Fantasy Island

Exporting British Columbia’s abundant energy resources should have been a slam dunk. How did a multibillion-dollar dream go up in smoke?

Photos by Jim McAuley

The island that was supposed to save British Columbia’s economy is perched on the banks of an underwater pasture at the mouth of the Skeena River, near the top of western Canada’s North Coast. Each year, hundreds of millions of young salmon cascade down from the province’s second-largest fishery, riding the current from the highlands, growing to adulthood in the river’s eelgrass before swimming for the open ocean.

But visions of a very different kind of resource, in a different corner of British Columbia, turned eyes to Lelu Island in 2013. One day, the provincial government promised voters, Lelu Island would be the hub of an approximately $25 billion industrial complex, where natural gas fracked deep in the province’s interior would be liquefied, pumped onto waiting tankers, and dispatched to sate Asia’s seemingly insatiable thirst for energy. Christy Clark, then the newly re-elected premier of the ruling BC Liberal Party, had staked her government on the idea that liquefied natural gas, or LNG, export facilities such as this one would kick-start a struggling regional economy and give British Columbia, like its neighbor to the south, a way to turn underground wealth into real riches.

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“LNG is a once-in-a-lifetime opportunity to create 100,000 new jobs throughout [British Columbia], and a Prosperity Fund to eliminate the provincial debt,” Clark told local legislators in 2014. If that wasn’t enough, she added, “it’s also the greatest single step we can take to fight climate change.”

Then, in July 2017, that dream vanished into thin air. Petronas, the Malaysian state oil company behind the Lelu Island terminal, pulled the plug, it said, “following a total review of the project amid changes in market conditions.” One thing was clear: A flood of new natural gas export facilities around the world, coupled with dirt-cheap gas prices, had conspired to hammer the already delicate economics of the province’s signature project. Petronas was hardly alone; energy firms from Spain, the Netherlands, and even Canada itself all killed proposed Canadian LNG projects in 2016 and 2017, and all pointed to the gas glut and lousy economics. But that was no longer Clark’s problem; she and her BC Liberals had already been voted out of office at that point, their energy-fueled aspirations having failed to come true.

The question now is whether the demise of Petronas’s mammoth project also puts paid to Canada’s hopes to become a major gas exporter like Australia and Qatar. The acid test will come in 2018, with the final investment decisions on a pair of megaprojects, both of which have warily eyed Petronas’s failure but which seem keen to soldier on. For them, as well as for the new provincial government, Petronas’s loss serves as a cautionary tale about the dangers of betting on something quite so volatile as gas.

Fabian Alfred counts sockeye salmon on the Bulkley River on Aug. 4, 2017. The Wetsuweten people monitor the traditional dip-netting spots to check the salmon run’s population and health.

Clark breezed into office on huge promises of another resource bonanza, and her plan seemed like a no-brainer and an easy win. In British Columbia, an estimated 520 trillion cubic feet of natural gas lies deep underground, trapped in shale formations like the ones that dot Texas, North Dakota, and Pennsylvania. (That represents a 150-year supply of gas at Canada’s current rate of consumption.) Better yet, it’s cheap, costing only about $3 per million BTU to blast out of the ground. That makes Canadian gas potentially competitive even after tacking on liquefaction and transport costs to Asia (especially because Asian gas prices were sky high when Clark came into office).

And unlike some of its potential export rivals such as Qatar and the U.S. Gulf Coast, British Columbia literally sits on the doorstep of the East Asian markets that are expected to fuel global demand for natural gas in the decades to come. To top it all off, the province had plenty of deep-pocketed foreign partners — in particular Petronas — snapping up land and leases in its remote northeast that were ready to spend billions of dollars to build the latticework of pipelines and the massive supercoolers needed to chill methane into liquid form for export.

For a corner of Canada that had long relied on natural resources — from sea otter pelts to timber to salmon — the allure of low-cost, easy-to-drill natural gas with a ready supply of buyers was obvious.

Christy Clark, British Columbia’s then-premier, speaks to the media in Vancouver on May 30, 2017. (Ben Nelms/Reuters)

Most importantly, LNG seemed like the perfect solution to the great paradox of Canada’s oil and gas riches: For a country with the world’s longest coastline — snaking some 125,000 miles — Canada is essentially landlocked when it comes to exporting its energy bounty. Most of its oil and gas is in the heart of the continent, in Alberta and Saskatchewan, with no easy ways to reach the global market. The north is entirely shielded by the Arctic. There are no pipelines directly connecting the oil patch to Canadian ports on the Atlantic or the Pacific: Whenever Canada has tried to build pipelines to its coasts — whether with Enbridge’s Northern Gateway (canceled in 2016) or TransCanada’s Energy East (canceled in 2017) — it ran into intractable problems, including lousy economics, local resistance, and legal challenges from the powerful First Nations.

And to the south lies the United States, which lately has been as much a part of Canada’s energy problem as it has been a solution. Nearly 100 percent of Canada’s energy exports go south to the United States.

Relying so heavily on the United States wasn’t a problem for Canada as long as its southern neighbor was the world’s biggest energy importer, a title it held from the Richard Nixon era until just a few years ago. But beginning about a decade ago with the U.S. fracking revolution and energy boom, that relationship went from collegial to a migraine. Cheap U.S. gas glutted American markets that used to buy Canadian; much of the gas went directly to the energy-starved Canadian east. In 2007, just as the fracking revolution was getting started, Canada’s exports to the United States peaked at 3.8 trillion cubic feet of gas. By 2015, that had fallen to 2.6 trillion cubic feet, a drop of almost one-third. Canadian producers, tempted by high gas prices in East Asia and Europe, began to salivate about “getting to tidewater” — connecting the Western Canada Sedimentary Basin to the coasts so they could sell their product on the world market.

So did the BC Liberal government. As early as 2012, Clark began promoting British Columbia to international firms as a site for LNG export terminals, creating a special ministry — the Ministry of Natural Gas Development — to run the process. A few years later, the province had 19 prospective energy projects on the table. Petronas’s was one of the crown jewels, the chance to marry huge reserves to what seemed a privileged export location. But the Lelu Island site was also the most ecologically fraught.

A Spectra Energy pipeline crosses the Pine River in northern British Columbia.

Petronas’s journey to Lelu Island began more than a decade earlier, when the state oil and gas giant began searching for energy reserves around the world to replace the dwindling deposits to be found at home. The quest wasn’t just the normal scrambling after resources that all big energy firms engage in. Petronas is hugely important in Malaysian domestic politics, providing a significant chunk of the country’s income and offering a ready source for cash, patronage, and employment — making it imperative to find new sources of oil and gas to keep the machine going. (That reputation as an opaque and politically connected energy firm initially dogged Petronas during its Canadian adventure, especially when it tried to acquire local firms, but ultimately didn’t derail its plans for the big LNG project.)

It started searching for gas in undeveloped hinterlands such as Chad, South Sudan, and then British Columbia. Over a period of about 10 years, Petronas outpaced other Asian firms in snapping up acreage in the province’s northeast, culminating in the 2012 purchase of Canada’s Progress Energy for about $4.6 billion, after overcoming initially skeptical federal regulators who balked at foreign control of so much gas. Once it prevailed, it had secured the largest reserves in the province — which it quickly tapped. By 2014, the company had 204 drilling rigs operating in the province — four times that of the company’s closest rival, ARC Resources, which had been ambitiously expanding in the Montney shale in the past decade.

The Lelu Island export terminal was to be Petronas’s largest foreign adventure yet, and British Columbia’s government did everything it could to sweeten the deal. The BC Liberals offered the nascent LNG industry extravagant giveaways, largely exempting LNG from Canada’s environmental and climate change regulations. Though British Columbia’s Clean Energy Act bars the province’s state-owned electricity generator from getting more than 5 percent of its energy from fossil fuels, including natural gas, provincial leaders made an exception for the electricity used to supercool LNG.

And when Petronas balked at a 7 percent tax on LNG — the province would have to “buck up real fast” if it wanted to be taken seriously, the company’s CEO said — the BC Liberals bucked right up, dropping the tax rate for all LNG projects to 3.5 percent. Sweeter yet, as is standard in these sorts of deals, the tax would fall due only after the billions of dollars in capital investment had been repaid.

Christy Clark needed these juicy incentives to keep her promise that LNG would save the economy, and she was desperate to clamber on the LNG ship before it sailed. But there were ominous signs: By the winter of 2014, less than a year after Clark’s “once-in-a-lifetime opportunity” speech, the LNG market was already showing indications of becoming glutted. That winter, usually peak season for gas for heating, Chinese demand was alarmingly stagnant. Japan, the world’s biggest LNG consumer, was starting to dial back its demand; three years after the nuclear meltdown at Fukushima, some nuclear power plants were starting to come back online, meaning less need for other fuels.

Getting oil and gas from the Canadian interior to the coasts for export has proved a nearly intractable challenge and led to years of battles with indigenous people and environmental groups.

By 2015, despite the government’s sunny pronouncements, the window seemed to be slamming shut. The rest of the world was scrambling to build LNG terminals as well, from Russia’s Sakhalin Island to the western coast of Australia to the U.S. Gulf Coast. Long before ground had been broken on any Canadian LNG projects, gas from the country’s competitors was already flooding the market. In 2015, the Oxford Institute for Energy Studies suggested that world LNG demand was already satisfied into the 2020s. As if that weren’t enough, the big buyers that Canada was hoping would ride to the rescue were busy lining up their own sources of energy. China inked a $400 billion pipeline deal with Russia, for example, that would supply as much as 15 percent of projected Chinese gas consumption by 2020, making Canadian energy less appealing.

Like their counterparts in Australia, Qatar, and the United States, producers and politicians in British Columbia mostly saw opportunities, not risks. Asia’s growing economies, plus the need to get off coal, would provide a bottomless market waiting to gobble up any and all gas that came to market. Clark remained upbeat. Asked how the province would exceed more advanced projects in the United States and Australia, she told a left-leaning website, “There are a lot of very unstable jurisdictions with poorly developed proposals that are on the books. But the ones that are being developed in British Columbia have attracted $20 billion in investment for a reason.”

In May 2015, the flood of gas had drowned even Asian markets; prices for LNG in Japan had fallen from approximately $18 per million BTU to less than $7, way below Petronas’s break-even point. Unfazed, Clark told the Globe and Mail that LNG would be a “huge transformative change for British Columbia.… It’s the future.”

There was some logic to this: U.S. firms, for example, had managed to get more than a dozen export projects approved while facing a similar glut. But there was a difference: The leading U.S. projects had an economic edge over Canadian producers because they could retrofit existing facilities to make them export terminals with a fraction of the investment needed to build a terminal like the Lelu Island one from scratch. Those huge upfront capital costs meant that British Columbia needed Asian gas prices of at least $10.30 per million BTU to break even, while American rivals could be profitable with lower prices in Asia.

This forced Canada-based producers — who by that time were understandably worried about recouping their investment — to try to persuade buyers to sign expensive long-term contracts, just as the industry had always done. But British Columbia’s big plans had the misfortune to come just as the global gas market was being transformed in another way. By 2014, thanks in part to the flood of flexible new gas supplies, “spot” deals were all the rage, with cargoes free to seek out the best buyer at a moment’s notice, sometimes shifting destinations while in mid-ocean. That made it much harder for Petronas to convince big buyers in China or Japan to lock in Canadian gas for decades into the future.

Chief John Ridsdale of the Wetsuweten, one of the groups that fought the British Columbia government over control of local resources, in May 2016.

There were even bigger — and, as it turns out, even more intractable — obstacles still in store. To get gas to market from the remote corner of the province, British Columbia had to build hundreds of miles of pipelines and related gas infrastructure over some of the continent’s most difficult terrain, both geographically and ethnically speaking.

What Clark did not say, however, is that the province had political instability of its own. Since the 1950s, British Columbia’s native communities have agitated, blocked roads, and filed suit in Canadian court, fighting for the right to control resource development on their traditional lands. And the Canadian Supreme Court has listened, repeatedly upholding indigenous people’s sovereignty; unlike in the United States, that gave legal force to a lot of First Nation anger over energy development.

That conflict made it hard to get infrastructure projects done quickly — and the BC Liberals made it worse by seemingly refusing to take aboriginal land rights seriously. “They come talk to us to check the box,” said John Ridsdale, a chief of the Wetsuweten people, who since the 1970s has been fighting for local control. Ridsdale’s and other nations had established camps in 2010 to block the construction of the Northern Gateway tar sands pipeline being built by Enbridge. Eventually, Canadian Prime Minister Justin Trudeau’s administration canceled the project, saying it was not “in the best interest of the local affected communities.”

As resistance among native groups gathered, the BC Liberals failed to take the hint — and so did Petronas.It was almost as if, one oil analyst said, they knew they would never get local support and would have to “divide and conquer” to get the project off the ground. In 2015, government officials and Petronas representatives trekked to the village of Lax Kwalaams, home of the Tsimshian people, whose traditional territory includes Lelu Island. Petronas offered the Tsimshian approximately $932 million, spread over 40 years, for rights to build the gas terminal on the island. The Tsimshian turned the company down nearly unanimously; fishermen knew that the island sat atop the eelgrass beds where the sockeyes that supply British Columbia’s second-largest salmon run grow up. “The worst-case scenario is the [Skeena] salmon population would collapse,” Jonathan Moore, a scientist focused on aquatic ecology, told the Vancouver Observer.

The BC Liberals could have sweetened the deal by offering more generous terms to the indigenous peoples to get the project moving, as they did by cutting tax rates when encountering reticence from the Malaysian oil and gas giant. Instead, they tried to railroad the opposition, announcing that the plan would proceed without the Tsimshian’s approval. (By neglecting to take the salmon fishery into account, they also provoked the ire of federal regulators, who throughout 2016 kept making the province amend the proposal, further delaying the project.)

As organized indigenous resistance grew against the Lelu Island project, Christy Clark seemed intent on antagonizing aboriginal leaders.

“I’m not sure what science the ‘forces of no’ bring together up there,” she told reporters in January 2016, referring to a group of people who rely on salmon for much of their daily sustenance. “It’s not really about the fish.… It’s about fear of change. It’s about a fear of the future.” In 2016, environmentalists and an alliance of native groups filed at least three major lawsuits against Petronas and the BC Liberal government charging that the province had failed to properly consult the tribes whose livelihoods would be affected by the project.

By the time the 2017 provincial election rolled around, the BC Liberals had failed to deliver on any of their glitter-eyed LNG promises and were swept from power in late June by a coalition of the center-left New Democratic Party (NDP) and the Green Party. That ended 16 years of BC Liberal rule, one of the longest of any party in the region. The next month — with gas prices still at rock bottom, fears of a yearslong gas glut on the horizon, and questions over Asian appetite for more — Petronas, beset by lawsuits and hemmed in by federal regulators, announced on July 25 that it was pulling out of its signature project. Clark’s political career outlived the LNG terminal by only days: On July 28, she announced that she was stepping down as head of the BC Liberals and returning to private life.

The idea of banking on energy exports to Asia wasn’t inherently misguided: U.S. cargoes are already landing in Asia, and several U.S. firms signed preliminary gas export deals with China during President Donald Trump’s trip to the region last fall. But the BC Liberals had put, as the NDP charged, all their eggs in one basket while doing virtually everything possible to alienate the local actors whose buy-in they would need to build the massive projects they desperately wanted.

The final test of whether the province will really have a future as a big gas exporter will come in the next several months. Two megaprojects remain on the table: a joint venture led by Royal Dutch Shell called LNG Canada to build a massive export terminal in Kitimat costing upwards of $31 billion, southeast of Petronas’s proposed site, and a smaller, approximately $2.7 billion facility planned by Chevron and Woodside Energy nearby. After Petronas’s failure, project boosters remained resolute, if not exactly bullish. “It’s still alive,” Ellis Ross, a former BC Liberal cabinet member and chief councilor of the Haisla people who has pushed hard for the Shell project, told the Globe and Mail. “The project is fighting to stick around.”

Shell seems the closest to success, having apparently learned from the Petronas saga. For starters, it has taken steps to rein in design and engineering costs to try to improve dicey economics. It has cooperated with indigenous people much more fully than Petronas did, choosing a site with greater attention to local concerns.

“Petronas proposed their site on a pristine island in a sensitive estuary with a deep local tradition in salmon fishery,” said Maximilian Kniewasser of the Pembina Institute, an energy think tank. “They really chose a very poor site.” In contrast, he said, “Shell chose the site wisely — an industrial site in an industrial town — and did genuine local engagement early on and got First Nations on board.”

But none of that can alter the deeper structural changes to the global energy market that have so far stymied Canada’s efforts to get on the gas train. Supply is still abundant, and prices are cheap. Many experts expect the glut to last into the middle of the next decade, souring the outlook for plans from Shell’s coal seam methane projects in northeastern Australia to Sinopec’s approximately $43 billion deal for an LNG export terminal in Alaska.

Barring an unforeseen doubling in the price of gas, said Ben Parfitt, an analyst for the Canadian Centre for Policy Alternatives, the outlook is bleak for all of those monster projects that raised so many hopes.

“I’m not hearing anyone saying otherwise. One project after another is being announced and failing,” Parfitt said. “There’s just no momentum going ahead.”

This article originally appeared in the January 2018 issue of  FP magazine. The reporting was made possible in part by the Pulitzer Center on Crisis Reporting.

Saul Elbein is a freelance journalist from Austin, Texas. His work has appeared in the New York Times Magazine, Texas Observer, and on This American Life.