24 January 2012

Wading through Locke on Muskrat (Part 2) #nlpoli #cdnpoli

[continued from Part 1]

Oil Prices

In Slide 20, Locke turns a comparison of the cost elements of Muskrat Falls and Nalcor’s isolated island scenario into a chart. Locke notes in red at the bottom of the slide that the only difference between the two scenarios is fuel prices.

In Slides 21 through 26, Locke looks at the pricing assumptions Nalcor used for crude oil and finds them in line with other assessments.  In Slides 26,  27 and 28 Locke transitions to a discussion of current prices for natural gas.


In general, Locke spent the greatest amount of his presentation on natural gas.  He did not, at any point, offer an assessment of possible alternatives to Muskrat Falls.  The sections on gas – imported, local and shale – contain omissions and errors that seriously affect the usefulness of Locke’s comments and the validity of his claims and conclusions.

Instead, Locke’s presentation appeared to refute or attack potential threats to the project he previously endorsed. His language in describing shale gas very much suggests an adversarial as opposed to analytical approach in his treatment of these potential alternatives.

Imported Natural Gas

Starting at Slide 26 and continuing through to Slide 37, Locke looks at imported natural gas prices in great detail.  He looks at possible future price scenarios based on anticipated demand growth.

While Locke spent a huge amount of time on this issue, his analysis starts from an unfounded premise.  That is, he starts with the assumption that the construction costs for a natural gas plant are the same as for any other thermal generation (the Nalcor Holyrood scenario). 

You will find this starting point in the comments on Slide 20:

While the isolated Island is $2.2 billion (PV 8%) more expensive, the difference is driven by fuel costs.

Maybe there is an alternative fuel, like natural gas, that can eliminate this differential. Let’s look at this more

One would expect that an experienced economist like Locke would construct a straight forward comparison along the lines of the Slide 19.  That one had all the costs of the isolated scenario on one side and Muskrat Falls on the other.

Locke could have used existing information for some of it. Bruneau’s 2005 study proposed a configuration and gave a preliminary cost estimate. Locke claims to have reviewed it but for some unknown reason he simply ignored it as a basis for comparison.

D’oh!  -  Ignoring the Obvious

Unfortunately for Locke – and his audience – he didn’t do that really obvious comparison.  All Locke had to do was calculate a few values, like the capital cost, the total natural gas fuel cost for the same time period as in the other comparisons and there’s the whole thing.

But that isn’t what Locke did.  He never discussed the capital expenditures.  Nor did he ever equate the total cost of fuel a natural gas plant would need to deliver the electricity needed across the entire period used in the other comparisons.

Instead, Locke just launched into a lengthy discussion of the unit price of natural gas and the potential factors that may drive natural gas prices up to the point where natural gas can’t beat the project he has already endorsed.  Of course, without knowing the total amount of fuel needed or the relationship between units of natural gas compared to oil, Locke’s discussion is irrelevant.

And, of course, since his cost of Muskrat Falls electricity in the earlier slides (7.5 cents per KWH) omitted transportation costs, you wouldn’t necessarily have had a fair comparison across the board anyway.

Unexplored Alternatives

Unfortunately for the audience at Locke’s presentation, Locke’s colleague Jim Feehan didn’t get the time during the Question and Answer session to delve into some related issues that Locke skipped over.  For example, Feehan noted that natural gas electricity is currently available in the United States for two to four cents per kilowatt hour.

If Nalcor could import that electricity through Nova Scotia for 10 cents per kilowatt hour, you would have a source of electricity in the long-term that would be competitive to Muskrat falls without the risk to the taxpayers locally. Feehan just didn’t have the time to get into that discussion.

Locke did note the low cost of natural gas in the US at the moment. 

Offshore Gas

One slide.

That’s it.

The slide amounts to a series of excuses for ignoring natural gas.

Locke’s first two bullets contain the same arguments Nalcor used to justify the fact it did not study natural gas as an alternative to Muskrat. They aren’t any more convincing when Locke repeats them than they were when Nalcor pushed them out.

The SRBP favourite bullshit line:: “…there are no public plans to develop Grand Bank gas for use at Holyrood…”.  Of course there aren’t.  Nalcor is already committed to Muskrat. They aren’t going to study potentially cheaper alternatives when they have made their choice.

That doesn’t mean they got it right, though.  One would have thought Locke would review this in greater detail in a presentation that purported to compare Muskrat to the alternatives. Instead, Locke just uses crap logic to justify his own analytical failing: essentially, his argument is that he didn’t study local natural gas because Nalcor isn’t going to build it because they want to build Muskrat Falls.

One bullet point was pure bullshit:

  • None of the currently available studies on natural gas can be used to definitely say that domestic natural gas is viable to use as a fuel source for producing electricity at Holyrood. …

No one said it was.  They are starting points.  Locke should have – at the very least – made an assessment of them, but as we know he just didn’t bother.  This is the sort of thing one would expect from an advocate for Muskrat falls, not an analyst.

One bullet point is wrong, as it turns out:

  • There is not even a natural gas royalty in place at this time.

Your humble e-scribbler thought so as well.  According to the natural resources department website, though, the province has a natural gas regime.  The pdf file dates from April 2010.  While the website claims there is a regime, it hasn’t be set down in regulations like the generic oil royalty regime.

Shale Gas

Locke spends three slides discussing shale gas. Rather than view it as a potential alternative, Locke considers it a threat to Muskrat Falls (Slide 40):

  • Maybe economic to produce at $4-6/MCF, and would constrain NL’s options

  • In the short term, lower natural gas prices, which will compete with hydroelectric imports and reduce the revenue potential from exported hydro electric projects such as Muskrat Falls and Gull Island. In fact, this will have implications for our ability to develop Gull for the export market (at least in the near term).

That’s a huge indication of the fundamental pro-Muskrat bias Locke brought to his presentation.

At no point did Locke assess Nalcor’s interest in shale gas on the west coast of Newfoundland or the potential availability of shale gas in the St. Lawrence basin as a source of feedstock or electricity. If Nalcor or a local private sector explorer finds shale gas in the province, we could have a ready supply of cheap, easily accessible fuel for a gas plant that is available in less than 10 years.

[Next:  Debt and Locke’s conclusion]

- srbp -