Competition, Capital, and People

Rewriting the Rules of Engagement

S U M M E R 2 0 1 4

F O C U S I N G O N M E M B E R S I N I N D U S T R Y

The LNG Opportunity in BC

BC’s more than 28,000 professional accountants are invited to attend the CPABC Fall Leadership ConferenceKirstine Stewart, Managing Director and Head of Twitter Canada,

and John Ibbitson, author and political columnist for The Globe and Mail,

will headline three days of stimulating and thought-provoking professional

development at the Fairmont Empress Hotel and the Victoria Conference

Centre in September.

Register Today!

PROS KEEP LEARNINGBC’S TOP ACCOUNTING CONFERENCE JUST GOT BIGGER – AND BETTERCPABC FALL LEADERSHIP CONFERENCE

September 17-19, 2014

Victoria, BC

bcCPA.ca

SUMMER 2014 | page 3

S P R I N G 2 0 1 4

6 The LNG Opportunity in BC – Part I

9 Competition, Capital, and People

13 LNG: An Overview of a Nascent Industry

14 An Overview of the LNG Shipping Industry

19 In the Wake of Tsilhqot’in, To Do Nothing is No Longer an Option

22 Rewriting the Rules of Engagement

26 The LNG Opportunity in BC – Part II

In this Issue

Liquefied Natural Gas (LNG) and British Columbia

Over the past two years, LNG has become one of the most important, and controversial, issues in British Columbia. The global LNG market is rapidly growing and many BC and foreign companies are hoping to capitalize on BC’s large natural gas reserves. However, development of the LNG industry has been met with environmental concerns and a need to meaningfully consult with local First Nations.

This issue of CPABC Industry Update profiles the economic potential of the LNG industry in BC, the global LNG market, the challenges of transporting LNG, the infrastructure that is being created to export LNG, the need for full consultation and partnerships with local First Nations, and the impact a blossoming LNG industry could have on CPAs and the BC economy.

The summer 2014 issue also includes updates about the CPABC Fall Leadership Conference, taking place in Victoria from September 17 to 19 and a new CPABC Professional Development section.

We hope you enjoy this summer edition of Industry Update.

14

19

2296

British Columbia’s CA, CGA, and CMA bodies are currently working to unite under the CPA designation. CPABC Industry Update is their online magazine for members, candidates,

and students working in industry.

AboutCPABC Industry Update is published online four

times a year and is sent to over 28,000 CA, CGA, and CMA members, candidates, and students in

British Columbia. Opinions expressed are not necessarily endorsed by the ICABC, CGA-BC, or

CMABC. Copyright CPABC Industry Update 2014.

Contact usVisit us online at bccpa.ca, or email

info@bccpa.ca. Editorial inquiries can be sent to James Eisner at jeisner@bccpa.ca.

4 Industry Snapshot: LNG Process and Facts

18 PD Opportunities

30 Connect with CPABC Online

in every issue

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Look for these icons throughout Industry Update

| I N D U S T RY U P DAT E page 4

MARKET

INVESTMENT

EXPORT

* Main data source: Global LNG: Will new demand and new supply mean new pricing?, published by EY. Additional Info: Premier’s Liquefied Natural Gas Working Group, The Premier’s Liquefied Natural Gas Working Group: Final Report, March 2014; Deutsche Bank Markets Research, Global LNG: Gorgon & the Global LNG Monster, September 2012; J.P. Morgan Cazenove Global Equity Research, Global LNG, January 2012; and Deutsche Bank Global Market Research, The Australian LNG Handbook, September 2011.

Gas extracted from well

Gas and water is gathered; water is

treated

Gas is processed

Natural gas sent to LNG facility via transmission pipeline

LNG demand is forecasted to grow by 5%-6% per year through 2020.

China and India are expected to be the biggest sources of future LNG demand.

Natural gas will account for 25% of the world’s energy mix in 2035.

The world has almost 600 mtpa of LNG regasification capacity, far exceeding

current and projected supply or demand.

World regasification capacity could rise by as much as 200 mtpa by 2020.

Of the 13 proposed or announced LNG facilities, 11 have applied to the National Energy Board

for a licence to export LNG.

7 of these licences have already been granted.

The average cost for the recently sanctioned and proposed projects is

more than US$2.6 billion per mtpa.

A gas treatment process condenses impurities, such as carbon dioxide, mercury,

hydrogen sulphide, and water, and removes them

from the gas

The natural gas is then cooled to -160°C using

refrigeration and compression

The LNG is stored in cooled storage

tanks

LNG is put onto specially built ships for export

LNG plant

LNG production is measured in millions of (metric) tonnes per annum, known as “mtpa.”Since 2000, global LNG demand has risen by an estimated 7.6% per year.

This increase in demand is almost three times higher than the increase in demand for natural gas.

As of March 2014, 13 LNG export facilities have been proposed or announced in BC.

Between 2013 and 2023, there are an estimated 47 projects planned in BC.

More than 30 countries have proposed plans to build or add LNG import/regasification capacity.

By 2020, the number of countries with import capacity could double to 50.

These projects are worth more than $500 million each.

The expected total investment is $165 billion.

This cost is more than double the historic average.

The LNG Process

SUMMER 2014 | page 5

MARKET

INVESTMENT

EXPORT

* Main data source: Global LNG: Will new demand and new supply mean new pricing?, published by EY. Additional Info: Premier’s Liquefied Natural Gas Working Group, The Premier’s Liquefied Natural Gas Working Group: Final Report, March 2014; Deutsche Bank Markets Research, Global LNG: Gorgon & the Global LNG Monster, September 2012; J.P. Morgan Cazenove Global Equity Research, Global LNG, January 2012; and Deutsche Bank Global Market Research, The Australian LNG Handbook, September 2011.

Gas extracted from well

Gas and water is gathered; water is

treated

Gas is processed

Natural gas sent to LNG facility via transmission pipeline

LNG demand is forecasted to grow by 5%-6% per year through 2020.

China and India are expected to be the biggest sources of future LNG demand.

Natural gas will account for 25% of the world’s energy mix in 2035.

The world has almost 600 mtpa of LNG regasification capacity, far exceeding

current and projected supply or demand.

World regasification capacity could rise by as much as 200 mtpa by 2020.

Of the 13 proposed or announced LNG facilities, 11 have applied to the National Energy Board

for a licence to export LNG.

7 of these licences have already been granted.

The average cost for the recently sanctioned and proposed projects is

more than US$2.6 billion per mtpa.

A gas treatment process condenses impurities, such as carbon dioxide, mercury,

hydrogen sulphide, and water, and removes them

from the gas

The natural gas is then cooled to -160°C using

refrigeration and compression

The LNG is stored in cooled storage

tanks

LNG is put onto specially built ships for export

LNG plant

LNG production is measured in millions of (metric) tonnes per annum, known as “mtpa.”Since 2000, global LNG demand has risen by an estimated 7.6% per year.

This increase in demand is almost three times higher than the increase in demand for natural gas.

As of March 2014, 13 LNG export facilities have been proposed or announced in BC.

Between 2013 and 2023, there are an estimated 47 projects planned in BC.

More than 30 countries have proposed plans to build or add LNG import/regasification capacity.

By 2020, the number of countries with import capacity could double to 50.

These projects are worth more than $500 million each.

The expected total investment is $165 billion.

This cost is more than double the historic average.

The LNG Process The LNG Facts

| I N D U S T RY U P DAT E page 6

Editor’s note: In a two-part feature published

in the Business Council of British Columbia’s

Environment and Energy Bulletin, the validity of

the arguments suggesting that BC should put the

brakes on LNG development are assessed.

Part I (Volume 6, Issue 3, June 2014) focuses

on the economic concerns related to LNG

development in BC; chief among these concerns:

the highly competitive Asian market, and the

possibility that the price spread supporting the

LNG opportunity in BC could easily disappear.

Part II (Volume 6, Issue 4, July 2014) focuses

on concerns about climate change and other

environmental impacts linked to LNG. Here’s an

abridged version of Part I, published with the

authors’ permission.

The LNG Opportunity in BC:

Separating Rhetoric from Reality - Part I

LNG Economics

In the BC context, the scale of market activity in the LNG sector is remarkable. It is clear that the potential for private sector LNG capital deployment is unprecedented

in BC’s history.

To summarize the activity briefly, BC (and Alberta) have world-class upstream natural gas resources – estimated

By Tom Syer and Jock Finlayson

in excess of 500 trillion cubic metres of reserves – making Canada the fifth largest gas producer in the

world. To date, these natural gas resources have been well developed by a cluster of companies that are global leaders in shale gas development. Combined with BC’s institutional/regulatory stability, close proximity to Asia, and the existence of a significant price differential between Asian and North American natural gas markets, BC’s resource abundance has prompted as many as 13 proposed LNG

projects – over half of which are led by major global energy companies on both the supply and demand sides.

These proposed projects each represent capital deployments valued between $1-2 billion for the smaller projects and up to $20+ billion for the larger LNG facilities. When incremental midstream and upstream activity is added in, the total private sector capital deployment for a large LNG project will exceed $36+ billion.1

Private Sector Investment Activity Actual expenditures – dollars spent by proponents on regulatory work, front-end engineering and design, labour and supply chain activity, and partnership development – are already in evidence. We estimate that the cluster of LNG

SUMMER 2014 | page 7

projects in BC has deployed well in excess of $2 billion on project-related expenditures to date. 2

And several projects currently have go-forward budgets exceeding $1 billion.3 This activity includes a growing number of LNG project offices in BC and a material increase in the work flowing to goods and services companies, as well as a sizable number of global LNG supply chain firms entering the local market.4 When the value of market transactions to build out project consortiums is included, the relevant investments quickly grow by multi-billion dollar increments.

On the regulatory and permitting front, in terms of environmental assessment (EA) process activity, one LNG

project is now fully certified, four are currently

going through EA reviews, and several others

are in a pre-application phase.

Turning briefly to LNG export requirements, permits to

export have been issued to nine domestic-

based LNG export facilities by the National Energy Board, with two others still in the review process.

On the financing and partnership development side, most LNG projects continue to build and diversify their ownership structures, with domestic and Asian partners being announced for several projects. Overall, most

project proponents have indicated that they

expect to arrive at final investment decisions

within the next 6 to 24 months.

Judged against this backdrop of strong private sector investment interest and activity, the provincial government’s desire to facilitate LNG development is sensible and economically prudent. Given the significant financial benefits that will be derived from establishing a commercially viable LNG industry in BC, we believe the government’s approach is clearly in taxpayers’ interest.

Concern that the LNG marketplace is highly competitive and that the BC government may be putting “too many eggs” in the LNG basket may or may not turn out to have some validity. However, it is market factors and market forces that will determine the size and shape of the nascent LNG industry in British Columbia. BC has faced commodity cycles many times in the past – the reality of global commodity market fluctuations is not particularly new. But entering this market does merit some caution, as well as careful management of both policy development and public expectations.

At this stage, we believe the high level of private sector interest and real expenditure activity around LNG in the province is a clear signal that government should continue to vigorously advance its work on the policy frameworks needed to enable LNG development.

Many critics fall into the trap of thinking that LNG is primarily a government initiative. This is untrue. At its core, LNG is a private sector, market-driven opportunity.

Drilling deeper into critics’ commentary, much of the focus centres on a complaint that government is rushing policy development and hasn’t been transparent or consulted widely enough with other key interests. Below, we assess this concern as it relates to tax and fiscal matters associated with LNG development.

Assessing the Tax Framework In the 2013 Throne Speech , the government announced that it would create a “Prosperity Fund” with LNG tax revenues to ensure the public receives a fair portion of the potential “rent” resulting from the price arbitrage opportunity between North American natural gas prices and Asian markets. To assist with verifying the opportunity, the government commissioned and released an independent review of the potential tax

benefits from LNG, built around a relatively optimistic growth/price scenario.

Subsequently, in the 2014 budget, the government put forward additional details of the proposed “two-tier” LNG income tax structure – with the benefits at a hypothetical plant level.

The tabling of a proposed tax in advance of actually legislating the rates is a notable departure from traditional tax policy-making. This step has provided legislators, industry, and other stakeholders with an opportunity to consider and comment on the fiscal regime proposed

1 $36 billion is the publicly cited figure for the Petronas (Pacific Northwest LNG) project.

2 Note that this figure does not include upstream drilling activity, which would add several billion additional dollars of spending.

3 Chevron/Apache has publicly acknowledged deployment of more than $1 billion to date with a 2014 budget in excess of $1+ billion. The consortiums led by Shell and Petronas have each invested several hundred million to date.

4 These numbers are based, in part, on the increased membership activity noted by Business Council staff.

| I N D U S T RY U P DAT E page 8

for the LNG industry prior to the finalization of all of the relevant details. It has also provided negotiating flexibility between government and proponents.

The question is not whether there are significant economic benefits to be reaped from LNG development (there clearly are), but rather about their magnitude and timing. Ultimately, whether the direct government tax value of future LNG development ends up closer to $20 billion or $100+ billion,5 it’s clear that the fiscal upside for the province is substantial.6

While critics can question the government numbers, the reality is that much of the fiscal benefit will be determined not by government, but by the global marketplace for LNG.

LNG in the Global Marketplace for Energy Globally, natural gas is going through an adjustment phase as the shale gas revolution transforms traditional regional supply and demand dynamics, driving price differentials that have opened up attractive market opportunities for natural gas exports into Asia.7

The Asian marketplace is in a very dynamic phase for natural gas import planning and supply option analysis, which creates some urgency to ensure that BC’s supply options are fully and fairly explored.8

Importantly, and also linked to this analysis, BC (and

Alberta) faces significant risk from continental

natural gas prices that are likely to remain

relatively flat for a decade or more as the implications of the North American shale gas bounty are priced into the domestic market.

The current phase of active planning by Asian energy importers will not last forever – even if natural gas demand in Asia continues to grow over time. As the recent Russia-China natural gas trade agreement highlights, long-term energy import decisions are being made now.

Taken in combination, there are clearly a series of market-driven imperatives that underpin the sense of urgency around LNG policy development in BC, and a real, market-driven urgency to advance the LNG opportunity in BC as various Asian energy-importing countries take steps to secure energy supplies for the future.

Conclusion – A Bright Economic Path Ahead? Overall, we believe there is a solid economic fact base supporting the view that LNG development will be positive for BC economically and essential to realizing the benefits of the province’s vast shale gas resources over the short, medium and possibly long term.

Based on our analysis of both current and predicted private sector investment activity, there is little doubt BC is benefitting from LNG development now, with a strong possibility for transformational growth in the near future. LNG and natural gas development hold real promise for sustained benefits over the medium to long term across many key metrics. In fact, we believe that slowing the pace of LNG development at this stage, as some critics suggest, would significantly disadvantage the province.

While the majority of LNG critics tend to focus mainly on environmental matters, the purely economic arguments against LNG development in BC are weak, in our view. Critics would contribute more to the economic aspects of LNG policy debates by focusing on global competitiveness challenges as well as domestic distributional issues – such as looking at First Nations and community-level benefits, infrastructure needs, downstream diversification opportunities, and the potential structure and governance of the proposed Prosperity Fund.

To read the original version of this article, visit www.bcbc.

com/publications/2014/the-lng-opportunity-

in-bc-separating-rhetoric-from-reality-part-i.

5 The $20 billion is a “low” scenario put forward by the CCPA; $100 billion is a figure proposed by government as part of the analysis tabled with the 2013 budget and undertaken by Ernst & Young.

6 Even assuming a modest build-out of the sector, the investment levels would be unprecedented.

7 This price differential is well explored in many other assessments.

8 This situation is brought about by a number of factors: LNG contract cycles, major capital deployment choices between LNG and pipelines, geo-political tensions, and climate/air pollution matters.

Tom Syer is the vice president of policy and communications at the Business Council of British Columbia.

Jock Finlayson is the Business Council of British Columbia’s executive vice president and chief policy officer.

Separating Rhetoric from Reality – Part I (cont’d)

SUMMER 2014 | page 9

Competition, Capital, and People

Canada’s Global CompetitorsCanada’s extensive reserves, stable and reputable political environment, and transportation cost advantages won’t be enough to attract the attention of investors and secure long-term supply contracts in today’s competitive LNG market. Capital will always flow to the most

economically viable project.

Global powerhouses, including Australia and Qatar, remain dominant threats to Canada’s LNG potential, although many face political and geographic challenges. Emerging supply markets such as East Africa and Russia currently operate below the radar, but could become future competitive threats if their projects get off the ground.

And, closer to home, the US continues to increase its focus on the sector. Seven projects have already received approval in the US, and the Cheniere Energy Inc. project is scheduled to produce its first cargo by late 2015.

Where does Canada stand against US exports? Many argue that Canada has a transportation cost advantage based on shipping distance. The West Coast provides a direct

route to Asian markets that’s shorter than

those from the US and on par with

Australian shipping times. To access Asia, the world’s premium-priced LNG market, US cargos will have to travel through the Panama Canal. And, while the expanded canal will cut shipping times significantly, there is still much

uncertainty around tolls.

Canadian LNG production not only faces

competition from other countries but from other

energy resources. Coal and nuclear power production is on the rise in many countries. Japan’s Prime Minister Shinzo Abe has suggested that the country may restart a significant portion of its nuclear reactors. And although Germany has

Excerpted from “Competing in the global LNG market: Evolving Canada’s

opportunity into reality,” a paper by EY’s Canadian Oil & Gas practice.

See the complete report at ey.com/ca/lng.

| I N D U S T RY U P DAT E page 10

Competition, Capital, and People (cont’d)

taken strides to shutter all of its nuclear plants, we’ve seen a significant increase in German coal-fired power generation – in part made possible by access to relatively inexpensive (certainly compared to LNG cargos) US coal supplies that have been pushed out of the US because of regulatory and market pressures.

While much of the current demand for LNG originates from Japan and Korea, it may be China that represents the largest potential buyer of future LNG. The Chinese government has already declared its desire to significantly ramp up its use of natural gas and reduce its overreliance on coal, which has caused very significant air quality concerns. In time, China expects to feed significant demand with its own shale gas resources but until that resource is developed, it is likely that Chinese demand for LNG will grow. Demand for natural gas in China could reach as much as 43 bcf/d [billion cubic feet per day] by 2030.

Russian pipelines to China, LNG opportunities from Mozambique, and buyers’ efforts to break the long-standing oil-indexed-linked pricing mechanism also contribute to fierce competition at the global level.

Capital AllocationThe capital agenda continues to dominate discussion at the C-Suite and boardroom tables of the world’s leading oil and gas companies. Important strategic decisions around where, when, and how to raise, invest, preserve, and optimize capital have become increasingly challenging as companies struggle to achieve satisfactory returns and effectively manage risk.

Canadian LNG projects will have to compete globally for capital against projects in many jurisdictions. For example, the significant capital requirements for pipelines, infrastructure, liquefaction facilities, and development of the required natural gas reserves for Canadian projects will have to compete with brownfield projects in the US where a far more developed infrastructure capable of supporting LNG exports already exists.

For participants looking to grab some share of the multi-billion dollar spend that will be needed to advance the BC LNG projects, the dynamics of this capital allocation process and the global organizations that are behind the projects add to the complexity. Where are the decisions being

Canada’s Advantages

• Regulatory and market support for exports

• Projects led by global players (operators, customers)

• Cost advantages vs. competing projects (all-in transportation, operating costs)

• Participants hold equity interests in gas

• Stable legal and fiscal business environment

• Skilled local labour market in Western Canada

Canada’s Disadvantages

• Infrastructure required (facilities, pipelines, production, and civil)

• Cost pressures (project construction, people shortages)

• Global competition

• Evolving pricing arrangements (oil price de-linking)

• Complex First Nations dynamics

• Continuing uncertainty regarding applicable fiscal regimes

SUMMER 2014 | page 11

made? To secure a contract, do sales calls get

made in Canada, Houston, or somewhere in Asia? What is the timing of the spend? Will global procurement practices and world-class best practices in areas such as “modularization” leave room for BC content? And, will wage inflation zap profit margins both for the project owners and contractors?

Another challenge to those assessing an

investment in a Canadian LNG project is the

ongoing chess game around how LNG cargos

will be priced. LNG buyers are holding out for supply contracts that break – or at least modify – the traditional oil-indexed-linked contracts. Sellers (the project developers) argue that their projects simply are not economically viable unless they earn sufficient premium over simple Henry Hub pricing models.

Buyers are proceeding cautiously, pointing to the large number of announced “new-build LNG projects” globally and assert that there will be plenty of LNG supply (in fact, if all announced projects were to proceed there would be a significant oversupply based on current demand forecasts).

There is considerable risk to LNG buyers, however, that they will find themselves short of LNG. Given the structural challenges to achieving adequate returns that many of the global oil and gas companies are facing, and the cost blowouts on many of the recent LNG projects, it seems unlikely that projects will proceed, in

Canada or elsewhere, unless acceptable pricing

arrangements are achieved. And no new LNG facilities means no downward pressure on LNG prices.

Another dynamic affecting Canadian LNG projects

is the structuring required to accommodate the

multifaceted nature of the projects. Upstream spending decisions, the need for significant investments in pipeline and midstream facilities, the multi-billion dollar investment in liquefaction facilities, ports, logistics, and the need for sophisticated marketing operations to manage complex processes leads to complex business structures. Add to the mix the need for project structuring to achieve desired risk management and mitigation objectives. All projects will also require very sophisticated financing structures to support the required project returns. The good news for Canadian projects is that the financiers will

see relatively little geopolitical risk. The more challenging news is that many perceive relatively higher project cost risks, given the Australian LNG experience and Canada’s cost history in the oil sands.

People, Processes, and CostsSolving the cost challenge is not easy. These are multi-faceted projects being executed in difficult operating conditions. In Canada, that means starting with little existing infrastructure, challenges in securing adequate labour capacity – at a fair price – and very stringent regulatory processes. Similar to the emergence of the oil sands industry some 30 years ago, in a relatively remote region of Northern Alberta, the LNG industry will be developing on predominantly greenfield sites without some of the existing infrastructure that exists for many of the proposed US sites.

Moving LNG projects forward comes at a steep

price and one misstep can result in significant

cost overruns. We’ve already seen the effects of this in Australia and the result has left many cautious. Cost blowouts have severely pressured project returns and challenged the viability of the Australian industry. Many of these same LNG developers are involved in the Canadian LNG projects and advancing these projects will require confidence that the Australian cost experience will not be repeated.

| I N D U S T RY U P DAT E page 12

The costs associated with LNG grow even greater when labour challenges enter the equation. Finding the labour to advance Canadian projects will be challenging. High levels of development and construction activity are causing shortages of skilled labour across the country, including mechanical, electrical, and process engineers, construction foreman, welders, etc. Exacerbating this

challenge is the increased need for specialized

LNG-specific skill sets (aluminum welders, for

example), where experience is limited in Canada. Increased demand for specialized skills will drive costs up and lead to higher salaries, perquisites, and training costs, and, at the end of the day, high project costs. Adding to the labour force dynamic, the use in Canada of temporary foreign workers has recently come under fire.

To help solve the labour challenge, the BC government announced an LNG-labour working group that included 18 representatives from government officials, organized labour, the Haisla Nation, and major LNG industry players. The group produced 15 recommendations to tackle apprenticeship, training, and other challenges in growing the LNG industry. The report is publicly available and actions are under way to implement the proposed recommendations.

Addressing labour concerns is only one of the important elements of successful project management. Project success also depends on a sophisticated and holistic approach to project and cost management, from the fundamental structural design of the organization, to creative contractual terms for project build-out, to the use of technology to increase reliability and reduce costs. Innovating at every turn is essential. Companies must re-think traditional business processes and embed digital oilfield concepts such as remote operations centres directly into projects at the outset. They must also develop operating practices for the underlying natural gas development and production operations that align with the unique challenges and opportunities posed by unconventional resource development.

Top 10 Construction-Related Jobs

with the Greatest Demand*

1. Steamfitters & pipefitters

2. Construction workers and

labourers (including riggers)

3. Welders

4. Concrete finishers

5. Heavy equipment operators

6. Carpenters

7. Truck drivers

8. Purchasing agents and officers

9. Gas fitters

10. Crane operators

* Source: B.C. Natural Gas Workforce Strategy Committee, B.C. Natural Gas Workforce Strategy and Action Plan, July 2013.

Competition, Capital, and People (cont’d)

SUMMER 2014 | page 13

LNG: An Overview of a Nascent Industry

A generational opportunity. Multi-billions of dollars of possible capital and operating expenditures. Taxes and other levies that will fund community

development, education, training, and social programs. Jobs, prosperity, and the potential to thrust the BC natural gas industry onto the world stage. These are just some of the benefits credited to the BC liquefied natural gas (LNG) opportunity.

Sounds attractive – but there are multiple challenges, too. Environmental considerations, project infrastructure complexities, ensuring that First Nations are included, and creating a competitive fiscal and tax regime are not easily addressed.

Moreover, the competition is not just next door – it’s global –and BC isn’t the only jurisdiction wanting its share.

The global LNG industry is celebrating its 50th birthday this year with growing demand and an ever-increasing amount of new capacity proposed around the world – as much as 350 million (metric) tonnes per year (mtpa) – which, if all were built, would more than double current capacity by 2025.

Fifteen Canadian LNG export projects have been proposed and nine have already received export permits with the expectation that many more will be approved (with a view that ultimately the market, and not the National Energy Board, will determine which projects are viable). Proposed projects represent more than the equivalent of Canada’s current daily natural gas production of approximately 14 billion cubic feet per day (bcf/d).

Investment in Canada’s LNG industry will depend on whether LNG projects are competitive globally. Plentiful natural gas reserves alone will not support development. Understanding where Canada stands requires zeroing in on the factors that determine competitiveness. These include considerations such as:

1. Understanding the state of global competition and how other projects will impact the supply, demand, and pricing balances;

2. Creating a framework where the various First Nations communities will support projects;

3. Addressing complex capital allocation decisions by global players, many of whom have multiple opportunities and are focused today on ensuring adequate project returns;

4. Building a fiscal policy that is fair to multiple different constituents and ensuring that such fiscal policy will

remain consistent over the life of the projects; and

5. Developing world-class competencies around people, processes, and costs.

Unanswered questions revolve around many of these factors. Evolving the Canadian LNG opportunity from promise to reality requires addressing them head on.

Excerpted from “Competing in the global LNG market: Evolving Canada’s opportunity into

reality,” a paper by EY’s Canadian Oil & Gas practice. See the complete report at ey.com/ca/lng.

| I N D U S T RY U P DAT E page 14

An Overview of the LNG Shipping Industry by Christian Waldegrave

Global demand for natural gas is rising. According to the International Energy Agency, growth in demand for natural gas is expected to outpace that of any

other fuel over the next 20 years.

The growing importance of natural gas is due to its widespread availability, competitive supply costs, and environmental advantages in comparison with other

fossil fuels. As a result, natural gas is expected to gradually displace coal as the primary fuel used for power generation and in industry over the coming years.

Natural gas can be transported in two ways. First, it can be moved in its gaseous state via pipeline. However, for transport over longer distances, it is more cost effective to liquefy the gas into liquefied natural gas (LNG) by

SUMMER 2014 | page 15

cooling it to -163 degrees Celsius at a liquefaction plant, thereby reducing the volume of the gas by 600 times. The reduced volume allows for the efficient storage and transportation of natural gas by ship over long distances, enabling countries with limited natural gas reserves or limited access to long-distance transmission pipelines to meet their demand for natural gas.

LNG is transported by sea via dedicated LNG carriers. These doubled-hulled ships feature a sophisticated containment system that holds and insulates the LNG in order to maintain its liquid state. LNG that evaporates during the voyage and converts back to natural gas (called boil-off ) is used as fuel to help propel the carrier. At the end of the voyage, the LNG is unloaded and turned back into its gaseous form at a regasification facility.

In 2013, a total of 237 million tonnes of LNG was shipped worldwide. Most of the demand for LNG comes from Asia, which accounts for 75% of global imports. Japan is by far the largest consumer of LNG, importing 88 million tonnes in 2013, or 37% of the global total. South Korea is the world’s second largest importer, while China and India are becoming increasingly important importers of LNG and are expected to be the main drivers of demand in the future.

On the supply side, 17 countries currently export LNG. The largest LNG exporter is Qatar, whose 78 million tonnes of exports in 2013 accounted for one-third of the global total. Other important LNG exporters include Malaysia, Australia,

and Indonesia.

An Overview of the LNG Shipping Industry Looking ahead, Australia is expected to overtake Qatar as the world’s largest producer of LNG in the next few years, while North America – including both the United States and Canada – is expected to emerge as a significant supplier of LNG by the end of the decade.

A fleet of around 400 dedicated LNG carriers is used to transport LNG across the world every day. A standard LNG carrier can transport approximately 150,000–170,000 cubic metres of LNG, although the largest vessels in the fleet can carry up to 265,000 cubic metres. LNG carriers are complex vessels to construct compared to bulk carriers or tankers and, as a result, are more expensive; the average price for a new LNG carrier is approximately $200 million. Most LNG carriers are built by shipyards in South Korea, although a small number of vessels are also built in Japan and China.

Ownership of the LNG carrier fleet is divided between a mix of private and state-controlled energy and utility companies that operate their own fleets or hire independent carrier owners and operators. Given the complex, long-term nature of LNG projects, major energy companies have historically looked to transport LNG through their captive fleets. However, independent private fleet owners and operators have, in recent times, been winning an increasing share of new LNG business.

Teekay Shipping, which has its global headquarters in Vancouver, is one of the world’s largest independent operators of LNG carriers, with an existing fleet of 29 vessels and another 15 carriers on order.

Chart 1: Top

Independent

Owners of LNG

Carriers

| I N D U S T RY U P DAT E page 16

Historically, the majority of the LNG fleet has been employed on long-term, fixed-rate contracts whereby a ship is dedicated to a specified project for a period of 20 years or more. The reason ships were employed on such long contracts was that the LNG itself was sold on long-term offtake contracts. These contracts were favoured because of the significant capital investments involved in natural gas extraction, liquefaction, transportation, storage, and regasification that are all necessary to build the LNG supply chain.

Under these long-term charters, the ship owner is paid a fixed rate, typically around $70,000-80,000 per day, and is responsible for the vessel’s operating costs (for example, crew, maintenance, and repair costs). The LNG company directs the commercial operations of the vessel and pays for all of the voyage costs (including fuel costs, port charges, and canal dues).

In recent years, a more fluid spot and short-term charter market for LNG shipping has emerged. This involves both the emergence of a true spot market, whereby LNG cargoes are sold on a single-voyage basis, and short-term charters of four years or less. In 2013, approximately 27% of all LNG trade was done on a spot or short-term basis, compared with just 12% in 2000.

Under a voyage charter, the ship owner gets paid freight for a single voyage and is responsible for all voyage and operating costs. LNG shipping spot rates can vary widely

due to market conditions, with earnings reaching as high as $150,000 per day during the strong spot market witnessed in 2012.

Looking to the future, the expectation is that LNG trade – and therefore LNG shipping demand – will grow significantly in the coming years. The main driver for this growth is new demand for natural gas in Asia and the growth in natural gas extraction in Australia, the US, Canada, Russia, and East Africa.

Teekay estimates that over 200 million tonnes per annum of new LNG liquefaction capacity will come online between now and the end of the decade. In order to transport these volumes, an estimated 160-210 new vessels will be needed, depending on where the vessels trade. As a result, ship owners have been busy ordering new LNG carriers in recent months. There are now over 100 vessels on order from shipyards in South Korea, Japan, and China. Some of these have been ordered to fulfill long-term contracts, but some have been ordered speculatively in expectation of future demand.

The build-out of LNG infrastructure across the globe bodes well for the LNG shipping industry. Ship owners are getting ready for the coming wave of LNG by building ships to meet the growing demand.

Christian Waldegrave is a shipping market analyst with over 10 years of experience. Currently, he heads up all research activities for Teekay Corporation and its daughter companies.

Chart 3: LNG

Carrier 1-Year

Time Charter

Rates

An Overview of the LNG Shipping Industry (cont’d)

SUMMER 2014 | page 17

The Impact of LNG Development on Ports and InfrastructureIncreasing infrastructure capacity to effectively transport British Columbia’s shipments of LNG is

a priority for both private businesses and port authorities. BC’s three major ports, who all play a

significant role in getting this resource to market, will be impacted, but the two ports that will be

most affected are the Port of Kitimat and the Port of Prince Rupert.

Port of Kitimat1

The Port of Kitimat, BC’s third largest port for international trade, is one of the few private ports in North America. The port is currently attracting substantial investment for energy-related projects. It is also one of the few facilities where private container terminal development is possible. As a private port, all facilities are built, owned, and operated by private enterprise.

The following major projects include the construction of marine terminal facilities. BC LNG will require new marine terminals; LNG Canada will modify an existing one (formerly used by Eurocan Pulp and Paper):

Douglas Channel Energy Partnership (BC LNG) A barge-based liquefaction plant is proposed to be located on the west side of Douglas Channel, south of Moon Bay. This small-scale project will initially use existing capacity in the Pacific Northern Gas pipeline and produce up to 900,000 tonnes of LNG per year. In February 2012, the National Energy Board awarded a permit to export up to 1.8 million metric tonnes of LNG annually over 20 years, equivalent to 250 million cubic feet per day (MMcf/d) of natural gas. The Haisla Nation, LNG Partners, Golar LNG, and an unnamed Asian firm are the project partners.

LNG Canada – $12 billionIn May 2012, Shell Canada formally announced the development of a proposed two billion cubic feet per day liquefied natural gas export facility. The project consists of the construction and operation of natural gas treatment facilities, liquefaction facilities, storage facilities, marine terminal facilities, an interconnecting cryogenic transfer pipeline, and supporting infrastructure. LNG Canada will initially consist of two trains, each with the capacity to produce six million tonnes of LNG per year, with an option to expand the project in the future. In February 2013, the National Energy Board awarded a permit to export up to

24 million metric tonnes of LNG annually over 25 years. The approval process is expected to extend into 2015, and a decision to move the project into development could be taken in late 2015/early 2016, with start-up around the end of the decade (pending regulatory approvals and investment decisions).

Port of Prince Rupert2

The Port of Prince Rupert is the second largest port on Canada’s west coast, and the closest North American port to Asia by up to three days. It is the fastest-growing container terminal in North America with five existing terminals and has room for further development. The 750,000-TEU (Twenty-foot Equivalent Units) Prince Rupert Container Terminal is one of the most efficient facilities on the continent. The terminal has opened a new Asia-North America high-speed gateway, the first trans-Pacific trade corridor to be created in 100 years.

The BG Group is proposing an LNG facility that would liquefy and export natural gas to international markets. The facility will be developed in two phases: the first phase will include two LNG processing trains and in the second phase a third train will be added. The marine terminal will initially include one trestle and one ship-loading berth and, when the third train is constructed, a trestle and second berth will be added.

This $10 billion project is scheduled to begin in 2016. At peak construction, employment is expected to reach 3,850 during phase one and 2,000 in phase two, while creating 400 to 600 full-time permanent positions.3

1 All information was sourced from the District of Kitimat municipal website.

2 All information was sourced from the Prince Rupert Port Authority website.

3 Northern Development Initiative Trust, Prince Rupert LNG, March 2014.

| I N D U S T RY U P DAT E page 18

The Estate Planning Conference Day(A joint event by CPABC and the Society of Trust and Estate Practitioners Vancouver)

This event is designed to provide STEP Vancouver and CPABC members with practical and leading-edge estate-planning information. Sessions will include: The Application of the Division of Property Rules in the Family Law Act to Tax and Estate Planning, Blended Family Planning, Life Insurance Update, Being an Executor, Issues in Joint Partner Trust/Alter Ego Trust Planning, New Testamentary Trust Rules, 21 Year Issues for Trusts, Will Variation War Stories.

October 15, 2014 | Vancouver Convention Centre, West

Members in Business & Industry PD DayThis day is designed to provide members in industry with the most efficient way of obtaining practical information to use in the workplace. The focus is on issues that are relevant and timely. Keynote session is the Economic Outlook. Other sessions include Budgeting: Review of Current & Emerging Practices; Living Larger: How to Maximize Your Non-Work Time; Tax Update; Accounting & Financial Reporting Update; Outlook: The Killer App in Microsoft Office; and Personal Effectiveness: Self Awareness & Balanced Thinking. The topic of the afternoon plenary session is What Leaders Know About Effective Communication.

November 25, 2014 | Vancouver Convention Centre, West

Professional Development Opportunities for Members in Industry

PD CONFERENCE DAYS EXECUTIVE PROGRAMS

PD WEEKS 2014

The Controller’s Management ProgramThe Controller’s Management Program provides the theory, best practices, tools, and skills to take your leadership to the next level. It concentrates on four key leadership areas: self-awareness and self-management; organizational perspective and influence; managing and leading others; and effective communication for a variety of contexts.

September 10-13 | Whistler

The Controller’s Operational Skills ProgramThis program is designed to enhance your role on the management team by sharpening your skills in risk management and controls, ethical leadership, planning, budgeting and forecasting, performance measurement approaches, and financial reporting.

October 19-22 | Whistler

The CFO’s Operational Skills ProgramThis program delivers the core CFO competencies that organizations expect. Get up to speed on corporate governance and risk management as well as the latest tools and applications. Examine the relationship of strategy and risk-taking and help drive your organization’s mission and success. Nail down the planning, budgeting, and internal control competencies that deliver efficient and effective operations.

November 23-26 | Whistler

Kelowna: Oct 20-24 (Coast Capri) and

Nov 17-21 (Ramada Hotel)

Nanaimo: Dec 2-6 (Coast Bastion)

Parksville: Oct 20-24 (Quality Resort)

Surrey: Nov 17-21 (Sheraton Guildford)

Vancouver: Nov 3-8 (Vancouver Convention Centre, West) and Dec 8-13 (Vancouver Convention Centre, West)

Victoria: Oct 27-31 (Victoria Conference Centre) and Nov 24-28 (Marriott Inner Harbour)

We will also be offering seminars in Abbotsford, Coquitlam, Kamloops, Prince George, and Richmond.

Mark your calendars now, and check back on our website in August for the full lineup of PD seminars scheduled during PD weeks, as well as throughout the fall.

SUMMER 2014 | page 19

In the Wake of Tsilhqot’in, To Do Nothing is No Longer an OptionBy Harold Calla, CPA, FCGA

The Supreme Court of Canada’s decision in Tsilhqot’in Nation v. British Columbia brings a new

reality to the context of Crown-First Nations negotiation regarding matters of infringement or impact on First Nations traditional territory where treaty does not exist.

This new reality makes the obligations that governments are required to carry out on the form and content of the duty to consult and accommodate significantly more substantive. Large tracts of First Nations traditional ter r i tor y fa l l under the Cour t ’s decision. No longer is it limited to just the reserve. This decision taken by the Supreme Court furthers the jurisprudence established in other landmark rulings regarding Aboriginal rights and title with Delgamuukw in 1997 and Calder before it in 1973.

| I N D U S T RY U P DAT E page 20

• Who has the right to decide how the land

is used.

• Who has the right to occupy, enjoy, and

possess the land.

• Who has the right to reap the economic

benefits and proactively use and manage

the land.

• Who has the right to exclude others from

the land.

project development and operations, that gover nments and pro jec t proponents employ Aboriginal rights and title mitigation measures when and where they are required.

Governments retain the final authority to proceed with projects, but they face a much higher threshold to demonstrate that any infringements on First Nations rights and title have been given an appropriate and meaningful level of consideration. Such a level of consideration may only be satisfied after deep consultation and adequate and meaningful negotiations to address matters of accommodation and environmental mitigation have begun in earnest.

Now that the Supreme Court has made another significant statement on the nature of Aboriginal rights and title, how do industry, federal and provincial governments, and First Nations governments respond? Are we going to maintain the status quo and in effect bury our heads in the sand?

First Nations are not blind to these significant, once-in-a-generation opportunities that may be unlocked by their participation in proposed resource development projects. However, First Nations do not wish to see projects proceed at any cost. There must be a balance between economic development and impacts on the environment.

In the Wake of Tsilhqot’in (cont’d)

The Supreme Court also specified governments’

abilities to determine and regulate the use of land

subject to Aboriginal title, and that provincial

laws still apply to Aboriginal title lands, subject to

constitutional limits. The decision will have major,

long-term implications for land and resource users,

developers, and financiers throughout Canada.

Sources: Roy Millen, Sandy Carpenter and Laura Cundari, “Supreme Court of Canada Releases Landmark Aboriginal Title Case,” Blakes Bulletins, June 2014; Roy Millen and Sandy Carpenter (Blakes), “Roger William: Implications in BC and Elsewhere,” Blakes Presentation on Aboriginal Title, July 3, 2014.

Clearly, First Nations rights and title have been recognized through the Supreme Court’s recent decision in ways that are more consistent with the view First Nations hold of themselves, as governments to be negotiated with rather than stakeholders to be consulted, particularly as it applies to unceded traditional territories.

First Nations governments want to participate and have a say in project reviews and approvals. They want to ensure that independent and in-depth environmental assessments take place. For First Nations, those assessments must look at cumulative impacts, and they must ensure that should there be a need to remedy any environmental and social problems that arise out of

The Supreme Court of Canada’s recent landmark ruling in the Tsilhqot’in Nation v. British Columbia case granted the Tsilhqot’in First Nation title to nearly

200,000 hectares of land in central British Columbia. This Supreme Court ruling

will be applicable to unresolved land claims. This ruling clarified:

SUMMER 2014 | page 21

Looking at value-added opportunities that can reduce environmental impacts should become a principle to be endorsed by all sides.

First Nations are looking for significant economic and social benefits from these projects. There is a strong desire to move towards self-reliance and away from dependency, and there are some examples that support this desire. We can point to projects like the Pacific Trails natural gas pipeline on Canada’s west coast as a first-of-its-kind negotiated arrangement with a consortium of First Nations as partners in a project. Although Pacific Trails was a non-equity arrangement, future negotiations with First Nations could produce an equity ownership position in major project developments, particularly as court-directed pressure increases on governments and industry to adopt more meaningful accommodation approaches.

Governments and industry will need to be open to such proposals as options for First Nations participation, and the necessary financial capacity is going to have to be in place for these opportunities to be realized.

In order for these opportunities to be realized, gaps in First Nations a d m i n i s t r a t i v e a n d f i n a n c i a l management capacity are going to have to be addressed to support the evolution of First Nations into the mainstream economy.

The First Nations Fiscal Management Act (FMA) holds the tools necessary to address these gaps and to

certify First Nations by assisting with the development of financial administration laws and financial management systems. Once rigorous thresholds are achieved, these laws and systems provide a means for First Nations to join an active borrowing pool in order to gain access to the capital markets. These tools may be leveraged on a much larger scale to provide a group of First Nations with access to the capital markets to facilitate equity investment in proposed projects. The magnitude of equity that will be required is beyond the reach of individual communities and the capacity of the current borrowing pool, but could be achieved with the issuance of a federal government guarantee.

The Tsilhqot ’in decision requires governments and industry to develop new approaches to sat i s fy the duty to consult and accommodate when projects involve impacts or infr ingement on First Nations traditional territories, particularly where treaties do not exist. These new approaches must be founded upon an understanding that Aboriginal rights and title do exist and must be supported. As part of this, options to accommodate the interests of First Nations should include access to capital for equity participation if it is requested. All parties must look beyond the investment required for equity ownership and take stock in the value that will be unlocked should the project proceed.

Equity as a mechanism for participation by First Nations, above all others, positions First Nations at the table with a meaningful say in all aspects of project management, including environmental mitigation. Such an opportunity would, for the first time, allow First Nations to be in control of their own future from both an economic and social perspective as full players in the economy of Canada.

Rightly, it will be up to individual First Nations communities to make the call on where, when, and how they participate in proposed projects. In order to arrive at these critical decisions, First Nations should be afforded the opportunity to consider a range of options upon which to make informed decisions.

The foundation to gaining the consent of First Nations on proposed projects must be built on the principle of establishing trust and respect with First Nations leadership, communities, and the grassroots. This will require government and industr y to be prepared to cons ider new and innovative options to include First Nations as partners in projects should they request it. The key concept here is partnerships.

I n the wake of Tsi lhqot ’in , i t i s abundantly clear that the status quo approach to dealing with First Nations is no longer an option.

Harold Calla, CPA, FCGA, is the executive chair of the First Nations Financial Management Board and a member of the Squamish Nation.

| I N D U S T RY U P DAT E page 22

Rewriting the Rules of EngagementBy Kasia Sell and Henry Stoch

SUMMER 2014 | page 23

When a resource company and a First Nation announced in July that they had formed a partnership to build a liquefied natural gas plant

on Aboriginal land on Vancouver Island, the news shone a spotlight on an emerging reality: First Nations in British Columbia are being engaged at a more meaningful level than ever before by the resource development sector.

The way business is conducted in BC’s resource industry is changing. First Nations now have a stronger voice when dealing with projects proposed on their territory. Resource companies are continuing to transform their relationships with First Nations communities. The rules of engagement are undergoing a fundamental change. Once simply meeting regulations, companies are now embarking on long-term, comprehensive relationships that, ultimately, bring the greatest benefit to all.

A landmark ruling in June by the Supreme Court of Canada will help speed along this evolving engagement process. In a unanimous decision, the court granted declaration of Aboriginal title to more than 1,700 square kilometres of land in BC to the Tsilhqot’in First Nation. This unprecedented ruling has significant implications for future economic and resource development on First Nations lands, and draws further attention to major pipeline projects, such as the Northern Gateway, that are poised to cross several First Nations territories.

Recognizing that stakeholder engagement must be not only done better, but also differently is good news for everyone. Here’s why:

Evolving to Long-Term RelationshipsFor years, the procedures for engagement with groups that would be affected by resource development projects, such as First Nations and local communities, was driven by the regulatory process. It was quite prescriptive: companies were required only to provide information about the

project, hold engagement meetings, consider the views of communities, and document the consultation process.

Our clients, both energy companies and First Nations alike, tell us that the traditional transactional approach has not produced a satisfactory long-term result for anyone. For their part, companies are realizing that to improve outcomes, they must gain a deeper understanding of Aboriginal values and relationships with the land, and engage First Nations during the project planning and design phases to discuss, consider, and address project risks and benefits. It is imperative that these relationships are built on a foundation of mutual respect and take the long-term view. Energy companies have also recognized they must deepen their relationships with environmental and other non-governmental organizations (NGOs), whose acceptance of a particular project can lend the weight of consensus to a company’s resource development plan.

The new approach includes initiatives that contribute to the long-term well-being of the communities impacted by development activities. It means working with local leaders to identify areas where the greatest benefits can be had, investing in them, establishing specific goals, and measuring progress through performance metrics. Over time, the effectiveness of these goals and investments can be benchmarked against the results the energy company has achieved with other communities.

At the same time, we’ve heard from our First Nations clients that they recognize the need to take a more comprehensive approach. They’re looking at responsible energy development as not only a way to ensure the long-term sustainability of their communities and the environment, but also as a way to drive economic independence. There’s now a heightened focus on community benefits, greater decision-making power, and engagement as partners.

The partnership announced by Steelhead LNG Corp. and the Huu-ay-aht First Nations (HFN) to build the LNG

| I N D U S T RY U P DAT E page 24

plant on HFN-owned land exemplifies this new approach to engagement. Larger, more complex LNG projects in development, such as in Kitimat, have also involved the negotiation of forward-looking agreements with multiple First Nations. Before long, these practices may well become standard procedure.

This new approach means companies who want to develop resources on First Nations land must look at a more extensive “benefits package” that will:

• Employ local workers in lasting and meaningful positions;

• Support local education and training initiatives over the long term;

• Support First Nations’ capacity to engage;

• Offer procurement opportunities;

• Share financial benefits or offer equity participation;

• Become involved in community development programs; and

• Measure the impact of their presence on the long-term well-being of the community by establishing per formance metr ics, measur ing them, and benchmarking that performance over time.

Several of these measures, such as employing local residents and investing in community programs, are not new. However, the availability of equity participation and the measurement of performance metrics in regards to community well-being are fresh initiatives.

Another new strategy, developed by Deloitte and First Nations communities, is the re-establishment of traditional forms of decision-making through community trust structures. These trusts put control of the wealth that can result from settled land claims, impact benefit agreements, or significant business revenue into the hands of the communities instead of banks, as has traditionally been the case. Investment decisions are made by trustees chosen by and from community members, not by corporate trustees with no stake in the development of the community.

Updating Approaches These new approaches represent a major shift in how the energy industry will do business in future. Companies and

First Nations must be ready to follow this new approach to resource development, as will the professionals who support them. New measures will need to be considered, such as:

• Developing forward-thinking engagement strategies;

• Understanding communities’ priorities and building consensus on desired outcomes;

• Capacity-building by First Nations through the establishment of governance structures that align with traditional decision-making processes to ensure community needs can be met;

• Establishing First Nations community development performance measures;

• Conducting investment assessments to track actual outcomes against set goals; and

• Timely and effective communication and disclosure on performance.

Well-planned engagement strategies should embrace core business processes that enable higher returns on investment and provide a sense of long-term certainty. An engagement-minded dealmaker will always look for a winning scenario for the key stakeholders, facilitating good conditions for successful business outcomes.

While the new “rules of engagement” may seem to require a significant amount of effort, especially in a highly competitive environment, the benefits they produce are worth it. In the end, authentic engagement between stakeholders in a resource project provides secure, significant, and long-term economic benefits for all parties — and that’s good news for everyone.

Kasia Sell is a manager in Deloitte’s Sustainability and Climate Change practice who consults on a variety of strategy, risk, and assurance projects related to social, economic, and environmental issues.

Henry Stoch is a partner in Deloitte’s Enterprise Risk group and leads the Western Canadian Sustainability and Climate Change practice. He has spent his entire career in the energy and resources sector, both in industry and consulting, focused on solving complex social, economic, and environmental issues at many of the most significant companies across North, Central, and South America.

Rewriting the Rules of Engagement (cont’d)

SUMMER 2014 | page 25

There has been a seismic shift in how resource companies, First Nations, and other

stakeholders approach working together.

Old Ways

• Interactions were governed by the regulatory process and companies were primarily concerned with meeting legal requirements.

• Companies relied on the regulatory process under the assumption that it would result in First Nations’ consent.

• Companies met with First Nations, as required, stating their plans and gathering input but would proceed with project applications despite concerns that had been raised.

• First Nations engagement was transactional to get project approval; companies ended engagement once the project began.

• Companies dec ided terms of compensation – money given for access granted.

• After regulatory compliance and community benefits were met, companies had the final say in projects and were willing to use legal means to access those resources.

New Ways

• In addition to regulatory acceptance, c o m p a n i e s n o w s e e k s o c i a l acceptance to operate, which is granted by the network of stakeholders — local communities, NGOs, etc. — in addition to First Nations. It is not a formal piece of paper, but general acceptance to proceed.

• Co m p a n i e s u s e m e e t i n g s to gather traditional knowledge and understanding of First Nations’ values and work to address concerns in a mutually acceptable manner.

• Engagement is ongoing from early planning all the way through the duration of the project to reach consent.

• First Nations determine community benefits and priorities and pursue e m p l o y m e n t o p p o r t u n i t i e s , procurement contracts, decision-making, and equity participation.

• Companies measure the impact of their presence on the well-being of communities through performance metrics.

Social Acceptance:

In a Nutshell

Companies that want to develop natural resources in BC must not only acquire the permits to proceed but also the tacit acceptance and ongoing approval of their various stakeholders, which may include local communities and NGOs.

While it is not a formal document, social acceptance still has standards. It’s built on a foundation of mutual trust. Stakeholders will accept a project’s legitimacy and credibility once certain specific requirements are met. If any of the conditions are broken, the much needed social acceptance can be withdrawn. Ensuring compliance can be tricky because there is no physical document. However, an Impact and Benefit Agreement can provide clarity.

The concept of social acceptance originated in the mining industry in response to concerns about sustainability, but it can be applied across the resource sector to govern situations where stakeholders have starkly diverging interests. Industry has generally been proactive in adopting this new approach, as it can help to avoid project delays or costly litigation. The various pipeline projects currently winding their way through British Columbia demonstrate the increasing challenges involved with obtaining and retaining social acceptance under the status quo.

| I N D U S T RY U P DAT E page 26

The LNG Opportunity in BC:

By Tom Syer, Denise Mullen, and Jock Finlayson

Editor’s note: In the second part of a two-part

feature published in the Business Council of

British Columbia’s Environment and Energy

Bulletin, the arguments suggesting that BC

should put the brakes on LNG development are

assessed.

Part II (Volume 6, Issue 4, July 2014) focuses

on concerns about climate change and other

environmental effects linked to LNG. Here’s an

abridged version of Part II, published with the

authors’ permission.

Environmental ConsiderationThe environmental critiques of LNG in British Columbia centre largely around two clusters of issues:

1. Greenhouse gas emissions and the impacts of LNG development on the province’s climate change policies and initiatives; and

2. The upstream impacts of natural gas development, most notably the use of water in the extraction process.

Greenhouse Gases and LNGTo ground the discussion, a useful starting place is to be clear about three facts:

1. Greenhouse gas emissions from fossil fuel use are increasing globally and need to be managed to address climate change;

Separating Rhetoric from Reality – Part II

SUMMER 2014 | page 27

2. Energy markets are dynamic, with long transition periods to new technologies and new supplies, owing in part to the massive capital stocks involved in energy systems; and

3. Natural gas, due to supply and demand

dynamics, will inevitably play an important

role in the shift to a less carbon-intensive

global economy.

The Natural Gas ImperativeThe logical necessity of increasing natural gas use to help manage climate concerns is now well-established in the literature. Looking at global energy demand and supply options, it is clear that it won’t be possible to quickly convert to low/no CO2 energy sources.

The size and complexity of the existing energy infrastructure, and the relative cost of supply options to satisfy demand, make it both technically difficult and costly to convert energy systems.1 This is particularly true in a world where the lion’s share of future growth in population, economic activity, and energy consumption will be heavily concentrated in emerging market economies.

Due to these energy supply and demand realities, the option to increase natural gas use is identified as a core component of the solution because only natural gas can serve as a relatively rapid substitute for higher CO2-emitting energy sources. This transition role for natural gas, in combination with other actions, can ratchet down an otherwise increasing global CO2 trend.

Although it is generally agreed that natural gas

has fewer greenhouse gases (GHG) than coal,

a more definitive report from the US Department of Energy’s (DOE) National Energy Technology Laboratory confirms that, on a life-cycle basis, this also holds true for LNG – even with long pipelines and long shipping distances to end-use markets.

GHG life-cycle emissions, from natural gas exploration to LNG to final conversion in a power plant (in China), are

40% lower than those produced from coal in a Chinese coal-fired generation facility. This difference would likely be even more favourable in the case of BC LNG, because the distance travelled from upstream through to delivery is shorter than that from the US (New Orleans).

Upstream Natural Gas Activities - FrackingHydraulic fracking was first used on an

experimental basis in 1947 and deployed

commercially in 1949 in Oklahoma. Fracking is not revolutionary, except to the extent it was combined with horizontal drilling techniques, an innovation which has enabled access to gas that cannot be extracted using more conventional methods. This innovation has resulted in the shale revolution – providing substantial volumes of shale gas in a cost-effective manner.

The environmental concerns about fracking include:

1) Water – quality and volume impacts;

2) Methane leakage; and

3) Earthquakes.

A well-regulated shale gas sector, using today’s

technologies, yields an upstream natural gas

industry that can and does operate safely and

with a relatively small environmental footprint.

More importantly, where impacts outside of acceptable parameters have been found in other jurisdictions, the analysis suggests the impacts can be mitigated and prevented.

Water ImpactsFracking in BC started in the 1950s, when the first natural gas well was drilled. None of the thousands of sites drilled to date in BC have led to contaminated groundwater. In reality, groundwater is located in a geological zone far above where gas extraction is generally occurring. The likelihood of contamination is very small – approaching zero when regulations are followed. The BC Oil and Gas Commission (OGC) requires, as part of the drilling process, that pressure-tested steel casings be cemented in place to prevent hydraulic fracturing fluids from migrating. In addition, monitoring and reporting requirements mean that gas companies are obliged to ensure the

1 For an insightful review of energy system transitions, see Peter A. O’Conner “Energy Transitions.” Pardee Papers, No. 12, 2010.

| I N D U S T RY U P DAT E page 28

integrity of the casing barrier. BC was the first jurisdiction to implement fracking fluid disclosure.

In terms of quantity, less than 1% of the annual water supply available in the region is used for fracking. Of this,

a growing percentage is recycled, with non-

potable sources largely being re-injected in

deep reservoirs as per the regulatory standards

that have ensured no aquifer contamination.

However, as LNG development stimulates an increase in upstream activity, water management and planning will become more important considerations. Appropriately, BC’s new Water Sustainability Act provides for better groundwater regulation. This will be a key step in making what is already a high-quality regulatory framework even more effective – allowing for continuous improvements as the sector grows.

Methane LeakageThere is a growing discussion regarding the

extent to which methane leakage from shale

gas drilling negates the significant CO2 benefits

of burning natural gas versus both oil and coal.

What is not debatable is that methane leakage does occur, and that above a certain percentage of leakage (roughly 4-6%), the benefits of natural gas can largely disappear in comparison to the use of other fossil fuels from a GHG emissions perspective.

Leakage rates reported in the United States are significantly below the inflection point. With a leading-edge regulatory regime in place, there is no reason to believe BC’s shale gas drilling programs would have significantly higher leakages.

There are a (small) number of ‘super leaker’ wells that can skew the data. These sites are anomalies. A focus on the right technology and regulatory activities on these sites is important; but such sites are not commonly found in BC.

Nevertheless, since methane is more potent than CO2 as a GHG, methane leakage is an issue worthy of attention.

Fortunately, there is a convergence of incentives to continue improving outcomes since methane leakage directly reduces the volume of natural gas available to sell. This provides an economic signal to both companies and government to act to limit leaks. On a net life-cycle basis, LNG does produce significant climate change benefits.

Seismic Activities — EarthquakesScientific analysis in the US and Canada has shown that fracking processes can stimulate minor seismic activities. On rare occasions, based largely on poor site selection for waste-water storage, a few jurisdictions have recorded small-scale seismic events.

The BC Oil and Gas Commission’s review

of seismic activity related to shale gas

development found that some minor seismic

activity was induced by fracturing. The report found no human injury or property/infrastructure damage from these events.

Research indicates that fracking-induced seismic activity is rare and minor in nature, and the potential for more significant induced seismic events can be eliminated through effective planning.

While there may be a general impression that those involved in the fracking process are indiscriminately injecting materials into the earth to crack the shale and release the gas, this is incorrect. In fact, the extraction process requires precision, and work in this area has led to more innovation and a new field of study in the sector called micro seismicity.

Cumulative ImpactsAnother LNG-related area of environmental concern is cumulative impacts. If LNG development moves ahead, there would be a substantial increase in industrial activity in northeastern BC and at proposed LNG facility locations on the coast.

Separating Rhetoric from Reality – Part II (cont’d)

SUMMER 2014 | page 29

The concerns in the northeast centre around the added land, air, water, and community impact on top of what is already a significant amount of natural resource development activity occurring in the region. Although

the Peace River area does have a completed

land use plan, some critics argue that more

attention needs to be paid to the cumulative

impacts of industrial activity. In communities most affected by LNG development, the cumulative impact conversation is mainly focused on infrastructure stresses and community well-being challenges linked to potential population growth.

There are sizable benefits from LNG development that can serve to inform the planning and trade-off analysis required to ground a conversation about cumulative impacts. While critics often raise concerns over potential impacts and externalities, the benefits are rarely mentioned. A rational discussion of cumulative effects cannot ignore the benefits of economic activity.

The Path ForwardWhen we assess BC’s opportunity to build an LNG sector, and do so from a global perspective, it is clear the province has several strategic advantages, including market access, the quality of the resource, and the comparative environmental upside.

BC has many features that should give comfort that a commercially viable and environmentally responsible LNG industry can be developed here: decades of valuable on-the-ground experience in the unconventional natural gas sector; a leading-edge regulatory regime; a stable governance framework with checks and balances; an energy resource whose physical attributes make for significantly less potential water contamination and fewer demands on potable water; and a resource that is largely found in remote areas.

The question of how much the province should spend, either directly or indirectly, to achieve its climate change

and other environmental objectives given the opportunity to develop LNG is not a simple one. While critics do highlight some legitimate concerns, we believe the overall cost-benefit analysis is favourable for LNG.

Currently, LNG critics have underestimated the costs of undertaking more aggressive reductions in the GHG footprint of LNG in British Columbia. In combination with potentially overestimating the monetary benefits available to ‘pay’ for environmental improvements, there is a risk that BC would underperform relative to its LNG potential due to the costs inherent in the course of action advocated by LNG critics.

Ultimately, the critics raise a mixed bag of environmental concerns about LNG development in BC. Some are fairly easy to dismiss, while others, primarily around options to reduce the industry’s GHG footprint and manage cumulative impacts, require further evaluation.

While more analysis is needed, when we consider the substantial benefits of LNG from both an economic and environmental lens, together with the market imperatives currently at play, we conclude that the desired policy path forward is clear: BC and Canada should be moving aggressively to develop LNG in British Columbia.

To read the original version of this article, visit http://

www.bcbc.com/publications/2014/the-lng-

opportunity-in-bc-separating-rhetoric-from-

reality-part-ii.

Tom Syer is the vice president of policy and communications with the Business Council of British Columbia.

Denise Mullen is the Business Council of British Columbia’s director of environment and sustainability.

Jock Finlayson is the executive vice president and chief policy officer with the Business Council of British Columbia.

| I N D U S T RY U P DAT E page 30

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