Analysis: Last Chance Gas For B.C. LNG

There finally appears to be light at the end the tunnel for British Columbia’s fledgling LNG industry, and it’s not a bitumen-laden unit train.

By all indications, a favourable final investment decision (FID) should be coming before year-end for the first phase of the $40 billion Royal Dutch Shell-led LNG Canada project, with the B.C. government appearing to have learned from its past mistakes. For example, in March, Premier John Horgan announced some tax breaks for potential LNG projects in the province, effectively reversing a specific LNG tax his predecessor Christy Clark had proposed, contributing to Malaysia’s Petronas cancelling its Pacific NorthWest LNG project last July.

But the next several years may be the province’s last chance to establish a significant LNG industry — hence, last chance gas — given natural gas may not be quite the bridging fuel to a low carbon world as previously anticipated. The reason being rapid declines in the cost of wind and solar power, in conjunction with the rapidly declining cost of battery storage, could make gas uncompetitive in the all-important power sector sooner rather than later.

Just as most forecasters severely under-estimated the rate at which the cost of solar and wind power would decline, and hence, the adoption rate of these power sources, forecasts for declines in the cost of lithium-ion batteries appear to have suffered similar bias.

The price of lithium-ion batteries has fallen 80 per cent since 2010, and by a quarter between 2016 and 2017 alone, to US$208 per kWh, according to Bloomberg New Energy Finance (BNEF). Relative optimists tend to see future cost declines between 15 per cent and 21 per cent annually — the standard range for annual price improvements for rapidly rising mass-produced products since the Industrial Revolution.

In contrast, skeptics believe a “scalability issue” will retard price reductions for typical rechargeable batteries, and possibly lead to outright shortages, with the back-end resource industries required to provide the needed lithium, cobalt and graphite unable to keep up with potential high growth markets such as cars, domestic batteries and power grid storage.

The raw material supply chains are certainly immature, and much of the currently known economic resource suffers severe above ground risks. For example, 60 per cent of the world’s current cobalt supply comes from the Democratic Republic of the Congo, war ravaged and ranked one of the most corrupt in the world by Transparency International.

But in their 2014 book “The Second Machine Age,” MIT professors Erik Brynjolfsson and Andrew McAfee argued convincingly that 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 Brynjolfsson and McAfee gave to support their thesis were autonomous vehicles and artificial intelligence.

As of now, most of the world’s leading automakers and electronics companies are spending heavily on battery R&D — as well as numerous smaller companies led by top scientific minds. As a result, lithium-ion batteries could “blow past” Industrial Age levels of price reductions, and even if natural resource constraints prove relatively severe, they may still fall within the historical 15 to 21 per cent range of annual decline.

For example, in November, the research arm of Samsung Electronics announced that it had developed a “graphene ball” that increases the capacity of lithium-ion batteries by 45 per cent and charging speed by five times.

Last August, Bill Joy, tech guru and a co-founder of Sun Microsystems, announced that Ionic Materials, a company he is associated with, had developed an advanced, solid-state alkaline battery — like the 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 — that are more environmentally friendly.

In February, Ionic Materials announced it had raised US$65 million to build a production line and commercialize its technology, with advanced lithium-ion batteries firm A123 Systems and venture capital firm Alliance Ventures — a partnership between automakers Renault, Nissan and Mitsubishi — investing and acting as strategic research partners.

The companies are planning to have their battery ready for market by early next decade, while also making Ionic’s revolutionary plastic polymer — the basis for solid-state — available to the existing lithium-ion battery industry as Ionic’s own batteries gain market share. The goal of Ionic Materials is to bring down the cost of its battery to an outrageously low US$30/kWh by 2022, compared to BNEF’s forecast of US$70/kWh for lithium-ion batteries by 2030.

According to Joy, the storage and retrieval cost of Ionic Material’s battery translates to roughly US$0.01 per kWh on a lifetime basis — cost per grid kWh and battery capacity kWh are indeed different, and hence, not directly comparable — which takes into account the number of cycles the battery gets and so-called discharge percentage to achieve more of an apples to apples comparison.

At the present time, in North America, the cost of producing power from natural gas is roughly US$60 per MWh — divide by a thousand for kWh equivalent — about US$10 per MWh more than utility scale solar PV and onshore wind, based on levelized cost of energy (LCOE) calculated by the financial advisory firm Lazard. But the cost advantage of these renewable sources of power is negated by the fact they are intermittent in nature, imposing additional costs for backup generation when the sun isn’t shining and wind isn’t blowing, and extra transmission and network costs to connect to relatively distant customers.

Based on findings by the UK Energy Research Centre, this adds an additional US$13 to US$50 per MWh to the final cost of solar and wind power, with the former reflecting less than 30 per cent intermittent renewables in the power mix and the latter more like half. Hence, solar and wind remain at a competitive disadvantage to gas in North America at the present time, barring subsidies from various levels of government.

In Asia, the target market for B.C.’s LNG, natural gas tends to cost around 2.5 times more than North American gas given the high cost of shipping LNG to the region to cover its gas deficit and contractual factors. In turn, this translates into a power cost from gas of roughly US$105 per MWh in Asia, since gas accounts for half the cost of producing power from a combined-cycle plant in North America.

Pencilling in Lazard’s estimated cost of utility scale solar PV in India and Japan, US$71 and US$62 per MWh, respectively, and comparing it to the cost of power produced from gas, LNG will no longer be competitive in India once the cost of battery storage has fallen below about US$0.03 per kWh in India and around US$0.04 per kWh in Japan — and this is assuming no additional declines in the cost of solar power. The cost of battery storage is currently roughly US$0.07 per kWh and falling fast.

To conclude, it is widely believed that the global LNG market will be short of gas by the middle of the next decade, following a period of glut and the recent lull in FIDs. It would be best for the Canadian, B.C. and Alberta governments to do all in their power to get as many B.C. LNG projects as possible sanctioned during the next wave of global expansion, as it may be the last.

Unfortunately, this task could become all the more difficult upon a successful trade negotiation between China and the U.S. — the International Energy Agency (IEA) is forecasting China to account for a fifth of global LNG market growth through 2040. Chinese officials already are offering to import substantially greater volumes of U.S. LNG in the future as a means to reduce their massive bilateral trade imbalance.