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Energy and Resources Petronas seeks tax breaks for Pacific NorthWest LNG export terminal

Motorists queue to fill natural gas at a Petronas station with its landmark Petronas Twin Towers headquarters in the background, in Kuala Lumpur February 4, 2012.

Bazuki Muhammad/REUTERS

Malaysia's Petronas is urging Ottawa to give financial relief to liquefied natural gas export terminals, as the big energy company scrutinizes the B.C. government's proposals for taxing the province's LNG industry.

Petronas-led Pacific NorthWest LNG, which aims to build an LNG export terminal in B.C., sought unsuccessfully in the past to persuade Ottawa to make tax concessions related to asset depreciation rates. The federal tax classification of LNG plants will be an important factor in determining the economic viability of a project, including capital cost allowance rates.

"It is imperative that all levels of government recognize the need to remain competitive with other jurisdictions around the world," said Spencer Sproule, senior adviser of corporate affairs at Pacific NorthWest LNG.

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A B.C. LNG project in the so-called Class 47 tax category would take 27 years to depreciate the bulk of its asset, compared with only seven years for a manufacturing operation in Class 43, according to the Canadian Association of Petroleum Producers, which backs Pacific NorthWest LNG and other proponents' efforts to seek federal tax relief. Faster depreciation allows companies to make tax deductions quicker.

The consortium is digesting the details of the province's tax regime announced this week. "We're still reviewing the legislation. It takes a while to go through legislation in detail and understand the implications," Mr. Sproule said in an interview Wednesday.

On Tuesday, the B.C. government unveiled an LNG income tax rate of 3.5 per cent on net income once LNG export terminals recover capital costs, down from its earlier plan in February's provincial budget to slap a tax rate of up to 7 per cent. B.C. Finance Minister Mike de Jong also introduced a program for natural gas tax credits to allow LNG proponents to chop their B.C. corporate income tax rate to 8 per cent from the current 11 per cent.

Pacific NorthWest LNG is viewed by industry analysts as the B.C. project with the best chance to forge ahead first with a final investment decision. The Petronas-led group is aiming to make its decision by mid-December on whether to invest billions of dollars in the province.

Industry analysts said Wednesday that the revised tax regime is a step forward for the province's nascent LNG sector, but many hurdles remain.

The B.C. government is also placing carbon dioxide emission benchmarks on LNG facilities, above which offsets will need to be bought by LNG proponents – a system that is "a tax by any other name," said Raymond James Ltd.

"The government's goal is to make 'B.C. LNG facilities the cleanest in the world.' Our rough estimate is that this tax could clip just under 1 per cent of net operating profits to a facility, effectively increasing the LNG tax to something closer to 4.5 per cent," according to a research note from Raymond James. "The B.C. government giveth, but it taketh some away."

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FirstEnergy Capital Corp. said economic risks linger for exporting LNG to Asian buyers from Canada's West Coast, ranging from construction costs to future selling prices for LNG in Asia. "However, given the lessened take by the government, coupled with one less uncertainty facing LNG producers, we believe the announcement will be overall positive and will be favourable for stocks levered to Western Canadian natural gas," FirstEnergy said.

Ernst & Young LLP cautioned that British Columbia faces stiff global competition, notably some U.S. projects making progress faster than expected.

"The market continues to develop, and tax is only one of the factors that will determine the competitiveness of a Canadian LNG project," EY said. "Global supply/demand considerations, costs (both capital and ongoing operating), environmental approval conditions, First Nations support and the state of the global debt and equity capital markets will all be critical for a viable project."

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