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Vol. 20, No. 9 Week of March 01, 2015
Providing coverage of Alaska and northern Canada's oil and gas industry

BC sweetens LNG taxes

Canadian government offers capex tax break; industry cites global competition

Gary Park

For Petroleum News

British Columbia’s LNG hopes have received a lift from federal tax relief that Canada’s Prime Minister Stephen Harper said it designed to persuade project backers to make final investment decisions.

The break will save the industry a modest C$50 million over five years starting in the 2015-16 fiscal year and increase over later years if projects do go ahead.

The Canadian Association of Petroleum Producers said companies will be able to write off 90 percent of their investments in seven years, rather than 27 years under a program that will allow them to deduct a portion of certain equipment purchases immediately.

CAPP President Tim McMillan said in a statement that LNG development “presents a tremendous economic opportunity for British Columbia and Canada and is vital to the long-term viability of the Canadian upstream natural gas industry and the substantial benefits that flow from it.”

“The tax reclassification recognizes the need for a globally competitive business environment and will create a more level playing field.

“It will also enhance our ability to attract the significant capital investment needed to establish a Canadian LNG industry and grow upstream production.”

CAPP says lift needed

CAPP said that Canadian natural gas needs a lift at a time when it continues to be displaced from its traditional markets in Eastern Canada and the United States because of shale supplies that are closer to those markets.

As a result Canadian gas production could be reduced by 40 percent over the next 15 years, CAPP said.

McMillan said the International Energy Agency has also underscored the “heavy competition for LNG development - the United States and Australia are projected to become major payers - and notes the relatively high production cost of Canadian natural gas that’s needed to supply proposed LNG facilities.”

The initial write off of 8 percent, building to 30 percent, will help with the purchase of equipment such as compressors, pump storage tanks, pipelines “used exclusively” to move LNG from the liquefaction plants, but equipment used for regasification will not qualify.

Nor will the tax break apply to acquisitions of property for producing oxygen or nitrogen, of electrical generating equipment, or the cost of building docks, wharves or other related structures.

Last year, the British Columbia government announced it would cut the income tax on LNG plants in half to 3.5 percent.

Moving the ball

David Keane, president of the British Columbia LNG Alliance, representing seven of the largest proponents, said the break will “help move the ball towards someone being in a position to declare a positive final investment decision ... hopefully sometime this year.”

He said the announcement “will help increase the fiscal certainty that we’ve been looking for.”

There is currently a lineup of 18 projects, but only a handful of major undertakings, including those led by Malaysia’s Petronas, Shell Canada and Chevron Canada, are within sight of corporate sanctioning.

Harper said the projects could create investment that would otherwise not occur, while adding that the actual cost to the government of its fiscal framework “is quite modest” and will probably not affect federal revenues until 2020.

However, Michael Culbert, president of Petronas’ Pacific NorthWest project, complimented the government for delivering “on its goal to diversify and grow Canada’s energy exports. Pacific NorthWest has the potential to generate over C$1 billion in tax revenues to all levels of government each year.”

British Columbia Premier Christie Clark welcomed the new depreciation formula as a “big help in making sure that LNG companies get to that final investment decision.”

She said her own government, along with the industry, was “really persistent” in making its case to the Harper government.

Three by 2020

Clark is sticking with her prediction that three LNG plants will be ready to operate by 2020, but many analysts doubt that more than one or two plants will be built by then.

At another level, Clark’s own government is hedging its bets by not booking any LNG income over the next three years, least of all to its targeted C$100 billion Prosperity Fund.

In releasing a 2015-16 budget that extends fiscal projections over the next three years, B.C. Finance Minister Michael de Jong said Feb. 17 that its best hope is for LNG revenues to start flowing late this decade.

“First of all, you have to build the facility and then the operator is entitled to deduct capital costs,” he told reporters. “So the real short-term benefit around LNG comes not from the LNG income tax, but from the incremental activity that takes place around construction.

“We’re not going to include, until such time as there is a final investment decision, the incremental benefits from LNG,” de Jong said.

He said there is nothing more his government can do to set the stage for LNG development now that proponents have said “they have the basis upon which to make a decision. The fundamentals remain strong and encouraging, but if course there is lingering volatility in energy markets that is impacting on those major projects, to be sure.”



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