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Vol. 20, No. 28 Week of July 12, 2015
Providing coverage of Alaska and northern Canada's oil and gas industry

25-year tax shelter

BC-Pacific NorthWest deal promises compensation for tax hikes, regulatory changes

Gary Park

For Petroleum News

The British Columbia government of Premier Christy Clark wants to tie the hands of current and future administrations over 25-year periods by shielding projects against any changes to provincial taxes and regulations.

A 37-page project development agreement signed in May with Malaysia’s Petronas, operator of the Pacific NorthWest consortium, is designed to establish the “rules of the game” for Pacific NorthWest that will carry over to any other projects, Finance Minister Mike de Jong said.

He said the deal provides a “measure of stability.”

The pact locks in the status quo on three taxes that apply to the sector: The LNG income tax enacted by the provincial legislature last year; the natural gas tax credit on corporate income taxes; and the British Columbia carbon tax. A similar lock-in would apply to any greenhouse gas regulations.

But de Jong emphasized there is nothing to stop the province from raising corporate or sales taxes or “other levies of broad, general application.”

As well, the provincial government could raise the carbon tax or tighten GHG regulations, so long as those changes did not specifically target the LNG industry.


The key element in the agreement would require the province to compensate LNG operators if tax increases or regulatory changes were to increase costs to the company by C$25 million or more in a calendar year or by a cumulative C$50 million over five years.

At that point, the government would be contractually obliged to offset those costs on a dollar-for-dollar basis, directly or through deductions from other taxes.

The project development agreement also includes a “me too” clause that would allow Pacific NorthWest to take advantage of any more favorable terms negotiated with other projects.

Those conditions along with vague pledges to negotiate terms with First Nations or establish skilled job-training programs will come under scrutiny starting July 13 when a special session of the provincial legislature enacts the legislation and any other LNG agreements.

Jobs, revenues touted

De Jong said the C$36 billion Pacific NorthWest project is expected to employ “upwards of 4,500 individuals” during the construction phase and as many as 1,000 when it embarks on full operation, while the British Columbia treasury is expected to collect C$9 billion in taxes and royalties over the project’s operating life.

In answer to those who have asked him how the province can be certain the deal will deliver the projected benefits “when energy prices internationally are in a state of flux,” de Jong conceded that “I can’t.”

He said the estimated investment is the consortium’s money - “not mine and not the (taxpayers)” - which the partners are spending based on their analyses and their belief that “there is a fair return to be derived.”

The agreement indicates the Clark government hopes to have the legislation enacted by the end of summer, giving the proponent 24 months to meet a number of conditions, including front-end engineering and design, securing federal environmental approval, arranging financial backing and making a final investment decision, setting the stage for commercial operations to start in 2019.

De Jong said the government would not have devoted so much “intellectual capital” if it thought there was a chance the consortium might balk at going ahead.

Call for firm commitments

Bruce Ralston, the finance spokesman for the opposition New Democratic Party, said the terms are good for the Pacific NorthWest partners, but not good enough for British Columbians because they do not contain firm commitments on jobs and training.

The British Columbia LNG Alliance, which speaks for seven major projects, welcomed the announcement.

“LNG projects are large undertakings that require tens of billions in capital investment and therefore require certainty with respect to the fiscal, legal and regulatory framework,” Alliance President David Keane said in a statement.

Among the external hurdles facing Pacific NorthWest is the continuing challenge to gain backing from First Nations - a hurdle that increased in height at the same time de Jong was making his announcement.

The Gitga’at First Nation said it was taking the British Columbia government to court, seeking a judicial review of the project because it had been excluded from “full consultation.”

Noting that the Gitga’at community is 60 miles south of Prince Rupert, where Pacific NorthWest plans to locate its liquefaction and tanker terminal, legal experts and observers said challenges are generally based on an aboriginal community’s traditional territory.

“Our territory, for example, doesn’t go anywhere near Prince Rupert, but that doesn’t mean you only use (resources) within your traditional territory,” Gitga’at councillor Kyle Clifton told the Financial Post. “We’re just looking to have our rights to use the (Prince Rupert harbor and the mouth of the Skeena River) acknowledged.”

The British Columbia Environmental Assessment Office listed five First Nations that were entitled to full consultation, but did not include the Gitga’at.

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