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Japanese LNG importer decries tax talks

Chevron Corp.-backed Kitimat LNG has experienced lengthy delays in moving toward a final investment decision, with officials pointing to difficulty in finding buyers willing to sign lucrative contracts that link the price of natural gas to oil.

JOHN LEHMANN/THE GLOBE AND MAIL

Japan's largest importer of liquefied natural gas is warning that British Columbia's threats of a new tax on gas exports stands to choke off a nascent industry.

The challenges of building pipelines in B.C., where difficult topography and First Nations opposition stand between gas fields and the coast, is another concern for Tokyo Electric Power Co. Inc., or Tepco, a global buyer of LNG.

But it's the risk of new taxes that could have serious consequences, Tepco said in response to e-mailed questions.

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"We're afraid that uncertainty of legislation relating to LNG projects, including taxation on green-field LNG projects, could delay or stop those projects," said Mayumi Yoshida, a company spokesperson.

Tepco is also concerned that First Nations issues will have a "material adverse effect on pipeline construction."

The B.C. government has been a prominent cheerleader for a new LNG industry, which it has said can help eliminate provincial debt. Only this week, it trumpeted word that an LNG project under development by Malaysia's Petronas could result in a total investment of nearly $20-billion. But the industry is worried about a parallel bid from B.C. to bring in new taxes and levies, which the government said in February could raise roughly $30-billion over 30 years in additional revenue.

Tepco's comments mark one of the strongest industry warnings to date about how that effort could affect the viability of a nascent Canadian energy export industry.

The company does, however, believe B.C. is positioned to occupy a prominent spot in global natural gas markets.

"We expect that Canadian LNG projects will play an important role in the future LNG industry," Ms. Yoshida said, pointing to B.C.'s "substantial gas reserves and its good geographical position to export LNG to Asian countries."

Companies like BG Group Plc., Royal Dutch Shell PLC, Petronas, Korea Gas Corp. and others have adopted similar views, leveraging hefty pocketbooks to pursue giant multi-billion-dollar export terminals on the B.C. coast. At least one of those projects, however, has struggled: Chevron Corp.-backed Kitimat LNG has experienced lengthy delays in moving toward a final investment decision, with officials pointing to difficulty in finding buyers willing to sign lucrative contracts that link the price of natural gas to oil.

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Such oil-indexed pricing is common overseas, and has helped draw the interest of U.S. and Canadian producers who have struggled against the much lower price of so-called "Henry Hub" gas traded in North America.

Tepco and others, however, are eager to buy Henry Hub-priced gas, signing contracts on those terms in the U.S. Gulf Coast, while looking for the same from Canada. "We understand a green-field project needs to achieve a certain return," Ms. Yoshida said. However, she added, "we do not agree to the argument that only the oil-indexed price can achieve such certain return."

Industry observers, meanwhile, have warned that Canada faces a tough battle in global LNG.

Global energy consultancy Wood Mackenzie has run the numbers on potential new gas exports from Canada, the U.S., East Africa, Russia and Australia. "Most of these supply regions are going to be able to supply LNG into the Asian market in a very similar [price] range," said Asish Mohanty, a senior research analyst based in Houston. That makes it "very difficult to say, just on the basis of cost, which one is more competitive."

It also suggests a delicate position for Canadian gas exports, which can boast of political stability, but face high construction costs and possible challenges from First Nations.

The key vulnerability lies with pipelines, although TransCanada Corp., which has deals in place to build two major gas pipelines to the B.C. coast, said it is in the midst of lengthy consultations, and "is confident that we can build the necessary pipeline infrastructure," according to spokesman Grady Semmens.

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But, he added, "developing the LNG export industry in British Columbia is a long-term undertaking and therefore it inherently involves some uncertainties in terms of the regulatory environment, stakeholder involvement and economics. This is particularly true when you consider the global competition that is unfolding to provide natural gas to growing Asian markets."

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About the Author
Asia Bureau Chief

Nathan VanderKlippe is the Asia correspondent for The Globe and Mail. He was previously a print and television correspondent in Western Canada based in Calgary, Vancouver and Yellowknife, where he covered the energy industry, aboriginal issues and Canada’s north.He is the recipient of a National Magazine Award and a Best in Business award from the Society of American Business Editors and Writers. More

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