Companies balk at level of B. C. LNG tax

Fear is the golden goose will be ‘ stillborn’ and projects won’t be built, say industry offi cials

There are cracks beginning to show in the B. C. government’s strategy to reap benefits through a new tax on a nascent liquefied natural gas export industry.

Global energy heavyweights with leading LNG proposals say the tax could make the province uncompetitive.

Premier Christy Clark’s government revealed last week it wants to place a seven per cent tax on income from facilities that produce LNG after capital costs are recovered.

Early estimates provided by the province show that eventually the tax could pull in hundreds of millions of dollars per plant for the province.

But Shell Canada says it’s concerned that seven per cent is too high. “We need something that’s globally competitive if we, in British Columbia, are going to build an LNG industry,” said Shell Canada spokesman David Williams.

Shell Canada has proposed a $ 12- billion plant in Kitimat, in partnership with gas-buyers PetroChina, Korea Gas and Mitsubishi. Their project has export approval with the National Energy Board, and is working through federal and provincial environmental assessments.

The premier is banking on five plants being built to support 75,000 jobs and help fuel a $ 100- billion prosperity fund.

So far, no companies have made final investment decisions yet.

Petronas, another leading LNG proponent, is concerned the LNG tax will add to an already large tax basket in B. C., which includes an unique carbon tax.

The Malaysian state- controlled company warns that clarity is needed on the LNG tax by the middle of this year if a hoped- for investment decision on its $ 11- billion Pacific Northwest LNG project in Prince Rupert is going to be made before the end of 2014. Japan Petroleum Exploration owns a 10 per cent stake of the Prince Rupert project.

The province said legislation for the LNG tax will be introduced in the fall, but the detailed tax code will not be ready until spring of 2015.

“What we have an issue with, and a challenge with, is the fact there are so many different taxes. So, now the LNG tax is another tax on top of that,” said Greg Kist, president of Pacific Northwest LNG.

“When you look at the entire tax basket, it’s very large,” said Kist.

Industry insiders also say the B. C. government is in danger of stopping an industry before it gets started with its LNG tax, pointing to export deals being inked in the U. S. South where they are well on the way to turning former import facilities into export facilities.

For example, Cheniere Energy’s Sabine Pass project in Louisiana is expected to start shipping in 2016.

Estimates crunched by Calgarybased Ziff Energy show the LNG tax could amount to 50 cents per million British thermal units ( mbtu).

Royalties on natural gas production in B. C. are about 75 cents to $ 1 per mbtu right now, which means the 50 cents from an LNG tax is significant, said Ed Kallio, director of gas consulting for Ziff Energy.

“That’s the fear, that the golden goose will still born. You won’t even get these projects built,” he said.

Some companies are already on the ground in northwest B. C., including Petronas and Shell Canada, spending millions on site locations, and more money on engineering feasibility studies.

But Kallio says companies can easily walk away from their investments if the cost- structure in B. C. cannot compete with others in the world.

B. C. Natural Gas Minister Rich Coleman has a different take on the status and acceptance of the LNG tax.

He says he is confident enough information about the new LNG tax will be known this year for companies to make final investment decisions.

“( Companies) know where we are headed and they are comfortable with it,” he said.

However, Coleman acknowledged the tax file was complicated, and there were other elements to hammer out, including the level of royalty payments needed to develop gas basins in northeast B. C.