B.C. government touts new LNG tax regime.

Proposed rate cut fails to dispel doubts about province’s competitiveness

CALGARY/TORONTO• The B.C. government slashed its tax rate proposal for its nascent liquefied natural gas industry in a bid to entice proponents to the West Coast, but some industry players still believe the province has not gone far enough to roll out the welcome mat.

Mike de Jong, B.C.’s finance minister, said he is confident the new rules introduced Tuesday are fair and balanced, but the province is not taking anything for granted. “These proponents have to make decisions worth billions of dollars, and there is still a lot of work to be done,” he said in an interview.

The new Liquefied Natural Gas Income Tax Act would tax an LNG project at a rate of 1.5% when production begins, rising to 3.5% after capital costs are recovered. That rate will rise to 5% after Jan. 1, 2037 — when the Liberal government expects the LNG industry will be well established within the province.

“We believe this overall framework strikes the right balance between a competitive and economic environment and a fair return to British Columbians,” Mr. de Jong said in statement announcing the tax.

In February, B.C. floated the idea of a two-tiered tax system for proposed LNG projects, which super-cool natural gas into its liquid state for export off the coast. In addition to adding a third tier, the province Tuesday reduced the rate at which it would tax a project’s net income.

The province’s original proposal would have taxed projects at a rate 1.5% when LNG production begins, rising to 7% once the capital costs required to build the multi-billion projects are recovered.

Despite the lower final rate, the B.C. LNG Alliance, an industry group representing six of the more advanced projects, wasn’t convinced the industry could be competitive.

Alliance president David Keane said that while LNG proponents appreciate the government revisiting its original tax structure, “this tax, along with other taxes we will pay, have to strike the right balance that enables British Columbians to get fair value for their resource, but also recognize the huge technical and financial challenges of very large and complex projects with significant risk.”

“B.C. is a high-cost environment; for these projects to be economically viable, the LNG tax must be considered in conjunction with the overall fiscal framework, which includes other taxes, availability of skilled labour resources, constructing pipelines across two mountain ranges, global LNG market trends, and other fiscal and regulatory issues.”

The alliance represents LNG consortiums led by Royal Dutch Shell PLC, Petronas, Chevron Corp., BG Canada and Woodfibre LNG.

The LNG t ax was t he second major piece of prov- incial legislation targeting LNG proponents tabled this week. On Monday, B.C. Environment Minister Mary Polak introduced an act to limit CO2 emissions from LNG projects.

The two pieces of legislation were announced days before the Oct. 31 deadline imposed by Malaysia’s stateowned oil company Petronas, which is pushing to build the $11-billion Pacific Northwest LNG project near Prince Rupert, B.C.

Petronas president Shamsul Azhar Abbas gave the province an ultimatum: Clarify the LNG tax structure by the end of the month or risk a 10- to 15-year postponement of the project.

Other players were noncommittal.

A Pacific Northwest LNG spokesperson said the company is reviewing the proposed tax, and will say more once it has a “better appreciation of the implications of the proposed tax.”

LNG Canada Ltd., a consortium led by Shell, said the tax framework “provides balance and consideration of the challenges faced by an LNG sector in B.C.”

“We are pleased to have certainty on a final B.C. LNG tax framework and consider it an important input to our decision-making process,” Shell said in a statement, not- ing that there is much more work to do prior to a final investment decision for LNG Canada, including working with First Nations and local communities, as well as municipal, provincial and federal governments.

Analysts expect Petronas to be the first company to decide whether it will proceed with its project, though more than a dozen export projects have been announced for the B.C. coast.

PwC national energy tax leader Domenico Baruffaldi said it is unusual to have a new tax introduced that targets “only one industry.” He added that B.C. already has a royalty regime in place, effectively taxing the upstream side of the natural gas industry, and that taxing the downstream end of the business seems “mildly op- portunistic.”

“Canada’s cost structure to retrieve and get access to the resources is fairly expensive relative to other places in the world,” Mr. Baruffaldi said. He said that liquefying natural gas can be considered a valueadded process.

“If you do manufacturing, typically you get some rebates to encourage manufacturing and processing,” Mr. Baruffaldi said.

BC’s LNG income tax also includes a tax credit for companies “with permanent establishments,” like headquarters or corporate offices, within the province. The credit could reduce the provincial income tax rate for such a company to 8%.