The British Columbia government has hinted it may be willing to soften its call for a special LNG tax as deteriorating economics threaten possible upstream capital spending of C$219 billion.
Whether it has climbed down will be revealed shortly when the tax is unveiled by Finance Minister Mike de Jong, who now emphasizes that numbers contained in the tentative two-tier regime that was rolled out in February are “up to” figures.
Meanwhile, lurking in the background, are plans for a second levy on the industry when the province sets limits on greenhouse gas emissions from liquefaction facilities.
The final details will be contained in two bills to be introduced in the provincial legislature in October and scheduled for passage before year’s end.
Leslie Palti-Guzman, a senior analyst with the New York-based Eurasia Group, said in a recent report that the government’s position has softened over the last few months and “it is now likely to introduce a more industry-friendly tax regime that will not impede investments.”
“Eurasia Group expects additional concessions from both the provincial and federal governments to facilitate the fiscal environment for LNG developers,” she said.
Intensified pressure
Pressure on the British Columbia government from industry organizations and proponents of 17 LNG projects has intensified this year, culminating in late September with a threat by Malaysia’s Petronas to abandon its Pacific NorthWest scheme because of uncertainty over taxes and approvals, along with the “lack of appropriate incentives” for the industry.
“Rather than ensuring the development of the LNG industry through appropriate incentives and assurances of legal and fiscal stability, the Canadian landscape of LNG development is now one of uncertainty, delay and short vision,” said Petronas Chief Executive Officer Shamsul Abbas.
That was the biggest outright challenge yet to British Columbia’s plan to impose an initial 1.5 percent tax on the net income of LNG facilities after commercial production begins, rising to 7 percent once eligible capital costs of building the plants are recovered.
In addition to the LNG sales revenue, the province is ready to tax rents and fees for third-party use of the facilities as well as processing revenue.
Industry observers believe the second stage is the one that is most like to get modified if the government broadens its definition of what constitute capital deductions.
Marc Lee, a senior economist in British Columbia with the Canadian Center for Policy Alternatives, said the pressure should see the 7 percent drop to 5 percent, or even less.
But he said the danger is posed by Premier Christy Clark’s insistence that LNG underpins much of her economic strategy to wipe out British Columbia’s debt (currently C$60 billion and climbing), generate C$1 trillion in economic activity, build a C$100 billion prosperity fund and create 100,000 jobs.
Prices in Asia down
It doesn’t help these grand dreams that LNG prices in Asia have dropped to multiyear lows of about US$10 per million British thermal units, as new supplies come onstream and the Chinese economy turns sour, from the once-heady heights of US$20.
A major export pipeline from Russia to China is largely responsible for the decline, which is forcing Qatar, which has some of the lowest breakeven LNG costs in the world, to discount its prices.
The result is grim for British Columbia, which is believed to need sales prices of up to US$15 to earn an acceptable profit.
Although de Jong says there will not be “huge surprises” in the final tax package, he concedes negotiations have concentrated on finding the right balance and what qualify as eligible capital costs.
He said that any LNG proponent, if asked what level of taxation would be acceptable, would likely say zero.
“Folks are going to advocate for the best interests of the organization they represent,” he said. “The organization we represent is the taxpayers of British Columbia.”
Natural Gas Development Minister Rich Coleman said he believes British Columbia has reached a “sweet spot” in its negotiations.
Tax on top of royalties
What troubles the energy industry is that the LNG tax comes on top of regular corporate income tax and the payment of royalties for use of British Columbia’s underlying natural gas resources, plus property taxes, sales taxes and a provincial carbon tax.
Jennifer Winter, associate director of energy and environmental policy at the University of Calgary, said the new tax would amount to a “revenue grab,” and would be no different from the government imposing a special tax on pulp mills.
She said there is no justification for taxing the liquefaction of natural gas “other than the government wants the money.”
The government recently asked Ernst & Young to weigh its fiscal-framework plans against those already in place in Australia and five U.S. states: Alaska, Georgia, Louisiana, Oregon and Texas.
The accounting firm said that British Columbia’s proposed taxes and royalties on LNG, including the next tax, would be competitive with other jurisdictions.
But E&Y carefully avoided commenting on the “appropriateness” of any fiscal regimes it studied.
E&Y partner Byron Beswick said the mood of confidence in the industry has not been helped by government delays in releasing the planned legislation.
Andrew Weaver, the Green Party’s sole member of the provincial legislature, said the dithering has caused Petronas to miss a supply window of 2018-19 while other companies such as Apache and Encana have backed away from getting involved in LNG.
If Petronas doesn’t like what de Jong puts on the table, the company is unlikely to wait long before quitting Canada, while Chevron, already struggling to find a replacement for its former 50 percent partner Apache in the Kitimat project, would likely take the same exit door.
Environmental obstacles
Adding to its concerns, Petronas is facing environmental obstacles related to the site for its export terminal near Prince Rupert.
The partnership has asked for more time to work out changes to the jetty and terminal design at Lelu Island to include “substantial” mitigation measures to offset potential adverse impacts on the marine habitat, notably salmon and steelhead trout, from dredging 7 million cubic meters of sediment in the area.
The British Columbia Environment Ministry has also flagged concerns about species-at-risk, air pollution, inadequate consultation with First Nations and potential human health risks.
Petronas has asked for an additional 45 days to answer issues raised by the Canadian Environmental Assessment Agency, meaning a final decision may not be reached until Dec. 20.
China’s Sinopec, a 15 percent partner in Petronas, has joined the piling on process, with Executive Vice President Feng Zhiqiang declaring that unless there are government concessions, “many projects will drop,” citing a shortage of skilled workers.
“You have a very limited number of people,” he said, estimating there are currently insufficient tradespeople to support even one project, given that the Canadian government has capped the number of foreigners on any project at 30 percent of the work force.
But Feng said it is still possible for several LNG projects to go ahead in Canada if the issues of taxes and labor are resolved.
“That’s the reason companies are watching instead of investing,” and why some companies are thinking about pulled out, he said.
