. According to Bloomberg New Energy Finance (BNEF), the price of solar power has declined by nearly a half over the past five years, for a compound annual decline of roughly 12 per cent per year. The price of lithium-ion batteries has fallen 80 per cent since 2010, for an average annual decline of over 18 per cent.

As of now, despite these massive price declines, the combination of solar power and battery storage continues to be highly uncompetitive with power produced by a modern combined-cycle gas turbine (CCGT) plant, even in a high-cost gas region such as Asia.

The cost of utility scale solar PV in Developing Asia — including China and India — is currently US$59 per MWh, based on levelized cost of energy (LCOE) analysis by Energy Intelligence. The cost of battery storage and retrieval has been pegged at US$70 per MWh on a lifetime basis, for a combined cost of US$129 per MWh. In contrast, the cost of power produced by a CCGT plant in Developing Asia is only US$72 per MWh, assuming US$9 per mmBtu for gas.

The delivered Asian cost of LNG from liquefaction plants on the B.C. coast should come in at around US$9 per mmBtu, assuming producers receive $3 per mmBtu and a relatively conservative U.S.-Canada exchange rate of US$0.75. The Canadian Association of Petroleum Producers (CAPP) has estimated the combined cost of piping gas from the Montney and Horn River formations to the B.C. coast, liquefaction and shipping to Asia at between $8 and $10 per gigajoule— roughly equivalent to an mmBtu (for the metric-challenged).

But by simply applying the recent 12 per cent annual rate of price decline for solar power — six percentage points less than for lithium-ion batteries — to both solar and battery storage into the future leads their combined power cost to fall below that for a CCGT plant in Developing Asia fueled by US$9 per mmBtu gas in 2023, and fueled by US$6 per mmBtu gas — the minimum transportation and liquefaction cost of B.C. LNG, hence, free B.C. gas — in 2025.

Skeptics will simply argue that the 12 per cent rate of price decline is not sustainable. For example, it has been argued that lithium-ion batteries will run into “scalability issues,” with the back-end resource industries required to provide the needed lithium, cobalt and graphite unable to keep pace with potential high growth markets such as cars, domestic batteries and power grid storage. The raw material supply chains are certainly immature at the present time, and much of the currently known economic resource suffers severe above ground risks.

On the other hand, based on Second Machine Age theory, we should expect the combined price of solar power and battery power to decline faster than a trend-like rate, with a disruptive technology or technologies leading the charge. This may already have occurred on the battery storage front.

In August 2017, Bill Joy, tech guru and a co-founder of Sun Microsystems, announced that Ionic Materials had developed an advanced, solid-state alkaline battery — like common zinc and manganese dioxide ones you buy at the drugstore, but rechargeable. This appears to be a revolutionary step towards cheaper, safer and more efficient batteries, while relying on plentiful and more readily available materials — including potentially lightweight aluminum.

The goal of Ionic Materials is to bring down the storage and retrieval cost of its battery to roughly US$10 per MWh by 2022 compared to US$29 per MWh in 2025 based on our trend analysis.

The rapidly declining price of combined solar power and battery storage could in turn cause future gas consumption in Asia-Pacific’s building sector to be significantly less than anticipated by the IEA. Lower power prices would likely support a higher rate of electrification in the region, especially given the high cost of laying pipe to transport gas to new clients — much like telecom in much of Africa skipping past land lines to mobile technologies.

To conclude, the B.C. and federal governments should take a bow. They finally did many things right to encourage a favourable FID by the partners of LNG Canada, including creating an attractive fiscal regime. It is important that these governments use the window of opportunity provided by the Sino-U.S. trade war — including China’s new 10 per cent tariff on gas imports from America — to get as many B.C. LNG projects as possible sanctioned during this new wave of global expansion, as it may be the last for long-haul LNG, especially to the Asian market.