The British Columbia government ended two years of high stakes poker by playing its final hand Oct. 21 that will either sway the LNG industry to sanction a handful of projects or head for other gambling tables.
The province’s often-postponed fiscal regime, which has evolved from quiet backroom negotiations into public bluff and bluster in recent weeks, was unveiled by Finance Minister Mike de Jong to strong indications of support from leading proponents.
The overriding conclusion is that the government has paid heed to industry warnings and scaled back its hopes for turning LNG into a multibillion-dollar revenue trough.
De Jong said the opportunity for British Columbia to develop a thriving industry remains.
“But the design and tax structure needs to take into account changing circumstances in the market and potential for return,” he said, conceding “it’s not quite as lucrative as it once was.”
Expected to be approved this fall
Under the planned legislation, that is expected to be approved this fall by the provincial legislature and take effect on Jan. 1, 2017, the initial income tax on operating revenues will stay at 1.5 percent as targeted last February, but a planned second tier to be imposed once the LNG terminals pay off their capital costs has been cut in half to 3.5 percent - but rising to 5 percent by 2037 - from 7 percent, lessening what many in the industry had said could be the undoing of British Columbia’s dream of a revenue windfall.
As a result, the government estimates it would capture C$800 million in a 10-year period from one medium-sized LNG plant like those being proposed by Petronas (Pacific NorthWest, designed to start at 12 million metric tons a year and possibly grow to 18 million metric tons), a Shell-led consortium (LNG Canada, coming on stream at 12 million metric tons a year, with an option to double) and Chevron (Kitimat LNG, targeting 11 million metric tons a year). The 7 percent tax was forecast to yield C$1.5 billion per plant over 10 years.
Natural gas tax credit
As an added incentive to advance LNG ventures, the government has introduced a new provincial natural gas tax credit that would shrink corporate income tax rates to as low as 8 percent from 11 percent.
That translates into an estimated C$150 million a year for each plant, although the full amount would not be collected until 7 years after a plant comes onstream, meaning the largest returns would not begin flowing until the late 2020s.
De Jong would not say whether the tax revenues would still flow into a Prosperity Fund, which Premier Christy Clark had once touted as a C$100 billion nest egg to pay for provincial services.
Although no LNG projects have been completed in British Columbia, there are 18 proposals, but Clark - endorsed by analysts - said Oct. 21 it is likely that only five will proceed.
De Jong rejected suggestions that the province has been pressured into lowering its tax rate, saying that while companies have “aggressively” made their case that they would like no tax, the government has been determined to see it extracts a fair return for British Columbians, who own the gas resource.
He conceded that since British Columbia first tested its tax structure there have been “significant changes” in the global LNG market, as selling prices have declined because of growing supplies, an easing of China’s economic growth, Japan’s possible return to nuclear power, a drop in oil prices that has shrunk oil-indexed LNG contracts and pressure from potential buyers to negotiate Henry Hub-based contracts.
In addition, de Jong said rising construction costs in Australia have raised expectations in British Columbia, while competition for resources is likely to trigger cost inflation.
“We need to be competitive ... we do need to strike a balance and ensure that our overall cost structure compares favorably because the (LNG proponents) poised to make decisions will be looking at this aspect of our regulation and taxation and they will be adding it to an overall analysis of costs,” he said.
Balance cited by industry
Backers of the Shell-operated LNG Canada said the final tax framework “provides balance and consideration of the challenges faced by the LNG sector in B.C. We are pleased to have certainty ... and consider it an important input to our decision-making process,” the partnership said.
It said work will now turn to areas such as “skills training and labor availability, protecting the environment, community needs and overall fiscal competitiveness and certainty.”
Pacific NorthWest, which has been the most outspoken critic of the February tax proposal, said it now needed time to more closely assess the new regime.
Spencer Sproule, a senior adviser for the project, said the consortium continues to believe that British Columbians are entitled to benefit from natural resource extraction.
“At the same time, it is imperative that all levels of government recognize the need to remain competitive with other jurisdictions around the world” that are working on LNG export plans, he said.
Geoff Morrison, the British Columbia manager for the Canadian Association of Petroleum Producers, said companies involved in the upstream end of LNG are pleased the government has delivered on its promise to clarify the tax position, allowing proponents to move ahead with final investment decisions.
