The energy sector is lashing out at a British Columbia proposal to impose a major new tax on the impending export of natural gas, saying the province risks serious damage to a fledgling industry before it has a chance to take wing.
Some 10 proposals are now being considered for the shipment of liquefied natural gas from B.C., a province that has eagerly promoted the vast new revenues the coming development stands to produce. The province has said it now believes five export terminals could be built in coming years; the first could be complete by 2015.
But long before the first LNG tanker sets sail, the government is looking to grasp a larger chunk of what revenues may arrive. The province has found that Australia's natural-gas tax and royalty regime "is up to one-third higher than B.C.'s," it wrote in a document published this week. New taxes on gas exports "can maximize the benefits to British Columbians" while preserving the province's competitiveness, the government wrote.
Negotiations are under way to see exactly what form a tax might take, said B.C. Finance Ministry spokesman Jamie Edwardson.
Those talks are motivated by "the province's desire to get revenues from this new industry," he said.
B.C. believes it faces a veritable fountain of cash. The new tax, along with existing royalties and taxes, could secure $130-billion to $260-billion for the province over the next 30 years. Six-and-a-half billion dollars, the midpoint of that range, is equivalent to 15 per cent of B.C.'s entire budgeted spending for the current fiscal year.
But in Alberta, where many in the industry looking to build new LNG facilities are headquartered, the idea of ratcheting up the government take has created new uncertainty for development, exacerbated by the lack of details about the size of the tax. And B.C.'s announcement has begun to draw comparisons to the Alberta royalty hike, which was followed by a flight of spending to other provinces.
"The B.C. government was actually building roads to try to stimulate [natural-gas] activity – and now they want to turn around and bite the hand that's going to feed them?" said Peter Doig, a former financial analyst who has scrutinized the potential for LNG exports. He has expressed doubts whether projects can be profitably built in B.C.
"You kind of question the economics already. And then if you throw higher royalty rates on, it's a nail in the coffin," he said.
Another problem for B.C.: Raising royalties on gas production could push activity outside its borders.
"They're welcome to put royalties wherever they think best. But they are also competing against other gas that would likely be attached to the same pipeline network – Alberta gas," said Steve Paget, an analyst with FirstEnergy Capital in Calgary.
Unlike Australia, where some LNG supplies come from isolated offshore locations devoted to shipping away supplies, B.C. gas is already connected to the massive web of pipe that moves energy around North America. That means any talk of higher revenues for B.C. has to be weighed by companies that also have the option to sell locally.
"Here in Canada, we've got an opportunity to build an LNG industry, to ship gas to new markets, to create market diversification," said Greg Kist, president of Pacific Northwest LNG, the Petronas-owned project working to build a large new terminal near Prince Rupert, B.C. But, he said, "if the better investment opportunity is not in an LNG facility, but actually producing into North America, that could be an equally good decision."
Still, he added, "until we actually see the details, it's really tough for us to comment on what the end result looks like."
Industry, however, has already struggled with the profitability of building in B.C., where some new export terminals are expected to cost upward of $10-billion, in addition to many billions required for new pipelines through difficult terrain and drilling in remote, expensive locations. Chevron Corp., which has signed a deal to take control of the Kitimat LNG facility, has expressed concern over the prices needed to build that project – a concern that exists under the existing B.C. revenue regime.
Earlier this month, chief executive officer John Watson said: "It's going to take substantial prices to underpin developments of these tens of billions of dollars in spending that is going to be required and, therefore, some projects will go and some will not."
"We would argue that Canadian LNG investors are at a disadvantage," said Geoff Morrison, manager of B.C. operations for the Canadian Association of Petroleum Producers. "Canada is a new entrant, but LNG is a well-established global market. Canada is in a very competitive marketplace."
Indeed, Australia is only one competitor. Others include Qatar, Russia and Mozambique.
Some in the B.C. government itself have cast doubt on the promise of LNG. On Wednesday, for example, B.C. Environment Minister Terry Lake said the forecast of five LNG plants by 2020 may be optimistic.
"We'll see as things develop how many plants are up and operating; hopefully we have up to five plants operating," he said.