British Columbia, Alberta seek tax perks for LNG, oil sands processors

By REBECCA PENTY and CHRISTOPHER DONVILLE
Bloomberg

British Columbia and Alberta are banding together to push the Canadian government to apply the same tax treatment to multibillion-dollar energy plants that benefit Ontario manufacturers.

The western provinces want Prime Minister Stephen Harper’s government to let energy investors deduct costs of building liquefied natural gas (LNG) shipping terminals and oil-sands processing plants at the same rate as manufacturers, which are largely based in Central Canada.

“We’re cooperating with Alberta to try and get this issue raised,” said Rich Coleman, British Columbia’s minister of natural gas development.

British Columbia, vying with the US, Australia and Mozambique for an economic jolt from LNG megaprojects, is trying to lower costs as developers including Petronas evaluate whether to build facilities in the province to ship the fuel to Asia. Alberta faces similar pressures amid competition from quicker returns in US shale.

The western provinces argue that plants that refrigerate gas into a liquid for shipment, or turn oil-sands crude into synthetic oil or diesel via upgraders and refineries are essentially manufacturers, so they should receive the same tax treatment.

British Columbia began seeking more favorable tax treatment for LNG in 2012. It’s ramped up efforts as the federal government appears more open to altering the depreciation rate ahead of its 2015 budget, Coleman said.

Seven Years

“There’s nothing concrete, although there is more interest in having the conversation around this tax than there’s ever been,” Coleman said.

The Alberta government has also been advocating for changes for a couple years, said Carolyn Gregson, a spokeswoman for the province’s finance department.

LNG facilities are allowed depreciation rates of 8 percent while oil-sands refineries and upgraders can apply a 25% rate. Manufacturers qualify for a 50% rate under a temporary policy introduced in 2007 that’s due to expire at the end of 2015.

It would take seven years to depreciate an LNG facility if it were classified as a manufacturer using a 30% rate, rather than 27 years under the current policy, the Canadian Association of Petroleum Producers said in an August submission to the federal government. In Australia, an LNG terminal takes 13 years to depreciate, the group said.

Useful Life

Reclassification would help level the playing field with other countries, according to a letter to the federal government from the BC LNG Developers Alliance. The group represents companies including Royal Dutch Shell, BG Group, Chevron and Petronas, as the Malaysian company is known.

“If the federal government can afford accelerated capital cost allowance for manufacturing in Ontario, why not accelerated capital cost allowance for oil sands and for LNG on the west coast?” said Ken Kobly, president of the Alberta Chambers of Commerce.

Canada’s tax policy allows the cost of assets to be deducted over their useful life and also considers changing technology and market conditions, Stephanie Rubec, a federal finance department spokeswoman, said in an e-mail.

The rate for LNG facilities was raised in 2007 and the rate for oil-sands plants is already sufficient, Rubec said. A temporary accelerated rate introduced for manufacturers the same year so they could cope with changing technology was extended because of the global recession and will be reviewed, she said.

Shale Competition

Oil-sands projects are being shelved or scrapped as costs escalate and the US pumps rising volumes of crude from shale. Suncor Energy and Total last year abandoned plans for an C$11.6 billion ($10.4 billion) oil-sands upgrader that would have converted heavy bitumen into synthetic light oil amid competition from US shale.

Shamsul Azhar Abbas, the Petronas CEO, said this month the company needs clarity on costs in Canada as it seeks to make a final decision in December for a project that appeared “marginal” during a recent review.

British Columbia’s Coleman and Michael de Jong, the finance minister, are scheduled to meet with Shamsul in Malaysia next month to explain the province’s new LNG legislation on greenhouse-gas emissions and taxes, Coleman said.

BG Group is pausing development of its Canadian LNG project as at assesses global supplies with US volumes set to rise and prices falling.

“Anything the federal and provincial governments can do to make these projects more competitive, and therefore more likely to reach a financial investment decision, that’s for everybody’s benefit,” said Madeline Whitaker, president of BG’s Canadian unit.

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