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A storage tank at the Mt. Hayes Natural Gas Storage Facility in Mt. Hayes, B.C. April 2, 2013.

CHAD HIPOLITO/The Globe and Mail

The British Columbia government unveiled its tax regime for liquefied natural gas exports, providing an industry framework the province hopes will lead to an avalanche of new revenue.

Under the tax plan announced in Tuesday's B.C. budget, LNG export plants on the West Coast will be subject to an initial tax rate of 1.5 per cent on net income. The rate will rise to as high as 7 per cent once the plants recover the capital costs of building what are expected to be multibillion-dollar terminals that will super-cool natural gas into LNG for shipment to Asia. The first such plant could be in operation within four years.

The Liberal government's goal is to pave the way for energy companies to capitalize on B.C.'s huge reserves of natural gas, while creating a major new revenue stream for the province. The Liberals campaigned hard in last May's provincial election on the promise of enormous economic benefits from exporting LNG, scoring a surprising re-election victory over the opposition B.C. New Democratic Party.

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"Any conversation about the future of B.C. must take into account the huge potential represented by LNG," B.C. Finance Minister Mike de Jong said in his budget speech in Victoria.

B.C. Premier Christy Clark said last year that an LNG tax could result in $100-billion pouring into provincial coffers over three decades of production. But some are wary of estimates of that order, amid concerns that B.C. is already behind in the global LNG race.

There are a dozen proposals by an array of companies seeking to export B.C. LNG, but the province lags LNG developments in other jurisdictions such as Australia, Nigeria, Qatar and Russia.

"There are some skeptics out there who question whether this industry is real, and whether it will proceed in B.C.," Mr. de Jong said. "It is very real."

While it is difficult to determine how much tax revenue might be collected in the long term from LNG, the government envisages a windfall of roughly $250-million annually for just one major plant, roughly six years after that LNG export terminal gets up and running.

The Canadian Association of Petroleum Producers said the proposed LNG income tax appears to be workable, but individual projects will be assessing the potential impact in the weeks and months ahead.

"Is 7 per cent the right number for the LNG tax rate? It depends on what all the other costs are," said Geoff Morrison, the association's manager of B.C. operations. "There are no guarantees."

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In the new budget, the B.C. government announced that it will allot $29-million over the next three years to spur development in the nascent B.C. LNG industry. B.C.'s Natural Gas Development Ministry, created last year, has already invested several million dollars to support LNG activities.

Rates and other details in the two-tier LNG income tax system will be finalized when legislation is unveiled in the fall.

LNG producers, which will also be subject to paying existing federal and B.C. corporate income taxes, will be able to deduct the new LNG tax paid in the early years from subsequent years under a new system of tax credits.

There is fierce global competition to export LNG to Asia, where energy-thirsty customers are willing to pay premium prices for the commodity.

"The B.C. government has reviewed the tax and royalty regimes of key competitor jurisdictions, namely Australia and the U.S.," according to budget documents.

Independent consultants retained by the province concluded that the LNG framework announced Tuesday will be competitive with Australia's system, as well as five jurisdictions in the United States: Louisiana, Texas, Georgia, Oregon and Alaska.

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B.C. government officials say the province has the edge in other aspects of the LNG game, including "a cooler coastal temperature that saves energy and costs during the liquefaction process."

The energy industry has been eagerly awaiting more information from the government, with several companies aiming to decide within two years whether to forge ahead with their LNG plans.

An LNG project led by Malaysia's state-owned Petronas will make its final investment decision by the end of 2014, while others are expected to announce their intentions later. A project led by Shell Canada Ltd., for instance, said it has a "mid-decade" target for announcing its decision.

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About the Author

Brent Jang is a business reporter in The Globe and Mail’s Vancouver bureau. He joined the Globe in 1995. His former positions include transportation reporter in Toronto, energy correspondent in Calgary and Western columnist for Report on Business. He holds a Bachelor of Commerce degree from the University of Alberta, where he served as Editor-in-Chief of The Gateway student newspaper. Mr. More

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