British Columbia LNG Tax to Raise Billions on Gas Exports

British Columbia’s proposed tax on liquefied natural gas provides long-awaited financial clarity to energy companies deciding whether to spend as much as $240 billion to start shipping the fuel from Canada’s Pacific Coast.

Profits from liquefied natural gas, or LNG, projects will be taxed at an initial rate of 1.5 percent, Michael de Jong, finance minister for the nation’s westernmost province, said yesterday as the government released its budget for the fiscal year beginning in April. The rate will rise to as much as 7 percent after companies recover the costs of building the shipping terminals.

The province plans to erase its debt with revenues from the LNG sector, which may add C$1 trillion ($903 billion) to its economy by 2046. Exxon Mobil Corp., Chevron Corp. and Royal Dutch Shell Plc are among companies seeking to liquefy low-cost Canadian gas so it can be shipped to Asian markets that pay as much as five times more than North America.

“The tax-rate framework as laid out brings some needed clarity to the industry, so that’s positive,” said Geoff Morrison, a Victoria, British Columbia-based manager with the Canadian Association of Petroleum Producers. “The tax is one component of the all-in costs that a proponent would face. Are these the right rates? I can’t say for sure.”

The province said its tax and royalty rates will be lower than in Australia and five U.S. states, where competing projects are being built.

Final Approval

The government plans to seek approval of the rates from the legislature before the end of the year. Additional regulations related to gas exports are expected in 2015. The tax won’t be collected until plants are running, after 2017, de Jong said.

“We’d like investment decisions to be made as soon as possible, construction to start as soon as possible,” de Jong told reporters before introducing the budget in the legislature, in the provincial capital of Victoria. “Once that happens, we derive the benefits related to construction and ultimately the revenue stream that flows in part from the LNG income tax.”

More than a dozen LNG projects have been proposed in British Columbia as producers seek to capitalize on Canadian fields including the Montney Shale, estimated to contain 449 trillion cubic feet of gas. No companies have yet made a final decision to proceed.

Negotiating Room

There’s enough detail in the tax framework to help LNG proponents in British Columbia make investment decisions starting in late 2014 and the government’s commitment to continue reviewing details before the tax becomes law shows there’s “some room to negotiate,” a group of analysts at Haywood Securities Inc. in Calgary, led by Darrell Bishop, Alan Knowles, Megan MacNeill and Dan Tsubouchi, wrote in a note today.

“On balance, we believe the proposed initial LNG income tax is a reasonable ‘ask’ from the B.C. government and provides the basis for final negotiations this summer,” the Haywood analysts wrote.

British Columbia has the chance to reap a “cash windfall” with LNG, as its neighbor Alberta has done with oil-sands producers, Brian Kristjansen, Geoff Ready and Maxim Sytchev, analysts with Dundee Capital Markets, wrote in a report last month. The analysts said companies may spend as much as C$262 billion on gas drilling, pipelines and terminals if three plants proceed.

Even if only one large project moves ahead, the industry may spend C$100 billion on drilling, pipelines and export plants, the analysts wrote.

Needed Frameworks

The provincial government continues to plan on three plants being built in British Columbia by 2020, de Jong said. “We think that’s achievable. I don’t underestimate the complications and challenges of getting there.”

A single plant could generate as much as C$1.4 billion of LNG income taxes after 10 years in operation, de Jong said yesterday in the British Columbia legislature. The government’s tax plan and competitiveness with other regions was assessed by Ernst & Young LLP.

Yesterday’s tax proposal emerged after months of talks between the government and industry representatives.

“Governments need to have effective fiscal frameworks and regulatory approval processes in place that can balance industry requirements for certainty, timeliness and a reasonable return on investment with other stakeholder concerns of environmental impacts and social benefits,” Jeff Lehrmann, president of Chevron’s Canadian subsidiary, said at an October energy conference in Calgary.

Carbon Taxes

In addition to the LNG tax, companies must consider other project costs of building in British Columbia, including taxes on carbon emissions and corporate income, the price of laying pipelines across mountains, a shortage of skilled labor and potential conflicts with aboriginal groups over land access.

British Columbia plans to collect C$1.23 billion from its carbon tax in the fiscal year starting in April and C$441 million from gas royalties, according to budget documents. The province taxes carbon emitted within its boundaries at a level of C$30 a metric ton.

The absence in the budget of an estimate for total government revenues from LNG and when they’ll be collected makes it tough to weigh whether the industry is worth the environmental costs, including water use in gas drilling and carbon emissions from shipping terminals, said Matt Horne, a Vancouver-based director of the Pembina Institute, a nonprofit environmental research group.

Golden Goose

Canadian projects already face higher construction costs compared with U.S. proposals to build export facilities at existing import terminals, said Ed Kallio, a Calgary-based director at Ziff Energy, a division of HSB Soloman Associates LLC. Australian project costs may decline if Prime Minister Tony Abbott is able to fulfill a promise to repeal the nation’s carbon tax.

“The industry wants to make sure that when you add all of that up, you don’t kill that golden goose,” Kallio said. “These are big companies and they have a portfolio of projects around the world that are all competing for capital.”

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