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Jury out on BC’s LNG tax regime Subdued reaction to new policy, critic convinced it will discourage development; industry tackles costs, labor, regulatory process Gary Park For Petroleum News
The response to the British Columbia government’s big push to entice global energy giants to launch the province’s LNG industry has remained mostly subdued and non-committal as companies gird themselves for the next phase in their decision-making process.
While that takes shape some analysts are voicing hope that the province could now be within months, or perhaps a few years, of corporate sanctioning for a handful of the larger ventures.
British Columbia’s key selling features remain its vast natural gas deposits and its proximity to the Asian markets.
But there is still a delicate balancing act between the obvious upside and the doubts all players have over the capital costs, the availability of skilled labor, the slow pace of regulatory approvals and other taxes and regulations.
Some of the sharpest criticism comes from Jack Mintz, director of the School of Public Policy at the University of Calgary, who wrote in the National Post that the new fiscal regime “discourages LNG development.”
He said the policy “should be taken for what it is: A revenue grab without much thought given to economic or policy objectives.”
“It sets a precedent of taxing differently one form on business activity compared to others, distorting the allocation of capital and labor in the economy.
“Instead of moving to a smart efficient tax system with respect to resource development, the province has created a poor public policy precedent for the coming years,” Mintz said.
Separate decisions Gaetan Caron, a former chairman of Canada’s National Energy Board and a colleague of Mintz’s at the University of Calgary, said that regardless of whether the projects are controlled by foreign governments or the private sector, each proposal will make its own decision based on cost structures and the complexities of their proposals.
He suggested to the Financial Post that it is unlikely proponents will react in unison to the tax regime, which is set at an initial 1.5 percent of operating income followed by 3.5 percent after the recovery of investment costs.
That is minimally offset by a 0.5 percent tax credit for the cost of natural gas provided to an LNG facility of up to 3 percentage points of corporate taxable income (thus lowering the corporate tax rate to 8 percent from 11 percent).
Greg Pardy, an analyst at RBC Capital markets, said in a report to clients that his firm views the tax structure as “a positive development in the context of intensified LNG supply competition from the United States, East Africa and elsewhere. It would appear that British Columbia’s LNG tax would not unduly burden a sector that has yet to come into existence.”
Peters & Co, the Calgary-based investment banker, said the tax represents a modest 30 cents per thousand cubic feet of gas for an integrated project.
It told clients that although that is an incremental cost for developers, LNG exports from the British Columbia coast are likely to proceed, with up to three projects commissioned by 2025.
Tough competition Ernst & Young said British Columbia faces tough global competition, notably from some U.S. projects that are moving ahead faster than expected.
“The market continues to develop and tax is only one of the factors that will determine the competitiveness of a Canadian LNG project,” the firm said. “Global supply/demand considerations, costs (both capital and operating), environmental approval conditions, First Nations support and the state of the global debt and equity capital markets will all be critical for a viable project.”
FirstEnergy Capital said in a report that the greater risks still stem from initial construction costs and the eventual selling price of LNG in Asian markets.
It said a landed price of US$13 per million British thermal units could keep project economics and rates of return “relatively attractive.”
But FirstEnergy suggested that oil prices, which the Asian LNG customers want to apply as a benchmark, pose a risk.
At Brent crude prices of US$100 per barrel the LNG price in Japan is about US$15 per million Btu, while a US$90 price translates into US$13 for LNG.
Petronas most vocal critic Malaysia’s Petronas, operator of the proposed Pacific NorthWest LNG project and the most vocal critic of the directions being pursued by the British Columbia government and the pace of the regulatory process, said only that it wants more time to digest the tax regime before commenting.
But the company issued one cautionary note, telling all levels of government that they must “recognize the need to remain competitive with other jurisdictions around the world that currently, or plan to, export LNG” - a reference in part to labor and construction costs.
Petronas has, for now, shifted its attention to lobbying the Canadian government to provide financial relief for LNG export terminals.
It has failed in the past in trying to persuade the federal government to make tax concessions related to asset depreciation rates, noting that the federal tax classification of LNG plants will be vital in determining the economic viability of a project, including capital cost allowance rates.
A British Columbia LNG project in the Class 47 tax category would take 27 years to depreciate the bulk of its assets, compared with only seven years for a manufacturing operation in Class 43, the Canadian Association of Petroleum Producers has estimated. Faster depreciation allows companies to make tax deductions sooner.
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