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Providing coverage of Alaska and northern Canada's oil and gas industry
May 2014

Vol. 19, No. 19 Week of May 11, 2014

BC answering LNG pressure

Provincial government may introduce tax legislation this summer; initial framework open to change as players outline financial plans

Gary Park

For Petroleum News

Just getting LNG out of the starting blocks in British Columbia is turning from a tranquil and measured long-distance journey into a frenzied scramble, with one eye on a clock that is fast winding down.

The pressure on the British Columbia government since it rolled out the framework for a fiscal regime in mid-February is forcing the administration of Premier Christy Clark to buckle under the weight of global companies that want greater clarity before they commit to spending billions of dollars.

In offering the first details of the regime in his 2014-15 budget, Finance Minister Mike de Jong promised to enter a round of bargaining with the province’s LNG proponents before introducing legislation this fall, in hopes of obtaining at least one final investment decision in 2014.

So far the province has attracted 14 LNG proposals, although none have been officially launched.

Negative response

But the negative response from players such as Royal Dutch Shell could see the government advance the release of its fiscal plan to this summer, Steve Carr, British Columbia’s deputy natural gas minister, told reporters at a Calgary investment symposium in April.

He emphasized that the two-tier LNG tax released in February is far from a done deal in the government’s mind.

The first tier was set at 1.5 percent, with a second tier rising to 7 percent once projects had paid off their capital investments.

“I really want to stress the ‘up to 7 percent’ — we have not landed on the 7 percent and we are continuing to look at our competitive position,” Carr told business executives in Toronto.

He said the government will engage with proponents over the next few weeks “since they are the experts and can tell us about their industry,” including the confidential details of their financial plans.

Progress: FID rests on tax plan

Michael Culbert is chief executive officer of Progress Energy Canada, whose parent company, Malaysia’s state-owned Petronas, is the lead player in the Pacific NorthWest LNG project, among the largest on the books for British Columbia.

He said the hope of making a commercial decision in 2014 is awaiting the details of the LNG tax.

The heat on the government is intensifying as companies compare the costs of proceeding in British Columbia against those in the United States, Australia, West and East Africa and the Middle East.

“The fiscal regime is one of the great many things that’s going to determine whether the British Columbia LNG projects are competitive or not,” said Barry Munro, oil and gas leader in Ernst & Young’s Calgary office.

Tax as revenue grab

The tax proposed by de Jong has been increasingly cited as a potential barrier to investment.

University of Calgary economist Jack Mintz said it is “far from clear what purpose the LNG tax has besides being a revenue grab by the province ... (the tax) could destroy the goose that lays the golden egg.”

Natural Gas Development Minister Rich Coleman, who heads the LNG file, dismissed Mintz’s critique by simply saying he has read the economist’s report.

“We think the LNG tax is a fair approach, to make sure that B.C. gets some benefit out of this resource, from British Columbia and other portions that might come through from other jurisdictions,” including gas supplies sourced in Alberta and Saskatchewan, he said.

Coleman said the government needs a license from British Columbians, who own their gas resources and want to see benefits from job creation, business opportunities, economic development, increased Gross Domestic Product and a balanced provincial budget for the benefit of future generations.

He said the final fiscal legislation will offer certainty to the industry and indicated the government has made more progress towards a tax regime than he anticipated when he assumed the LNG portfolio less than a year ago.

Coleman also emphasized that the legislation will incorporate skills training and immigration to achieve Clark’s goal of “having a workforce in place to build an economy of the future.”

The government is especially determined to establish a robust, home-grown training and recruitment process that will enable British Columbia to avoid the worker shortages that have plagued the development of an LNG industry in Australia.

Coleman told a British Columbia TV program that Australia encountered a “significant problem with the whipsawing of the cost of labor,” that pushed some budgets 45 percent over their original estimates.

He said some of those same companies are among those considering investment in British Columbia.

“It was not a great experience for the companies that had to go through (the Australian difficulties) and today they’re saying, ‘We’re not making that same mistake.’”





LNG tussle will be ‘fierce’

One of the trickiest calculations underlying all LNG decisions is the potential impact Canadian and U.S. LNG exports might have on global LNG contract pricing structures, said a report by Ernst & Young.

Barry Munro, the professional service firm’s Canadian oil and gas leader, said in a statement that “it is one of the most complicated issues for the LNG sector.”

“High LNG development costs have generally required ironclad long-term off-take agreements. And those have historically been oil price based,” he said.

But he explained that recent high crude prices have translated to high LNG prices for Asian buyers — “much higher than, on the surface, the current price of North American natural gas suggests should be the case.”

“We’re seeing expensive projects trying to sell to increasingly more price-sensitive buyers.

“High oil prices and low natural gas prices in North America have strained the traditional approach to LNG pricing. Asian buyers are now looking to modify or possibly replace their long-standing and, in the current environment, expensive pricing model of gas prices tied explicitly to oil prices,” Munro said.

He said that when LNG prices are taken into account, developers will have to balance the pressures of being competitive with the need to generate sufficient returns.

“Proposed increases in LNG supply have made the traditional oil-linked pricing structure more difficult to justify,” Munro said.

“We’re seeing industry players now explore alternative pricing structures to remain competitive, often referenced to Henry Hub prices.”

The report said that although Henry Hub pricing is initially challenging to LNG project developers, the move in that direction could increase choices for buyers and sellers, add liquidity to markets and allow buyers to hedge financially and physically, while giving suppliers the confidence to sanction projects before securing export contracts.

“At the end of the day there will always be competitive pressures from new suppliers and, at the same time, buyers will always look to obtain the lowest cost, least-risky supply, with the explicit understanding that security-of-supply is of high strategic value, but comes at a cost,” Ernst & Young said.

Munro noted that solving the pricing structure puzzle is “just one of the many challenges Canadian LNG players must manage to compete for capital.”

“When the pricing structure is right, both LNG buyers and consumers will win,” he said, delivering a final cautionary observation to Canadians.

“We’re not the only country looking to establish an LNG export industry. Competition will be fierce,” Munro said.

—Gary Park


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