British Columbia explores possible tax on future LNG exports

Vancouver (Platts)--18Feb2013/1131 am EST/1631 GMT


The British Columbia government has opened talks with Canada's natural gas industry about a possible new tax on LNG exports, which Premier Christy Clark estimates could generate C$1 trillion in cumulative GDP over the next 30 years.

Counting on at least five operating LNG projects from the 10 candidates currently in various stages of development, the province believes new taxes could "maximize the benefits to British Columbians" without affecting its competitive edge, Clark said in releasing new LNG and natural gas strategies last week.

Noting that Australia's natural gas tax and royalty regime was "up to one-third higher" than British Columbia's, she said the export of "our abundant supply of natural gas presents an opportunity for prosperity unlike anything we have ever seen."

The government reports estimated LNG exports could attract C$20 billion in investment over the next seven years, and contribute C$130 billion to C$160 billion in revenues over 30 years, assuming two larger and three smaller-sized plants are brought on stream.

The Clark government, which is facing stiff opposition in its bid to retain power in a May 14 election, is counting on directing a minimum C$100 billion of LNG-related revenues into a newly-created B.C. Prosperity Fund that could eliminate the province's deficit, currently at C$58 billion, by 2028.

But analysts and industry leaders have cautioned the government against making financial assumptions if they are based on higher taxes and royalties. Gary Leach, president of the Explorers and Producers Association of Canada, said February 15 that any revenue projections stretched over several decades for any resource commodity would be highly speculative, given the uncertainties of future commodity prices, global economic growth -- especially in Asia -- and competing energy supplies.

He said the Clark government needed to determine whether British Columbia's LNG proponents would negotiate the contract prices with Asian buyers that they need to justify going ahead with their plans.

Leach noted that Chevron, the new operator of the Kitimat LNG project, has insisted that venture needs oil-linked prices if it is to proceed.

The Canadian Association of Petroleum Producers said any move to impose new taxes would cause the industry to "reflect on its business assumptions" in a globally-competitive business where capital investments are fluid.

Peter Doig, a director at investment dealer GMP Securities who has studied the potential for Canadian LNG exports, said British Columbia was on the brink of "biting the hand that's going to feed it" after years of stimulating natural gas exploration and development.

He said the economics of the government's targeted LNG goals, including two large and three smaller-sized operating LNG projects by 2020, were open to question.

"If you throw in higher royalty rates, that's a nail in the coffin," he said.

Steven Paget, an analyst with FirstEnergy Capital, said British Columbia was not guaranteed exclusive rights to provide all of the gas feedstock for LNG operations, suggesting that LNG operators would likely also draw on gas from Alberta.

The government said its LNG calculations were based on forecasts by independent analysts along with information it has gathered from global natural gas and LNG forecasters.

Energy Minister Rich Coleman told reporters he was confident that by 2020 British Columbia would have "very much matured into the LNG marketplace."

"The message really is that B.C. has an opportunity to participate in a new LNG business that could create lasting benefits for many years," he said. "If we don't go with a vision and pursue this opportunity, we'll be letting British Columbians down."

--Gary Park, newsdesk@platts.com

--Edited by Katharine Fraser, katharine_fraser@platts.com

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