Olaf Scholz, Germany’s Chancellor, came to Canada recently, looking for supplies of natural gas. He left empty-handed, although a soft promise of expensive “green” ammonia was made, possibly available as early as 2025.
While much of the blame for lack of Canadian export facilities for natural gas lies with the present government, some of the blame lies with the previous government of Germany, led by Angela Merkel. Following its decision to phase out the burning of coal to generate electricity, Germany became more and more dependent on imported natural gas, particularly gas imported from Russia. While there were voices in Germany cautioning against this rising dependence, the Merkel government considered gas deals with Russia to be part of its efforts of “reconciliation” between these two former enemies, and hoped that increasing trade between the two countries would promote peace and stability. Germany’s new Chancellor, elected near the end of 2021, did not share that expectation, and quickly mobilized Germany for the “what if” scenario of reduced Russian gas supplies, or the discontinuation of gas supplies. The invasion of Ukraine by Russia shortly thereafter not only led to Russia using its vast exports to Europe of oil and gas as blackmail tools to stop Europe from supporting Ukraine, but also led to Europe’s resolve to minimize its dependence on Russia for future energy supplies.
Back to Canada. Until 2025, Canada will not have any facilities to liquefy natural gas and for that reason, cannot ship any gas to any overseas customers at this time. Until 2025, Canada will only be able to export gas to the United States via pipeline. Held hostage by environmentalists and other protesters, the government of Canada has effectively sabotaged the permitting process for any major new infrastructure to facilitate higher levels of exports of oil and gas. While Australia and the United States quickly took advantage of their vast gas reserves to build LNG capacity, and have now become the two largest global suppliers of LNG, stifled by outrageously expensive and time-consuming procedures and studies and consultations, nothing moved in Canada until LNG Canada was given the green light to proceed with construction of its $40 billion export terminal in Kitimat, B.C., slated to commence operations in 2025. Even so, amid heavy protest, the federal government did buy the TransMountain oil pipeline in 2018, and authorized the construction of an additional pipeline adjacent to the existing line, tripling the capacity of this vital export facility to 900,000 barrels per day. It seems that the Trudeau government finally realized the importance of the contributions of the country’s energy companies to sustain ever-growing demands for social spending. Completion of the expansion is now projected for late 2023.
We all know that, if the human race is to survive, the burning of fossil fuels must eventually come to an end. A major problem has been that fossil fuels are very efficient and very low-cost sources of energy. Because of that, nobody has been in a hurry to replace these enablers of modern economies with alternatives that are not reliable, that cost much more per unit of energy produced, or interfere too much with our way of life, or all of the above. Still, despite the bleak long-term outlook for oil and gas, western economies (and many others) will continue to depend on these energy sources for decades to come. In other words, isn’t it up to investors, producers and customers to jointly decide whether there is a “business case” for new investments in the industry? Maybe the PM is right in proclaiming that there is probably no “business case” for the construction of new LNG terminals. But, is that up to him to decide? Our country is built on the principles of private enterprise, with government playing the role of facilitator. Business people make investment and production decisions, playing by the rules established by governments. It’s not up to governments to decide that there is “no business case” to be made for new businesses, if they are not being asked to contribute financially to these new enterprises. The only question that should be asked of Mr. Trudeau is whether the federal government’s environmental review to authorize any new East Coast LNG projects that may be proposed will be collaborative or obstructive. Mr. Trudeau has hinted that it may ease past regulatory obstructionism, but that question should be put to the test. Also, almost any East Coast LNG project would require the support of the Quebec government which in the past has been anti-fossil fuels, so we should not expect miracles out of this corner.
It is probably realistic to dismiss the possibility of construction of new LNG terminals on Canada’s East coast. It is more likely that such a terminal may be built on the U.S. East Coast. In addition, if all goes well, the Kitimat plant may be expanded, and U.S. facilities along the Gulf Coast will be expanded.
Instead, Mr. Trudeau chose to use Mr. Scholz’ visit to announce a multi- billion dollar ammonia production facility in Stephenville, Newfoundland. Very little is actually known about the project, except that its initial capital cost is estimated at about $12 billion, and will comprise 164 huge wind turbines. The project consists of using electricity to split water molecules into hydrogen and oxygen, with the hydrogen then being reacted with nitrogen to produce ammonia, which is intended to be shipped to European customers as fuel to drive turbines to generate electricity. Does this project make sense? From the promoters’ point of view, it undoubtedly does. Nonetheless, I am doubtful about the economic benefits of this venture. After all, what does it take to make it successful? Principally, lots of water and copious amounts of electricity. There is no shortage of water in Newfoundland, but there are lots of other places in the world that have lots of water too. Secondly, one needs access to low-cost and reliable sources of electricity. Newfoundland is a place where the winds blow reliably, but wind turbines are expensive. Moreover, they are environmental eyesores, and produce serious annoyances to the people who have no choice but to live around these monsters. There are potentially other places that have access to cheaper hydroelectricity, where vast wind farms could be established without impacting the lives of people who live there, or where abundant sunshine can reliably extract power from massive arrays of solar panels. Lastly, there is financing. There is nothing to suggest that the new venture has the “inside track” on cheap financing. In summary, the news that has been made available does not suggest that it will have a strategic advantage over similar ventures that will likely be announced elsewhere in the world. The likely key to its commercial success is the Prime Minister’s willingness to use taxpayers’ money to subsidize this private venture.
The question of financing is one that worries me. Unlike the oil and gas industry, which is not a significant direct beneficiary of federal subsidies, new enterprises announced by Prime Ministers through on-site announcements usually carry federal money alongside. After all, this is politics: why would the PM visit Newfoundland to announce a new commercial venture if he does not benefit from that announcement through positive PR? The venture falls well into line with the PM’s thinking that we are on a path to zero-emissions transportation and power generation, but this does not mean that taxpayers would embrace the spending of their money on commercial ventures of dubious value.
During Mr. Scholz’ visit, Mr. Trudeau proclaimed that it was unlikely that natural gas projects could be supported by solid business fundamentals. Be that as it may, If the Newfoundland hydrogen / ammonia project represents the solid “business case” Mr. Trudeau has in mind, he will hopefully agree that governments have no business taking taxpayers’ money to support a plan to ship ammonia from Newfoundland to Europe, simply because, by definition, a commercial project characterized as possessing a “solid business case” will be able to find the necessary financing from the private sector, without digging into taxpayers’ pockets. As taxpayers we should be spared the massive and continuous subsidies our governments have committed to in order to support their vision of a “green” economy by subsidizing enterprises of dubious social, environmental or commercial value, such as ethanol production. The Prime Minister should remember that not everything “natural” is wholesome or nutritious. Similarly, not everything that is “green” is good for our financial or physical health, or even our environment. For example, the production of many “green” power sources implies very significant and probably very costly future waste disposal issues, but we refuse to factor those into our current calculations.
In principle, the PM was not wrong in putting the obligation of making a solid “business case” on promoters of new business opportunities. But, he should be aware that his own government’s actions should also meet this test, and should not merely reflect the vision of a future Canada as HE sees it.
As for anyone brave enough to construct LNG export facilities for production by 2030 and beyond, in Canada or the US, should we really expect European countries to continue to boycott Russian gas after the war in Ukraine will inevitably end some day? Additional liquefaction and receiving terminals and associated pipelines will cost tens of billions of dollars, and the question that must be asked is whether these assets may all become stranded assets, as Europe’s weakened economy needs cheap Russian gas to revitalize itself. And what about green hydrogen / ammonia facilities that will likely not get built without substantial transfers from taxpayers to private sector operators? If and when cheap Russian gas returns to European markets, who will buy subsidized Canadian ammonia?