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While B.C. looks to Asia to support its LNG dreams, it faces competition from lower-price suppliers.

CHAD HIPOLITO/The Globe and Mail

While B.C. Premier Christy Clark touts the potential for billions of dollars in economic benefits from liquefied natural gas exports, a Western Canadian think tank says the province needs to have "realistic expectations" and prepare for more modest returns.

The Calgary-based Canada West Foundation argues that British Columbia is coming late to the LNG party, that China has lower cost alternatives, and that LNG suppliers should be prepared for downward pressure on prices and revenues as the global competition to supply Asia heats up.

"The opportunity for B.C. to supply Asian markets with LNG is solid, but not guaranteed," said the report, titled "Managing Expectations, Assessing the Potential of B.C.'s Liquid Natural Gas Industry."

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"The B.C. government should be prepared for a more modest natural gas boom in the event that projected production and revenues build more slowly," the report said.

The report appears in contrast to the B.C. Liberal government's optimistic contentions that the nascent industry could create a $100-billion prosperity fund, eliminate the provincial debt and usher in the end of a provincial sales tax. Late last year, Ms. Clark said "energy output from LNG will likely be as big as the total energy output today from the oil sands."

Len Coad, director of the think tank's Centre for Natural Resources Policy, said the report is not meant as a rebuttal to Ms. Clark or her government. "It's simply a word of caution," he said.

As proponents of the LNG industry have often argued, the report says the B.C. government needs to build quickly to out-maneuver competitors. Australian projects might be coming in at a higher cost than originally projected, but are closer to completion than those in North America.

North American natural gas producers are looking hopefully to Asia, where prices are linked to oil prices and are several times higher than in Canada or the U.S. However, the low North American prices are what attracted potential investors and buyers to B.C. in the first place.

"North American projects have a potential advantage to the extent that they are willing to consider pricing that is at least partially indexed to North American natural gas prices," the report said, noting that at least one U.S. exporter has already agreed to such an arrangement.

The cost of turning shale gas into marketable LNG exports also needs to be kept under control, the report said. "The combination of supply costs, transport to tidewater, liquefaction costs and tanker transport must be carefully managed to remain competitive with Australia and Qatar."

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"Too much gas" could also be an issue. The report said traditional LNG suppliers to Asia already have projects announced or in the works that will increase capacity by 269 billion cubic metres a year, while demand in Asia is only expected to increase by 216 billion cubic metres a year. China's appetite for natural gas is likely to be tempered by alternative sources of supply, including increased pipeline imports and its own domestic shale gas.

While the report doesn't outline which of several proposed projects, including Kitimat LNG and the Douglas Channel Energy Partnership, are likely to proceed, it said the eventual list of projects is likely to be cut down from what is now proposed.

Also key to many potential exporters – but not mentioned in the report – is the B.C. taxation regime for LNG, he said. Earlier this month, Ms. Clark said her province is on the verge of a landmark agreement governing the taxation of LNG exported from B.C. The pact will make clear how much energy companies must pay the government for the right to export the province's natural gas.

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