Corporate welfare not needed for LNG

While Ottawa agreed in Budget 2013 to extend tax breaks for manufacturers for two years, a request by developers of liquefied natural gas terminals on Canada’s West Coast to receive similar tax savings fell on deaf ears.

Before they start crying foul that the West’s energy industry is being shortchanged relative to the Eastern-based manufacturing sector, developers of the new projects should be reminded that their ask showed poor judgment in the first place.

Represented by the Canadian Association of Petroleum Producers, LNG proponents have campaigned for an accelerated capital cost allowance to enable them to write off their investments in seven years, rather than the 27 years it takes under current tax legislation.

There has been a rush in the last two years to build terminals on the British Columbia coast to liquefy gas from large shale deposits in Western Canada for shipment to Asia. So far, five projects have been proposed.

But the developers are also arguing that Canada’s fiscal terms are not competitive with those in the United States and Australia.

What they have failed to recognize is that for Ottawa, which has gone out of its way to support the nascent LNG sector, to be seen to be handing out special tax treatment to foreign oil multinationals, and particularly to state oil companies from China, Malaysia and Korea, would be politically explosive at a time of mounting hostility toward energy infrastructure projects.

Besides, proponents of LNG facilities have known all along about Canada’s fiscal terms. Indeed, one of the reasons they are coming here is because of the country’s fiscal stability.

But their plans are also underpinned by the size of its shale gas plays, the proximity to Asia, and by Canada’s cooler temperatures, which make liquefaction plants more productive. They should stand on commercial merits.

Indeed, some have already recognized there are many. This month, Chevron Corp. chairman and CEO John S. Watson said his company’s North American natural gas exports efforts would focus on Western Canada rather than the U.S. because Canada has fewer barriers to exporting liquefied gas, or LNG, than the U.S., and possesses “enormous” gas deposits. Chevron purchased a 50% stake in the Kitimat LNG project in December.

Dave Collyer, president of CAPP, said Ottawa’s denial would be taken into consideration when LNG proponents make final decisions on whether to move ahead with their plans, which face significant risks in terms of access to Asian markets and commodity pricing.

“We need to be competitive, and fiscal treatment is one element in that,” he said. “We should by no means take those projects to the bank just yet. There is a lot of enthusiasm, but it’s a very competitive market.”

According to CAPP, an LNG facility in the U.S. or Australia takes about 13 years to substantially depreciate. As a result, Canadian LNG liquefaction facilities have a 10% higher after-tax cost than an equivalent expenditure in the U.S.

The group has argued that LNG plants are similar to straddle plants, which extract gas and are classified as manufacturing facilities.

Finance Minister Jim Flaherty has agreed to a two-year extension of the accelerated capital cost allowance for the manufacturing sector, introduced in 2007 to soften the impact of the high Canadian dollar. The sector had hoped for a five-year extension.

However, the special tax treatment is being phased out for oil sands projects, reflecting diminishing appetite for corporate welfare to during challenging economic times.