LNG developers applaud British Columbia for halving proposed taxes

By CHRISTOPHER DONVILLE and REBECCA PENTY
Bloomberg

Royal Dutch Shell is among liquefied natural gas (LNG) developers applauding British Columbia’s plan to halve a proposed tax on multibillion-dollar projects along Canada’s Pacific Coast as markets become less lucrative.

Canada’s westernmost province announced a tax of 1.5% of profits that rises to 3.5% after developers recoup the cost of building terminals. That compares with 1.5% and 7% proposed in draft legislation in February. In 2037, the top rate rises to 5%.

The tax framework “provides balance and consideration of the challenges faced by an LNG sector in B.C.,” LNG Canada, a project led by Shell, said in a statement. “We are pleased to have certainty on a final B.C. LNG tax framework.”

A rout in oil prices is reducing profitability prospects for LNG sellers, whose contracts are mostly linked to crude, as supplies are set to rise from terminals under construction in the US and Australia. Shell, BG Group and Malaysia’s Petronas have pushed for better terms to export from Canada as they compete with other Asia-focused projects.

“We appreciate the fact that the government has revisited their original tax,” said David Keane, president of the BC LNG Alliance representing six projects in the province. “We have to be concerned with overall pricing.”

Brent oil, the global crude benchmark, collapsed to a near four-year low last week amid projections of slower global growth and rising supplies from US shale, before paring losses on higher than expected economic figures from China.

LNG developers are also facing pressure from buyers such as power utilities in Asia, which are banding together to secure lower prices, including contracts that are tied to the US price of gas.

‘Market Changes’

“What ultimately persuaded us around the necessity to finalize tax rates where we did, were changes in the market,” said Michael de Jong, the provincial finance minister. “To the extent that proponents identified and highlighted those market changes, we analyzed and certainly agreed that the market had changed.”

British Columbia Premier Christy Clark has held discussions with the developers for more than a year regarding the tax. Petronas, as the Malaysian state-owned crude producer is known, said earlier this month it may delay construction of its C$10 billion ($8.9 billion) terminal past 2030 unless proposed taxes were lowered.

Pacific NorthWest LNG, the project led by Petronas, is reserving comment on the tax until it has time to review it, said Spencer Sproule, a spokesman. The company is testing lender interest for as much as $12 billion of financing for the project, people familiar with the matter said this week.

‘Encouraging Response’

“The government’s responding to world conditions, and that’s encouraging,” Geoff Morrison, a manager at the Canadian Association of Petroleum Producers, told reporters in Victoria.

Clark’s Liberals were re-elected last year after pledging to erase the provincial debt with revenue from the LNG industry, which the government said may add C$1 trillion to the British Columbia economy by 2046. Eliminating the debt is achievable though it will now take longer, de Jong told reporters.

“All of this is contingent on the industry deciding to proceed,” de Jong said.

British Columbia, which pledged to make its LNG industry the world’s cleanest, also announced rules to limit carbon emissions by LNG projects to the lowest among global competitors this week.

Shipping terminals emitting more than a target of the equivalent of 0.16 metric ton of carbon dioxide per ton of LNG will be able to offset emissions by buying credits or paying into a technology fund.

‘Other Issues’

“There are still other issues we have to resolve and get clarity and certainty on,” said Keane of the BC LNG Alliance. In addition to other taxes, the industry is assessing how much skilled labor is available, the cost of materials and the logistics of building gas pipelines across two mountain ranges.

Canadian LNG developers are lagging behind competitors on the US Gulf Coast, with none of the proponents of 18 LNG shipping terminals in British Columbia having yet decided to start construction.

“We’re in a very different spot than we were even six months ago,” said Byron Beswick, a Calgary-based oil and gas tax partner at Ernst & Young “We would have never expected six to eight months ago that the US would be progressing as fast as it is with LNG.”

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