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Liquefied natural gas pipelines in Mt. Hayes, B.C., on April 2, 2013.Chad Hipolito/The Globe and Mail

The British Columbia government has announced nearly $116-million in royalty breaks for energy companies to construct roads or build pipelines in support of natural gas production in the province's northeast.

In a move meant to stimulate liquefied natural gas exports to Asia, oil and gas companies will get a break on the royalties they would normally pay to the B.C. government for resource extraction. The benefit under the Infrastructure Royalty Credit Program can be as high as 50 per cent of the cost of constructing roads, pipelines and associated facilities. The majority of the 12 projects that will benefit from the $116-million break announced Monday will be built at the Montney play in an area north of Fort St. John, B.C.

The announcement comes the same day a report warned that B.C's pledge to build the cleanest LNG industry in the world must be met with strict, and likely pricey, environmental measures. Without them, the report from environmental group Tides Canada warned, the province's sector risks creating a carbon footprint nearly double that of the oil sands in 2010.

The main thrust of the B.C. royalty credit program is to encourage increased oil and gas exploration and production in underdeveloped areas, and extend the drilling season to allow for year-round activity.

The province expects the program to eventually benefit government coffers as well.

It estimates that the 2013 royalty credits will generate revenues of about $445-million five years from now.

"Our infrastructure royalty credit program is helping us build the capacity we need to make B.C. a world leader in natural gas supply and export," said Rich Coleman, B.C.'s Minister of Natural Gas Development, in a news release.

The issue for B.C. is the lack of pipelines and roads needed to get the huge natural gas reserves out of the ground and to markets, said Geoff Morrison, the manager of B.C. operations for the Canadian Association of Petroleum Producers.

Mr. Morrison said the royalty credit announcement is significant for B.C. natural gas producers, who are competing with companies across North America, often in places where roads and pipelines are already built.

"Since the resource is ultimately owned by the British Columbia government, this is their way of sharing that cost initially to encourage the resource to be developed," he said.

Factors such as the massive new natural gas supplies in the United States brought on by the shale-gas revolution and higher pipeline toll charges to get products to Central Canada have stranded natural gas supplies in storage facilities. The discounted Western Canadian prices have companies cutting production and pinning their hopes for the future of the industry on gaining access to Asian markets, such as Japan, China and South Korea, through the creation of LNG export facilities on the West Coast.

Other industry sources say the Clark government's plan for an LNG export tax on top of the existing royalties scheme is another issue weighing on the industry. In recent months, officials from Japan – the world's No. 1 natural gas importer – have said a major concern for trade between the two countries is uncertainty regarding the proposed B.C. tax.

While B.C.'s LNG industry remains in its early stages, the government is so sure of its vitality that it has already earmarked billions of dollars in projected LNG tax revenue for a new B.C. Prosperity Fund. Sandra Steilo – a spokeswoman for the B.C. Ministry of Natural Gas Development – said in an e-mail that the department is working on the creation of the fund, and is consulting on a framework that will deliver long-term benefits the province, provide industry with the certainty it needs, and give "a fair return for the owners of the resource, British Columbians."

She said specifics on the fund will be released when the framework is finalized.

Ms. Steilo noted companies are required to fund the entire cost of an approved project, and complete it, before they are eligible to recover up to half their costs through the royalty credit program.

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