Tax policy paves way for LNG Canada project

  • Shell Integrated Gas & New Energies Director Maarten Wetselaar, front left, LNG Canada CEO Andy Calitz, front right, and Prime Minister Justin Trudeau, back right, applaud during a news conference in Vancouver on Oct. 2 after a final investment declaration was signed by LNG Canada joint venture participants to build an LNG export facility in Kitimat, British Columbia. (AP Photo/Darryl Dyck/The Canadian Press)

It wasn’t just growing market demand and higher prices that motivated the partners in the LNG Canada project to go ahead with their C$40 billion development in British Columbia. Lower taxes helped, too.

The B.C. premier’s decision to scrap his predecessor’s special liquefied natural gas tax and endorse a new “competitive tax structure” helped the companies make their investment decision, LNG Canada’s commercial director Rob Dakers was quoted in Business in Vancouver.

In 2014, the B.C. government pushed a new tax on LNG projects, set at a minimum rate of 1.5 percent of net operating income (revenue less expenses) until a project recovers its capital investments and the plant starts operating at a profit. At that point, the tax rate would climb to 3.5 percent for 20 years, then top out at 5 percent. The special LNG tax would be in addition to corporate income taxes.

Then, nothing happened. Hopes never turned real for multiple proposed LNG export terminals on the British Columbia coast and booming gas production to feed the projects.

The new industry would create so much provincial revenue, then-Premier Christy Clark said, that the B.C. treasury would be able to pay off all its debts, eliminate sales tax and establish a “prosperity fund” — called a “fantasy fund” by skeptics.

But the global LNG market did not cooperate with the plan. Turns out plenty of new supply was on the way, prices were headed down, and developers were not looking to commit tens of billions of dollars with that much financial uncertainty.

Then, by early 2018, markets were looking much better, prices were up, and the provincial government that took control in 2017 was ready to offer a deal.

If LNG Canada — led by Shell, with partners from Japan, China, Malaysia and South Korea — would commit by November to build its project in Kitimat, B.C. (about 100 miles southeast of the Alaska border), the province would get rid of the LNG tax. The government wanted to move the seven-year-old joint venture toward a final investment decision.

British Columbia also will exempt the project from paying provincial sales tax during construction, similar to the policy for many manufacturing plants, recovering that forgone revenue over 20 years in a new structure called “operating performance payments.”

The province will exempt LNG Canada from a scheduled $20-per-tonne increase in carbon-emission taxes if the project can meet a target as the world’s cleanest liquefaction plant. That would lock in the carbon tax at $30 per tonne for the project, while the provincial tax for other fuel users is set to rise each year by $5 per tonne until it hits $50 in 2021.

The offer also provides the project access to cheaper electrical power, putting it on a similar footing to other industrial sectors. B.C. Hydro will cut its rate for LNG facilities and offer its standard industrial tariff in an attempt to get LNG Canada to use electricity and not gas to power much of its operations.

“I think these are the right steps forward to level the playing field and enable LNG development in B.C.,” Susannah Pierce, LNG Canada’s director of external relations, said when the government announced its offerings in March.

Other LNG developers can get pretty much the same deal. One small project near Vancouver is close to a construction decision, while others still are in proposal-and-planning stages.

“Our obligation is to the people who call British Columbia home, and our job is to get the best deal for them and the generations that follow,” Premier John Horgan said in March. “No premier or government can dismiss this kind of critical economic opportunity for the people of British Columbia.”

Instead of the provincial treasury receiving an estimated $28 billion in revenue over 40 years from LNG Canada, British Columbia would take in $22 billion, according to government estimates in March.

The tax breaks and other terms, however, are contentious. Before he became premier, Horgan spent years in the opposition, accusing the government of giving away too much revenue to large multinational LNG proponents.

“Shell does not need handouts from government, in my view,” Horgan said in 2013.

Environmental groups don’t like the deal, calling it an abandonment of British Columbia’s commitment to fight climate change.

“Today’s announcement is a new form of climate denial,” Sierra Club B.C.’s climate campaigner Jens Wieting said in March. “By sweetening the pot for fracked gas export, the government is laying out a red carpet for investors to help destroy our climate.”

Soon after LNG Canada announced its investment decision Oct. 1, the opposition party was calling on the government to make public the details of the tax deal.

“What promises has the government made that will bind future governments or cost taxpayers in the future?” asked Mike de Jong, an opposition party member in the provincial assembly. “What has this government promised in exchange for the decision to proceed, and how long have they promised it for? It may be eminently defensible, but surely people are entitled to know.”

Finance Minister Carole James said the government is finishing the “operating performance payment agreement” in lieu of sales taxes during construction, and the terms would be released when they are final.

The project’s C$40 billion price tag includes two liquefaction trains in Kitimat, with production capacity of 13 million tonnes per year. The partners have the option of later doubling that capacity. Almost half of the construction cost is for the LNG plant.

In addition to the Kitimat terminal, C$6.2 billion will be spent on the almost 420-mile pipeline to deliver feed gas from northeastern B.C.

In total, the LNG plant, pipeline and upstream development will employ 10,000 workers at peak construction.

A remaining hurdle is a jurisdictional challenge over the pipeline, which already holds provincial regulatory approval. An opponent contends that Canada’s National Energy Board has jurisdiction, not British Columbia, because the line would connect to pipe that serves Alberta. The NEB has agreed to consider the challenge.

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Larry Persily is a former Alaska journalist, state and federal official who has long tracked oil and gas markets and projects worldwide.

Updated: 
11/07/2018 - 11:52am

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