The British Columbia government has been served with notice that unless it provides “clarity and certainty” on its LNG tax and regulatory regime it risks losing a “rare and important opportunity” to attract a multibillion-dollar investment.
The message came from David Keane, a former executive for United Kingdom-based gas producer BG Group and now president of the industry’s B.C. LNG Alliance, who told Vancouver’s Board of Trade that if the province tries to squeeze project proponents it will scare them away.
“A company sizing up a final investment decision does so not just in the context of what is happening in British Columbia, but also what is happening globally,” he said. “When you prepare to invest billions of dollars on an LNG project, you do so based on sound due diligence, foresight and a strong understanding of the economics.”
But he declined to provide specific numbers on what level of taxation would make LNG development in the province uncompetitive.
“A new LNG industry in British Columbia is not a foregone conclusion,” he said, noting that B.C. lags in the global LNG race against Australia, Qatar, Nigeria and the United States.
The alliance’s original four members are Petronas (Pacific NorthWest LNG), Royal Dutch Shell (LNG Canada), BG Group (Prince Rupert LNG) and Chevron (Kitimat LNG), joined recently by AltaGas and Idemitsu (Triton LNG) and Pacific Oil & Gas Group (Woodfibre LNG).
Petronas steals limelight
Tensions between the industry and government were further strained earlier in October when Petronas stole the limelight from the British Columbia government on the day a new legislative session started.
Normally that event gives the government an exclusive chance to occupy center stage by outlining its legislative agenda, while delivering an upbeat speech.
Instead, Petronas issued a news release just before the session opened when its Chief Executive Officer Shamsul Abbas said that unless LNG tax and regulatory issues were resolved by the end of October the company would likely stall potential investments of up to C$36 billion on the Pacific NorthWest project by 10 to 15 years.
That came a few days after Abbas met with Premier Christy Clark and Natural Gas Development Minister Rich Coleman, who is the cabinet point man on LNG.
The far from “cordial” message from Abbas could indicate he failed to make any headway in his bargaining with the government leaders.
From polite to hardball
The release was polite enough to begin with, noting Petronas was “encouraged by the commitment expressed by the B.C. government” to launching LNG projects and the opportunity to “monetize, add value and link B.C. natural gas to the global market, to the benefit and prosperity of Canadians, especially British Columbians.”
Shamsul then resorted to hardball, noting:
*“The reality of the global LNG market is that we are facing potential overhang and decreasing demand that creates downward pressures on LNG prices. ... There is a need for international energy companies such as Petronas to seriously prioritize and reassess our investments. The proposed fiscal package and regulatory pace in Canada threatens global competitiveness of the (Pacific NorthWest) project.”
*“This is further exacerbated by preliminary project costs, which indicates the cost of local contractors to be higher and not benchmarked to global contractors’ costs. The additional tax and high cost environment will negatively impact the project’s economic viability and competitiveness. In fact, our last portfolio review exercise (indicated) the current project economics appeared marginal.”
*“Petronas needs to secure consensus on key principles vital to the success of this project by the end of October. Missing this date will have the impact of having to defer our investments until the next LNG marketing window, anticipated in 10-15 years.”
Scarce mention of promises
The government’s speech made scant mention of Clark’s sweeping promises of an LNG industry that could erase British Columbia’s debt, currently at C$60 billion, provide C$1 trillion in new economic prosperity and create up to 100,000 jobs.
Instead, the hopes have now been lowered to a “chance ... not a windfall” that would help British Columbia “maintain the same world-class services we rely on.”
“And the inescapable truth is that they can only be protected if we can afford them. The opportunity afforded by LNG is more than a chance to make a smart investment.”
The government underscored the importance of LNG at a time when its one sturdy export market for natural gas in the United States has dried up “and is never coming back,” forcing the province to shift its focus to global markets.
The speech also referred to greenhouse gas emission standards that LNG companies will have to meet, as well as how the government will balance any increased pollution caused by LNG facilities when the province’s legislated GHG reduction targets.
“B.C.’s 150-year supply of natural gas is an opportunity to change the world ... an opportunity to dramatically reduce air pollution.”
Not a surprise
Keeping his cool, Coleman said none of what Abbas had to say came as a surprise, suggesting the Petronas boss was merely engaging in a “little bit of posturing,” having told him in private only a few days earlier he was comfortable that the government was addressing the issues in a timely way.
Ed Kallio, director of gas with Ziff Consulting, said that while the Petronas salvo contained a bit of posturing or negotiating there are also serious risks that British Columbia’s proposed LNG production tax could price projects out of the global market.
He said it was “foolhardy” for the province to even talk about a new tax which amounted to treating the LNG sector in a completely different manner from any other industry when it already stood to reap the rewards of royalties from gas production, as well as increased corporate and income taxes.
Asked about the narrow window of opportunity that exists for LNG, Clark told reporters: “We’re a government in a hurry.” Exactly how desperate will be known later in October when she can either appease the LNG proponents, or watch helplessly as they withdraw, taking her LNG dream with them.
