LNG companies say BC LNG tax too high, Coleman says it's almost at sweet spot

VICTORIA – One of the first questions British Columbia’s Finance Minister Mike de Jong was asked when he introduced the Liberal government’s proposed Liquefied Natural Gas Income Tax as part of last week’s budget, was how oil and gas companies would react to paying a tax that could top out at seven per cent.

“Of course, they want zero,” he replied.

But de Jong pointed to a recent government-commissioned Ernst and Young survey that concluded B.C.’s all-in taxes — corporate, federal, provincial, municipal, carbon and the new LNG tax — put the province near or at the top of the heap compared to the tax regimes of potential competitors in Australia and the United States.

The B.C. plan “appears competitive relative to the existing frameworks in Australia and the five U.S. states,” stated the 12-page review, with the proviso that their analysis does not take into account any “discretionary credits that a proponent may or may not be able to obtain.”

The provincial budget last week revealed the government’s proposed two-tiered LNG tax, which will be introduced as legislation in the fall. The first tier will be 1.5 per cent to be introduced at the start of production. The second tier, when introduced, could rise to seven per cent once the plant is running and capital costs have been deducted.

But no LNG revenues are in the government’s three-year fiscal plan and the B.C. finance minister acknowledged tax dollars won’t flow until plants are in production, which would be in 2018 at the earliest.

The Canadian Association of Petroleum Producers, which represents major oil and gas companies, was lukewarm towards the proposed tax regime. B.C. spokesman Geoff Morrison said the plan provides a framework but more work needs to be done on the rates.

A spokesman for LNG Canada, a proposed export facility near Kitimat that includes Shell Canada ( TSX:SHC), Korea Gas, Mitsubishi and PetroChina, said the company supports an LNG tax, but the seven per cent rate may be too high.

“We appreciate the government’s commitment to flexibility on the two-tiered piece, ” said Shell Canada spokesman David Williams. “It’s clear that the rate has to be globally competitive. We’re concerned that the top end of that range in the second tier will not achieve that level of global competitiveness.”

Greg Kist, president of TransCanada Corp.’s (TSX:TRP) Pacific Northwest LNG, said his company, which has proposed a multibillion-dollar LNG facility near Prince Rupert, is looking for clarity from the government on the tax regime before making a final investment decision by the end of the year.

“For us, at this point in time, it’s a situation where we want to understand the details,” he said. “The LNG tax in and of itself is merely one piece of the fiscal framework we need to get clarity on before we can make a final investment decision.”

Pacific Northwest LNG includes Malaysia’s Petronas, Japex and Petroleum Brunei.

The Ernst and Young analysis included an aggregate review of expected taxes and royalties from LNG plants in Australia and B.C. over 20 years of operations.

It found Australia has a slight edge on the low-end of returns, collecting about $151 billion in taxes and royalties, compared to $152 billion in B.C. But at the high-end after 20 years, B.C. wins out across all jurisdictions, charging about $270 billion in taxes, compared to $320 billion in Australia. Texas had the highest aggregate taxes after 20 years, coming in at about $370 billion.

The Liberals believe LNG is a trillion-dollar opportunity that could pay off the provincial debt, currently at almost $62 billion.

But industry analysts and the Opposition New Democrats say the Liberals are already a year behind schedule for a tax and royalty structure and in danger of losing the race.

B.C. Natural Gas Development Minister Rich Coleman said more than nine months of work have gone into developing the tax regime and he’s convinced it will keep B.C. competitive.

Coleman said B.C. offers a 100-year supply of natural gas, a shorter distance to Asian markets and a cooler climate to extract and cool the gas to liquid form, which occurs at minus 160 Celsius.

“I heard one company president say at a conference, the ambient temperature of British Columbia is equivalent to getting the pipeline for free because you use less energy to cool it down,” he said.

Coleman said tax negotiations with the oil and gas companies are at the stage where “somebody’s going to blink.”