LNG project plans clouded as B.C. mulls new export tax

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The British Columbia government will take another year to finalize details of its proposed tax on exports of liquefied natural gas, casting uncertainty over the fledgling industry just as it contemplates major new investments.

The B.C. Liberal government last week announced plans to introduce the new LNG tax, but didn't provide details about how it would work or how much it will cost companies.

The government is betting energy companies will plow ahead with plans, stressing Tuesday that the province's natural gas resource presents great opportunities for the private sector in the long term.

"In the construction phase alone, these projects represent real jobs for B.C. families, real investment in B.C. worth billions of dollars and, ultimately, real revenue to government for deployment on behalf of British Columbians," B.C. Finance Minister Michael de Jong said Tuesday during his budget speech in Victoria.

But as the government works on the tax regime over the next year, companies won't be able to factor the tax impact into their investment calculations.

"We don't have any more clarity on the tax. Whenever you increase uncertainty, it is going to cause investors to take time to reflect on their potential investments," said Geoff Morrison, manager of B.C. operations at the Canadian Association of Petroleum Producers.

No company or group has made a decision yet on whether to forge ahead with LNG projects, Mr. Morrison said.

Several sources close to LNG projects said developers, as a whole, are unhappy about the impending taxes – and the numerous questions raised by the looming, but not-yet-defined, changes.

"How it will be applied and the quantum are both unknown at this point," said a person working with one project. "It makes near-term projects … difficult to progress with investors, producers and customers because of the uncertainties."

And the possibility of a tax may trigger a stare-down between industry and the government. Those with LNG projects can easily say "we'll use this as a poker chip and say we're delaying things" to persuade B.C. to back off, said Dirk Lever, an analyst with AltaCorp Capital Inc. in Calgary.

In that way, the threat of a higher government tax "may send a chill" through the LNG business for the next while, one that may have been averted with a lower-profile approach, Mr. Lever said.

"To me, it's very clear that the province of B.C. is acting in an amateurish way," he said.

The B.C. government forecasts that at least one major proposal for an LNG plant will enter the construction phase in 2015, as the province counts on energy to drive economic growth.

The Liberals expect to apply a new tax on LNG exports to Asia that will take effect in 2018.

Officials from the B.C. Ministry of Energy, Mines and Natural Gas released two consultants' reports on Tuesday to back up the government's recent prediction of between $130-billion and $260-billion in LNG-related revenue, including existing provincial taxes and royalties, over a 30-year period. This is assuming five LNG plants are opened. Those government-commissioned reports were produced by Grant Thornton and Ernst & Young.

While the LNG industry remains in its early stages in British Columbia, the government believes the resource will be so vital that it has already earmarked billions of dollars in projected LNG tax revenue for a new B.C. Prosperity Fund, Mr. de Jong said.

He made the comments after the B.C. government forecast a balanced budget for the 2013-14 fiscal year. The budget serves as a political prelude heading into the May 14 B.C. general election as the governing Liberals trail the Opposition New Democratic Party in public opinion polls.

The Liberals are striving to be prudent fiscal managers, and a key pillar on the revenue side will be taxes collected from the LNG industry, which would produce spinoffs with thousands of jobs created.

"Demand and growth is across the Pacific Rim, and that's a huge incentive for us to move forward aggressively to develop liquefied natural gas, using our twin advantages of a plentiful natural resource and strategic location as Canada's Pacific province – making it possible to ship our product to those more-lucrative overseas markets," Mr. de Jong said.

In 2001, Asia accounted for 19.4 per cent of the value of British Columbia's exports while the United States had a 69.8-per-cent share. Last year, the province's share of exports to Asia grew to 40.9 per cent, while the U.S. slid to 44.9 per cent.

"We are succeeding in diversifying our markets," Mr. de Jong said. "We are carving out a presence and gaining new footholds in new markets, opening up new opportunities for forest products, agrifoods, metals and minerals, and in the near future, natural gas."

While the Liberals have traditionally sought to portray themselves as tax cutters, they said Tuesday that corporate income tax rates will climb to 11 per cent from 10 per cent, effective April 1.