Painting itself into a corner: LNG and the climate-affordability trade-off in B.C.

Summary

This study reviews the challenging economics of liquefied natural gas (LNG) development in British Columbia. LNG Canada will be opening soon in Kitimat, British Columbia, and just in time for the Trump trade war. LNG Canada connects gas produced in B.C. to global markets, reducing reliance on exports to the U.S., a move that looks even better in light of new Chinese tariffs on American LNG.

Additional LNG projects are underway, and other LNG final investment decisions may soon be forthcoming. These multi-billion-dollar investments have been actively courted by both B.C. and federal governments, including a recent federal contribution of $200 million to the Cedar LNG project. Other public subsidies will likely be put on the table in order to secure new LNG investment.

Among the findings in this report:

The B.C. government is weakening its climate regulations to court new LNG development.

• Ostensibly part of the government’s response to the Trump tariffs, B.C. is fast-tracking LNG and related infrastructure projects, and is relaxing its previous requirement that LNG facilities have a plan to be net zero emissions by 2030.
• LNG facilities will also be eligible for a two-year break on B.C.’s industrial carbon tax, and it is possible LNG projects will be fully exempted, saving them tens of millions of dollars per year.
• Federally, the proposed federal emissions cap for the oil and gas industry is also under attack.

LNG is extremely energy intensive and is set to push the limits of B.C. Hydro’s electricity system.

• Powering large LNG facilities usually means burning gas, which increases greenhouse gas emissions.
• To reduce GHG emissions, they can also be powered using clean electricity, which requires new generation and transmission capacity from B.C. Hydro.
• Electricity demand from upcoming and potential LNG and mining developments is competing with other needs for clean electricity to decarbonize B.C.’s economy.

To get LNG producers to commit to electricity over gas, they would need substantial subsidies through B.C. Hydro.

• The cost of new electricity generation and transmission needed for LNG ranges from $74-90 per MWh for the 2024 clean power call, and $80-120 per MWh for Site C electricity. In contrast, LNG companies would need a price between $10-17 per MWh to be cost-competitive with using gas.
• If B.C. Hydro subsidizes LNG projects, other residential and business customers will see their electricity bills go up as a result.

The onset of LNG production in 2025 will drive up domestic B.C. gas prices.

• The experience in Australia shows that after LNG plants opened in 2015, gas prices doubled and recently have been three times higher than before LNG.
• The 2025 B.C. budget anticipates a 25 per cent increase in market gas prices for 2025 above 2024 levels, rising to 49 per cent higher by 2026. These increased costs will be passed forward to consumers.
• However, the recent elimination of the consumer carbon tax will swamp those price increases, at least in the short run.

The economics of LNG are challenging due to vagaries of global markets and the high cost of liquefaction and gas pipelines.

• Some key observers anticipate that global gas demand is close to its peak, after which there will be a steady decline due to energy transitions away from fossil fuels to other cheaper and cleaner sources of energy.
• That combo means production at much less than full capacity, greater risk of becoming a stranded asset and minimal revenues back to the B.C. government.
• These dynamics add substantial uncertainty when making tens of billions of dollars in investment.

These problems get worse the more LNG production comes on stream.

• While LNG projects create a few thousand jobs during construction, once completed only a couple hundred permanent jobs will remain.
• B.C.’s good intentions on climate action are being sacrificed to double down on big fossil fuel projects, a decision that will not age well.

Introduction: The promise and perils of LNG

For the past 15 years, the development of a liquefied natural gas (LNG) industry has been a dream of B.C. politicians who have envisioned the streets of the province’s economic future paved with the gold of gas exports. Those dreams are about to become a reality when LNG Canada opens in Kitimat, ready to ship out its first cargo overseas.

The timing of LNG Canada’s opening is fortuitous for B.C. and Canada, in light of the Trump-led tariff war. LNG Canada connects gas from Western Canada—where prices are low and dependence on the U.S. high—to world market prices, largely in Asia. The U.S. LNG industry, meanwhile, has been slapped with tariffs by China, a key export destination for LNG Canada, as part of the broader trade war.

Co-owned by oil and gas transnational Shell and major Asian buyers in China, Japan, Korea and Malaysia, LNG Canada is contemplating a final investment decision for Phase Two that has already been approved by B.C. and federal governments. Two smaller facilities, Woodfibre LNG, outside of Squamish and Metro Vancouver, and Cedar LNG, also in Kitimat, are next up. The federal government recently made a $200 million contribution to Cedar LNG under its Strategic Innovation Fund.

In light of the trade war, both the B.C. and federal governments are courting additional LNG developments, and betting on their multi-billion-dollar investments to further boost Canada’s export capacity to Asia. Whether LNG can deliver on its promise is questionable, in light of the challenging economics of the industry—including other new LNG facilities under development—and due to the global energy transition away from fossil fuels.

LNG megaprojects have been criticized for their significant environmental and climate impacts. The day it opens, LNG Canada will become B.C.’s largest point-source emitter of greenhouse gases (GHGs), while increased gas production across the entire supply chain—including fracking, processing and pipeline transport—will also add to B.C.’s GHG emission totals. This and other LNG projects essentially guarantee that B.C. will fail to meet its legislated GHG emission target for 2030. Moreover, this is not counting emissions from the exported and liquefied gas itself, which is combusted elsewhere. Beyond GHG emissions are cumulative impacts on the landscape and groundwater, due to the upstream fracking process and gas pipelines and infrastructure.

Adverse environmental impacts have led to substantial Indigenous opposition across Northern B.C., from grassroots blockades and campaigns to legal challenges in the courts. However, a number of recent LNG and pipeline developments have also secured Indigenous support and partnerships to move projects forward. The Haisla Nation owns 50.1 per cent of Cedar LNG in partnership with Pembina Pipeline Corporation. The proposed Prince Rupert Gas Transmission (PRGT) pipeline is a joint project of the Nisga’a nation and Texas-based Western LNG, but is opposed by the Gitanyow Hereditary Chiefs, the Kispiox First Nation and the Union of B.C. Indian Chiefs.

Governments in B.C. and Canada have tended to support LNG development, in spite of environmental impacts and lack of First Nations’ free prior and informed consent. Whether LNG projects actually move ahead or not is largely a function of global energy economics, and the perceptions of LNG proponents willing to put billions of investment capital on the table. Governments can also provide subsidies to help push projects over the finish line, including a subsidy package for LNG Canada Phase Two that is currently in negotiation.

Making LNG is expensive

The name of the LNG game is arbitrage: selling cheap gas from B.C. at much higher prices in Asia, Europe or elsewhere. LNG terminals and tankers allow B.C. to directly link to global gas markets and prices rather than being landlocked on the North American continent, where prices have been low. In other words, B.C. gas prices will rise as gas that was exported to the U.S. or Alberta is shipped instead to Asia.

Taking advantage of this, however, is expensive, and these costs must be covered by the price of LNG in Asia to make a shipment worthwhile. In addition to extraction of processing of gas in B.C., that gas must be pipelined over the Rocky Mountains to the coast. Some $14.5 billion was needed to build the Coastal Gaslink (CGL) pipeline from Kitimat to the Northeast, up from an original estimate of $6.6 billion in 2018.

The new LNG Canada facility is essentially a gigantic refrigerator to cool B.C. gas into liquid form at a temperature of about -160°C so it can be loaded on a tanker for shipment around the world, where it will be degasified for local usage. This terminal cost about $20-$25 billion in capital costs, and the LNG Canada consortium was able to contract with a company willing to take on the risk of cost overruns.

Factoring in the high costs of liquefaction and pipeline transportation, the break-even price for landing LNG in Asia is estimated to be about US$8 to $10.¹Per million British thermal units. Gas pricing and data are often reported in different units–per million British thermal unit (mmBTU), thousand cubic feet (mcf) and gigajoule (GJ)—all of which are very close to each other in values. The cost of gas itself is around US$2-3, while the liquefaction process adds US$5-6 and pipeline tolls about $2.²IEEFA 2023 and investor presentation by ARC resources.

Figure 1 shows gas prices in North America compared to LNG prices in Asia and Europe. The large divergence between North American gas prices and LNG prices in Asia from 2011 to 2014 was the impetus for LNG mania in B.C., when this gap more than covered the cost of liquefaction. In subsequent years, LNG prices fell closer to the break-even point but in recent years have been up again, in particular due to surging demand in Europe to replace Russian gas supplies.

How LNG prices move in the future is not clear. Oil and gas company Shell, part of LNG Canada, recently projected LNG demand growth of 14 per cent by 2040. Others are not so optimistic, since many new LNG projects around the world will be coming online in the next few years and are likely to outpace global demand increases. The International Energy Agency projects a 50 per cent increase in global LNG export capacity in their 2024 World Energy Outlook, but challenges on the demand side:

Europe and China have the import infrastructure to absorb significantly more gas, but their scope to clear the market is constrained by their investments in clean energy. Gas-importing emerging and developing economies would generally need prices at around USD 3-5/mmBTU to make gas attractive as a large-scale alternative to renewables and coal, but delivered costs for most new export projects need to average around USD 8/mmBTU to cover their investments and operation.

Due to the additional pipeline costs, B.C. LNG is at a disadvantage economically, should there be a glut of gas globally in the 2030s. Some key observers anticipate that global gas demand is close to its peak, after which there will be a steady decline due to energy transitions away from fossil fuels to other cheaper and cleaner sources of energy. That combo means production at much less than full capacity, greater risk of becoming a stranded asset and minimal revenues back to the B.C. government. These dynamics add substantial uncertainty when making tens of billions of dollars in investment.

To woo these investors into a final investment decision on this massive industrial project, the B.C. government provided a range of subsidies for LNG Canada including:

• Discounted electricity prices through B.C. Hydro.
• Exemptions from increases in B.C. carbon tax, or capped at $30 per tonne.
• Lower corporate income tax rate from 12 per cent to nine per cent.
• Deferral of provincial sales tax on construction, essentially an interest-free loan.

In addition, the federal government provided breaks on steel tariffs for the imported modules for the LNG plant.

There’s good reason to believe we are not done with subsidies, as governments seek final investment decisions for additional LNG terminals. The B.C. government appears to be easing up on climate policies in order to lower costs for LNG proponents and fast track development. This could include exemptions through the environmental assessment process or permitting.

According to internal government briefing notes, LNG facilities will be eligible for a two-year break on industrial carbon tax, and it is possible that the B.C. government will next seek to entirely exempt LNG from paying carbon tax. LNG companies would save tens of millions of dollars per year if they did not have to pay B.C.’s industrial carbon tax.³https://thenarwhal.ca/bc-lng-carbon-pollution-break/

The construction of LNG Canada and the accompanying Coastal Gas Link pipeline to B.C.’s Northeast have brought new development and thousands of jobs to the Northern B.C. economy. However, once LNG Canada is operational, the number of permanent jobs at the facility will diminish to only a few hundred.

Impact on gas prices

Notwithstanding trends in global markets, the scale of LNG exports relative to B.C. domestic gas consumption is huge, and will inevitably push up prices and hurt affordability. The initial production from LNG Canada on an annual basis will be equivalent to three times what British Columbians themselves consume, equivalent to more than one-quarter (28 per cent) of B.C.’s total production of marketable gas in 2023. As other LNG terminals come online, this situation will only get worse.

The experience in Australia shows that after LNG plants opened in 2015, gas prices doubled. More recently, those price increases have continued, with gas prices on the spot market currently about triple pre-LNG prices. While B.C. differs from Australia both in terms of the type of gas resource being exploited and distance to major centres, Australia is a cautionary tale. The same underlying dynamic is at play, where domestic consumption is dwarfed by exports, and LNG forces Australian gas consumers to pay world market prices.

The 2025 B.C. budget anticipates a 25 per cent increase in market gas prices for 2025 above 2024 levels, rising to 49 per cent higher by 2026, partly due to more modest increases in gas supply. These increased costs will be passed forward to consumers, although they will need to be rubber-stamped by the B.C. Utilities Commission (BCUC).

This will be on top of other gas price hikes. In January, the BCUC approved Fortis for a 17.5 per cent price increase. This appeared not to be due to the rising cost of gas itself but due to several other charges and fees. Fortis probably wanted to lock in higher profit margins before LNG plants start competing for B.C. supplies, and they can seek further price increases as the cost of gas surges.

Exactly how much gas prices go up remains to be seen and depends on global supply and demand dynamics. In addition to the trend of higher prices, there is increased volatility of prices due to connections with global markets. This means a cold snap in Asia that boosts global gas and LNG prices will have a knock-on effect in B.C.

In the short-term, however, price implications for B.C. households will be masked by the removal of the consumer carbon tax, effective April 1, 2025. Households in B.C. averaged $317 per year in carbon tax paid on gas consumption,⁴Authors calculations based on Natural Resources Canada, Comprehensive Energy Use Database: Residential Sector-British Columbia, https://oee.nrcan.gc.ca/corporate/statistics/neud/dpa/menus/trends/comprehensive/trends_res_bc.cfm at a rate of $3.9859 per GJ ($3.78/mmBTU). Gas prices would have to increase by more than this amount to fully offset the elimination of carbon tax (assuming no change in demand).

The push for “clean LNG”

The LNG Canada facility will be primarily powered by burning some of the gas that enters the plant, adding to B.C.’s GHG emissions at a time when they should be falling. To square this circle, the B.C. government is pursuing electrification to reduce domestic emissions by linking new LNG terminals to new sources of clean electricity via B.C. Hydro.

This is similar to what the B.C. government has been doing in the Northeast of the province, where the gas resource is fracked, extracted and processed. Wherever possible, compressor stations and other equipment have been connected to the B.C. Hydro grid through new transmission lines. Demand from the oil and gas industry was 3,225 GWh in 2024, up 135 per cent from 1,373 gigawatt-hours (GWh) in 2017. In addition, the government has provided subsidies to the industry for its compliance expenditures through credits against gas royalties owed to the province.

Both the Woodfibre LNG and Cedar LNG projects in development are examples of such “clean LNG” through electrification. Limits on emissions for new LNG facilities have been codified through the B.C. Energy Action Framework, which also requires new LNG facilities to have a credible plan to get to net zero by 2030. Again, clean only applies to the LNG plant itself, not the substantial emissions from upstream fracking and processing, nor the downstream emissions when LNG is eventually combusted.

The B.C. government has been in negotiations with LNG Canada, hoping to both secure a final investment decision for Phase Two, and appears to be backing off of attempts to use B.C. Hydro electricity as the power source. LNG Canada Phase Two was approved under the old rules and does not need to be electrified but, if it went ahead without electrification, the emissions impact would be substantial.

From a bottom-line perspective, it’s a lot cheaper to use gas than electricity. In order to secure a final investment decision, the B.C. government will be tempted to again use B.C. Hydro to subsidize LNG. It’s a painful choice: either have higher GHG emissions or lower emissions but a large commitment towards new clean electricity generation and transmission capacity.

New generating capacity and transmission lines needed to support the oil and gas industry and LNG are starting to add up. Electricity demand from LNG in-progress (LNG Canada, Woodfibre LNG and Cedar LNG plus upstream oil and gas) is over 16,000 GWh per year, according to estimates from the Pembina Institute. This is about double what B.C. Hydro projected for the oil and gas industry in 2030 in its updated Integrated Resources Plan.⁵The Integrated Resources Plan, approved in 2024, was originally tabled in 2021 but updated estimates were provided in 2023, the latter of which are used here.

The B.C. government’s appetite for more LNG does not end there. Adding in the potential demand for an electrified LNG Canada Phase 2, Tilbury Phase 2 and Ksi Lisims LNG (none of which has reached a final investment decision), electricity demand after 2030 could swell by an additional 26,000 GWh. Altogether, the oil and gas industry, including LNG in the 2030s, could be consuming the equivalent of 2/3rds of all B.C. Hydro power currently generated in the province. The oil and gas industry currently consumes only about six per cent of B.C. electricity supply.

The weight of these proposals is now leading the B.C. government to greatly relax the net zero or electrification requirements under the 2023 Energy Action Framework. The government now says companies only need to “have a credible plan” to be “net zero ready” by 2030 if they are unable to secure (B.C. Hydro is unable to provide) grid electricity. The provincial priority is LNG development, first and foremost, and whether emissions from LNG terminals can be cleaned up through electricity connections is secondary.

B.C. Hydro’s challenge

B.C. Hydro must table a new Integrated Resources Plan in October 2025, and that plan will need to reckon with planned LNG demand growth, albeit with uncertainty about which additional plants go ahead, if at all. New generation and transmission lines must be amortized into electricity prices and approved by the B.C. Utilities Commission. LNG projects are also competing with decarbonization, including electrifying buildings, transportation and other industry as part of B.C.’s climate agenda.

Table 1 shows various costs and rates for electricity in B.C. Based on a range of scenarios of gas costs and capacity utilization, the break-even electricity price LNG companies need to pay so that they are no worse off than using gas ranges from $10 to $17 per MWh. This includes industrial carbon tax of $6.36 per MWh as well as the cost of gas and is substantially lower than existing and new supply options for B.C. Hydro.

B.C. Hydro has a stock of heritage hydroelectric dams on the Columbia and Peace rivers that provide low-cost electricity at about $38 per megawatt hour, as well as other gas-powered generation and private power contracts that provide supply at a higher rate of about $98 per MWh hour.

Imports have been a part of the picture in recent years, due to drought, and can range in price but are typically $60-100 per MWh. Historically, B.C. Hydro had a trade surplus in electricity trade but, this decade, it has been more likely to be a net importer of electricity. Fortunately, B.C.’s legacy hydro dams enable B.C. Hydro to buy and store electricity at relatively lower prices.

New sources of electricity generation coming online are more costly. The Site C dam is partially complete, with two out of six generating stations now online and the remaining units coming online later this year. The final price implications for B.C. Hydro consumers won’t be known until later in 2026, when filings, including their costs, must be submitted to BCUC. Based on the BCUC’s final report on Site C in 2017, we can anticipate the cost of Site C electricity, after various cost overruns, to be about $80 per megawatt hour but many close observers put the likely cost at more like $110-120 per MWh. The impact on rates will also be affected by the amortization period granted, with B.C. Hydro seeking a lengthy 84-year amortization for Site C to spread its enormous costs over a very long time frame.

B.C. Hydro’s Clean Power Call in 2024, featuring substantial First Nations partnerships, yielded 10 projects at an estimated cost of $74 per MWh, for a total annual generation of 4,830 GWh. However, this doesn’t include transmission lines to connect these projects to the grid and that could add another $15-$20 per MWh. For example, the North Coast Transmission line is a $3 billion project upgrading the backbone line capacity from Prince George to Terrace. Additional transmission capacity to get to LNG terminals will also be needed (mining is another source of demand not considered here).

In comparison, current residential pricing is $117.2 per MWh in the first tier of the residential inclining block and 140.8 per MWh for tier 2. Electricity rates for business customers range from $65.3 per MWh (the industrial or heritage rate) to $135.2 per MWh for small businesses.

The climate affordability trade-off

B.C. Hydro has promoted stable and low-cost electricity for many decades, and is a central public institution needed for a decarbonized economy. B.C. Hydro already insulated British Columbians from energy price shocks in 2022-23. Much of the jump in post-COVID inflation rates was due to fossil fuel energy price hikes, largely blamed on Russia’s invasion of Ukraine. British Columbians are vulnerable to the vagaries of global market pricing, even though the oil and gas we consume is entirely sourced within Canada.

In contrast to volatile oil and gas prices, electricity prices from B.C. Hydro remained stable and low during this time. The B.C. government even used B.C. Hydro to provide affordability rebates to households and businesses. These were reflected as lower dividends or net income in the B.C. budget; in normal years, B.C. Hydro contributes about $700 million per year to budget revenues.

However, B.C. Hydro is now entering an era of rate increases. Rates increased by 3.75 per cent as of April 1, 2025 and will go up another 3.75 per cent in April 2026. B.C. Hydro is eliminating its two-tier pricing system and all of the increase in bills will come from higher rates in the lower tier while keeping the second, higher tier constant, with a merged single tier as of 2028. B.C. Hydro argues that this is to facilitate conversions off of gas to electric heat pumps and has been approved by the B.C. Utilities Commission.

The costs of new generation and transmission infrastructure inevitably must show up in electricity rates paid by residential, commercial and industrial customers. LNG development increases electricity demand and complicates GHG mitigation in the B.C. economy by competing with the need to decarbonize buildings, transportation and other industry, thereby pushing up future B.C. Hydro electricity prices.

It seems pretty clear that if LNG proponents won’t pay the full marginal cost of new electricity supply, this means higher rates for everyone else in order to cross-subsidize LNG proponents. This is a stark contrast to the electricity policy directive under the B.C. Liberals before 2017, which required LNG proponents to pay the full cost of new infrastructure built to service them.

If we flip this issue on its head, consider that B.C. Hydro wouldn’t need so much new electricity generation capacity if it were not for the oil and gas industry’s growing demand. If B.C. Hydro were, instead, to play a role in winding down the oil and gas industry, its current load would be available for other purposes, like decarbonizing the rest of the economy. As currently planned, LNG may break B.C. Hydro’s prized ability to maintain stable and low electricity prices for consumers.

Conclusion

For many years now B.C. politicians have tried to have it both ways: claiming to be climate action leaders while simultaneously encouraging increased gas production for export, including an LNG industry. The province has essentially given up long term control over its limited gas supplies to foreign companies. Now that LNG Canada is about to open, the B.C. government has painted itself into a corner due to the contradictions between these competing objectives.

The danger is that the B.C. government abandons its climate policies for the LNG sector, including electrification and carbon pricing, and instead opts for higher GHG emissions and sacrificing its long-run GHG emission reduction targets.

Doubling down on fossil fuel exports at a time of climate emergency is folly and is also costly from a bottom-line perspective. While LNG Canada will adversely affect B.C.’s energy system in many ways, the situation will only get worse as other LNG facilities come online. As a wealthy jurisdiction with abundant natural and human resources, B.C. instead needs to take the other path: being a true leader on the pathway to decarbonizing our economy.

Acknowledgements

Thanks to John Young and John Calvert for comments on an earlier draft and to the LNG and gas team at the Institute for Energy Economics and Financial Analysis for strategic insights into LNG markets.