Market Buzz – BC Confirms Tax Regime for LNG Sector – Tax Rate Lower than Initially Expected but is That Enough to Move Forward?

Posted by Ryan Irvine - KeyStone Financial

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UnknownOn October 21st, the BC Liberal government announced the province’s long awaited tax structure for Liquefied Natural Gas exports to Asia. Under this structure, companies processing and exporting LNGs from British Columbia’s west coast will pay a tax rate of 1.5% once production commences which will increase to 3.5% once after capital costs are recovered. This rate will then rise further to 5% at the start of 2037. This structure is lower than what the government originally discussed which would have been a straight 1.5% at the outset and 5% after the company’s recovered their capital costs of building LNG plants and supporting infrastructure. Responses from industry to the revised structure appear to be mixed.

Currently in British Columbia there are 18 LNG project proposals in various stages of consideration with estimated construction budgets up to $16 billion. So far, about 9 of these projects have approval from the National Energy Board (NEB) to export LNG from Canada but none have yet made a final investment decision. Malaysia’s state-owned Petronas, who is spearheading the $11 billion Pacific NorthWest LNG project, threatened in September to cancel their plans in British Columbia if the government didn’t make an effort to create a more globally competitive and efficient operating environment for the sector. The Pacific NorthWest LNG project is considered by many analysts to be the project with the best chance of getting off the ground. Petronas is schedule to make a final investment decision on their multi-billion project by October 31st and so far has not provided any concrete comments on the disclosed tax regime in the province.

It would seem that the pressure is on BC’s Liberal Party who made LNG development and the accompanying economic benefits a focal point of their recent election campaign. Premier Christy Clark alluded to the creation of 100,000 jobs and eventually a debt free British Columbia if even a small handful of these projects were developed. These projections seem to be extremely optimistic by most measure and obviously politically motivated. But the government’s opponents are now attacking them with accusations that they have bowed to Petronas’ threat and are essentially giving B.C.’s natural resources away.

In our opinion, these views indicate an extreme lack of understanding of the issues facing B.C.’s LNG sector (or perhaps better put the possibility of the province having one). Firstly, B.C. will actually be alone in the world with respect to imposing a special tax on LNG exports. Other nations, such as Australia and the United States who appear to be eager to invite the LNG opportunity, have no such ‘special tax.’ Secondly, the province will also generate royalty revenues from natural gas that is produced within its borders as well as corporate income tax both from the producers and the exporters. Not to mention income taxes generated from these company’s employees and all of the economic activity that a thriving LNG sector would provide. So rather than being cowardice, perhaps the government’s strategy to maximum revenue from the sector should be viewed more as perilous since it potentially endangers this sector even getting off the ground.

But ultimately the future of B.C. LNG may not even come down to the tax regime. This is a globally competitive marketplace and there are other players who are moving quickly to contract exports of their own supplies of LNG. These include the United States and Australia but even lesser known players like Papa New Guinea where Exxon (in joint venture with other parties) just finished the completion of a US $19 billion LNG facility which is now exporting to Asian markets. In many jurisdictions, not only is the LNG sector unhindered with a special tax but environmental regulations are less stringent and the number of stakeholders to please less numerous. For better or for worse, all of this equates to an easier operating environment for companies who want to invest billions of dollars. Commodity prices are also becoming a factor with LNG prices declining over the last six months making the prospects for anyone less attractive than they were a year ago.

If there is one thing we know about commodities, whether oil, gas, gold, or LNG, it is that they are volatile, risky and speculative. At this point, it is difficult and maybe even impossible to predict the future of B.C. LNG. The next several months will be very telling as some companies either make, or fail to make, their final investment decisions. 

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