Real estate prices in Kitimat, B.C., are up more than 40 per cent in less than two years. That's just a start to where the listings could go. But the trend could also affect where the winning liquefied natural gas (LNG) facilities are located.
According to the January 2014 Housing Facts, put out by the District of Kitimat Community Planning and Development, the average value of a single family dwelling in the region has jumped from $160,000 to $228,000 since 2012. Over the same period, rental rates have shot up to $1,800 a month from $1,000 (they used to be $450 a month in 2010).
All this housing inflation is symptomatic of a wave of dollars moving into the location of choice for the LNG pre-frenzy, at a time when not even one of the 14 consortia members has announced a final investment decision (FID). Other local stories of inflation abound, from cheap motels becoming not-so-inexpensive, to a low-quality cut of beef being priced like a Parisian filet mignon.
If only two of the leading proponents – Chevron and Shell – build their gas liquefiers in Kitimat, there could be up to an incremental 10,000 workers showing up with tool belts at the head of the Douglas Channel. Already, LNG reconnaissance workers are being billeted in alternative accommodations. Land-based camps are being augmented by a cruise ship that will house labourers working on the multibillion-dollar Rio Tinto Alcan smelter. Admittedly, such living quarters can be fairly luxe, but there is no place like a home for workers with families.
Rising home prices are great if you are a real estate tycoon, or a worker flush enough to pay a hefty mortgage with overtime hours. But inflated listings are not that great if you're looking to buy a house on a teacher's, nurse's or fireman's wage. Just ask those who experienced the Fort McMurray boom between 2002 and 2009. (See Figure 1.)
The epilogue to Fort McMurray is that it has done very well over the long run. But if the oil town is seen as an analogous case study over the near term, Kitimat house prices still have a lot of runway. In the absence of delays, a doubling of prices in three years could be the trajectory once the real LNG spending starts.
But there is a difference in this tale of two towns. Fort McMurray is located at the head of the resource, while Kitimat is at the end of the proposed pipes. So, it's not clear if inflated prices will stick when LNG workers start leaving after the last welding torch is snuffed out at the coastal plants. But the upstream drilling to fill the pipes and facilities with gas will continue. In this context, it's not surprising that the highest real estate prices in northern B.C. are in Fort St. John, the hub of B.C.'s upstream natural gas resources. Over there, the average house already costs over $350,000 (2012), and costs appear to be on a steep ramp when looking at data from the B.C. Northern Real Estate Board.
Cost inflation from one end of the proposed pipes to the other could be the mechanism that weeds out the excessive number of players in the LNG fray. That's actually a good thing, because 14 consortia are already tripping over each other. But cost inflation at all levels can act as a pesticide, rather than a selective weeding tool.
Unlike Fort McMurray, Kitimat faces competition from other choice locations like Prince Rupert. Not far up the coast from Kitimat are big players like Petronas, BG Group, Nexen, Exxon Mobil and Woodside Petroleum. For the moment, these consortia are either quiet or have more upstream resources to procure, so there is a nervous calm on the coast.
Judging by the latest numbers, the average house price in Prince Rupert is around $180,000 (2012) and appears to be holding stable. Of course, that can change quickly, depending on the magnitude and timing of the LNG spending to come there.
But there are potentially more options. An LNG underdog, Veresen, made headlines last week by announcing that they had received Canadian National Energy Board approval to export natural gas through Jordan's Cove, Ore., a picturesque four-hour drive south of Portland. Although Veresen still has plenty of American regulatory obstacles and other hurdles to overcome, it would be folly for Kitimat, Prince Rupert or even British Columbia as a whole to discount distant competition in the race to export Canadian LNG. Competition is always good for combatting rising costs. Spreading out locations can help spread out the inflation.
Peter Tertzakian is chief energy economist at ARC Financial Corp. in Calgary and the author of two best-selling books, A Thousand Barrels a Second and The End of Energy Obesity.