Providing coverage of Alaska and northern Canada's oil and gas industry
February 2013

Vol. 18, No. 8 Week of February 24, 2013

BC taints grand vision

Government views LNG as cash cow it can milk for up to C$260B over 30 years

Gary Park

For Petroleum News

British Columbia Premier Christy Clark is tying her flimsy hopes of clinging to power in a May 14 election on natural gas and LNG exports.

Her government issued two grand plans in February forecasting LNG exports could generate C$130 billion to C$260 billion in revenues over 30 years, assuming two large and three smaller-sized LNG plants, along with thousands of jobs.

But, just as quickly, Clark antagonized the industry by disclosing plans to impose a major tax on the exports of natural gas.

The government’s strategy papers noted that Australia’s natural gas tax and royalty regime is “up to one-third higher” than British Columbia’s, noting that new taxes on gas exports could “maximize the benefits to British Columbians” without affecting the province’s competitive edge.

A spokesman for the Finance Ministry said discussions are already under way with the industry to see what form a tax might take.

Reminder of Alberta battles

For the Calgary-based producers who dominate the companies holding potential LNG feedstock gas in northeastern British Columbia the prospect of tax hikes creates bitter reminders of the industry’s recent battle over royalty increases with the Alberta government that cost billions of dollars in investment and thousands of jobs before Alberta backed down.

A spokesman for the Canadian Association of Petroleum Producers raised concern about how the government is making it assumptions, including the projection of a new tax on LNG.

“I think it will cause the industry to reflect on its business assumptions,” he told the Vancouver Sun. “I don’t think it will send anyone running to the hills, but they are going to take a long look at this and decide what it might mean to them.”

The spokesman said the LNG industry is competitive, capital is fluid and despite price differences of C$3.50 a unit in North America and C$15 a unit in Asia, the margins, once all the costs of development are considered, are quickly whittled down to just a few dollars per unit.

‘Biting the hand’

Peter Doig, a former financial analyst, told the Globe and Mail that British Columbia has suddenly swung from subsidizing road construction to stimulate natural gas activity to “biting the hand that’s going to feed” the province.

He said some of the economics of the government’s targeted LNG goals are open to question.

“If you throw in higher royalty rates, that’s a nail in the coffin,” he said.

Steven Paget, an analyst with FirstEnergy Capital, warned that British Columbia is also faced with challenges from gas in Alberta that could be used in the same LNG pipeline networks.

Greg Kist, president of the Petronas-operated Pacific Northwest LNG project, suggested the industry could easily switch from financing LNG development to producing into a North American market if that offered better returns.

Those warning flags have already been waved by Chevron, which recently took over control of the Kitimat LNG project.

Its Chief Executive Officer John Watson has issued veiled cautions that it will take “substantial (LNG) prices to underpin developments (in British Columbia) of tens of billions of dollars and therefore some projects will go and some will not.”

The Clark government’s multibillion-dollar revenue estimates cover direct taxes paid by LNG facilities and royalties collected from natural gas extraction to support the projects, plus personal income tax revenues from jobs created by the LNG sector.

The grand objective held out by the government is that a minimum C$100 billion will be fed over 30 years into a newly created B.C. Prosperity Fund that could erase the province’s debt, currently at C$58 billion, by 2028, although the fund could be used for other options, including eliminating the provincial sales tax. (Alberta is the only one of Canada’s 10 provinces that is debt free).

“The safe recovery and export of our abundant supply of natural gas presents an opportunity for prosperity unlike anything we have ever seen,” Clark said in a news release.

She said LNG is “poised to trigger approximately C$1 trillion in cumulative GDP within British Columbia over the next 30 years.”

The government based its forecasts on analysis by independent consultants along with sector information gathered by the government from global natural gas and LNG forecasters and forecasts of potential natural gas production in British Columbia.

Concerns brushed off

Energy Minister Rich Coleman brushed off the concerns, predicting that by 2020 British Columbia, building on “trillions and trillions” of cubic feet of gas resources in the province’s northeast, will have “very much matured into the marketplace.”

He said there is also evidence that LNG investment in British Columbia will create a new demand for natural gas exploration and development over the long-term.

“The message really is that B.C. has an opportunity to participate in a new LNG market that could create lasting benefits for many years,” he said.

Gary Leach, president of the Explorers and Producers Association of Canada, said any revenue projections stretched over several decades for any resource commodity are highly speculative, based as they are on assumptions about commodity prices, including global economic growth — especially in Asia — and competing energy supplies.

He said the Clark government needs to determine whether LNG proponents will be successful in extracting from Asian buyers the prices they need to justify going forward.

Leach noted that Chevron recently said that venture will need higher oil-linked prices or it will not proceed.

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