B.C. offers Petronas tax pact, but LNG doubts remain.
Says unusual ‘cost recovery’ model will earn province $7.7B over 23 years
British Columbia is promising significant “cost-certainty” assurances to the Petronas-led consortium proposing a natural gas export project on the West Coast, even as rising opposition from First Nations threatens to sour the plan.
Flanked by federal Industry Minister James Moore and members of her provincial cabinet, B.C. Premier Christy Clark signed an agreement with the Pacific Northwest LNG consortium on Wednesday that outlined favourable long-term royalty rates and ensures the consortium is shielded from future increases in carbon tax and LNG income tax, in a bid to provide cost certainty for the $36 billion project.
The royalty rates will start slightly over six per cent, eventually rising to 13.36 per cent. The province expects that will generate $7.7 billion over the expected 23-year-life of the project. An additional income tax structure will start at 1.5 per cent on operating profit.
“These agreements set the stage for a new era of economic activity and a new industry for British Columbia,” Clark said in Vancouver.
The agreement is subject to internal approvals by Pacific NorthWest LNG and its partners, and if approved, the B.C. government will recall the legislature and table the proposal.
The new LNG structure is a departure from current practices in North America, according to industry observers.
“This is really unprecedented in North America,” said Dirk Lever, managing director, institutional equity research at AltaCorp Capital Inc. “It is following the cost-recovery theory of other countries in the world rather than a traditional tax-and-royalty system in North America.”
As many as 19 LNG consortium have proposed LNG export projects on the West Coast, but none have made a decision yet. Malaysia’s Petronas — partnered with Indian Oil Corp., Japan Petroleum Exploration, Petroleum Brunei and China’s Sinopec Ltd. — is closest to the finish line.
The B.C. government has recently signed agreements with 28 First Nations bands in support of the project to help reduce the risk of final investment decisions for LNG proponents.
However, a sudden decision earlier this month by the Lax Kw’alaams band to spurn a $1-billion compensation offer by Pacific Northwest LNG over 40 years, citing concern over fish habitats, made it clear that there are still obstacles to overcome.
The band is located near the project’s proposed site on Lelu Island and argues that while it’s open for business, “it is not open to development proximate to (the aquatic habitat of ) Flora Bank” to protect salmon populations.
While CEO Michael Culbert said the agreement was “good news,” he acknowledged there was much “heavy lifting remaining on this project.”
Culbert believes some of Lax Kw’alaams’ concerns are answered in the company’s latest submission to the Canadian Environmental Assessment Agency, which is reviewing the project and is expected to make a decision this year.
“We are optimistic through ongoing dialogue and consultation that we will move forward with all the First Nations and stakeholders in British Columbia,” he said.
Lax Kw’alaams Mayor Garry Reece said in a statement last week that it would be “unfortunate” if Petronas tried to proceed without the consent of the band. The group declined to comment on Wednesday’s announcement.
But Terry Teegee, tribal chief at Carrier Sekani Tribal Coun- cil, representing eight First Nations on the West Coast, called the provincial agreement “political posturing,” as the terminal site remains a matter of dispute and may be subject to court proceedings.
“Probably. If they go ahead with current proposal to use Lelu Island, I can’t imagine there being support.”
Carrier Sekani is not included among the 28 bands that ratified agreement with the B.C. government.
“The development agreement changes nothing in terms of First Nations issue,” said David Austin, a lawyer with Vancouver-based Clark Wilson LLP.
“Will the company’s bankers be willing to lend money to a project that might be in court for a very long period of time? The answer to that is usually ‘no.’ ”
Other major consortiums led by Royal Dutch Shell Plc., and Chevron Corp. face fewer issues on the First Nations side, while another consortium led by Altagas Ltd. has local participation.
“If I am a banker which project would I rather finance?” asked Austin.
The new B.C.-Petronas deal comes a month after the federal government announced breaks in capital cost allowances for companies building LNG facilities in the country.
The B.C. government also cut its proposed corporate LNG tax in half last year, after industry balked at the original seven per cent rate.
The B.C. government’s latest overture comes at a time when a collapse in crude oil and natural gas prices have led to the cancellation of a slew of oil and gas projects across the world.
The province fears it would fail to reach its target of three LNG projects by 2020.
“The Malaysian government is squeezing the B.C. government, but the B.C. government is trying to promote this clean form of energy and trying to get the first one done,” says AltaCorp’s Lever.
“Down the road, B.C. is hoping that they can be in a position they can squeeze industry.”
B.C. cut its proposed corporate LNG tax in half last year