By Chester Dawson
The Canadian province of British Columbia on Tuesday introduced
legislation to lighten the tax burden for natural-gas export
terminals, a move aimed at spurring development of
multibillion-dollar liquefied natural gas plants on the country's
Pacific coast.
The tax treatment for LNG terminals, which would target Asian
markets, has become a key issue for energy companies like
Malaysia's Petronas who have said uncertainty about taxation levels
in Canada threatens to delay or defer plans to build plants to
liquefy and ship natural gas from British Columbia.
British Columbia Finance Minister Mike de Jong said the
government expects the legislation to be passed in this legislative
session, which is scheduled to conclude in November. Premier
Christy Clark's British Columbia Liberal Party has a majority of
seats in the provincial legislature, which effectively guarantees
passage.
The long-awaited policy calls for a two-tier tax on exports of
LNG--natural gas that has been cooled to liquid form, shrinking its
volume and making it easier to transport. It cuts the maximum
income tax to 3.5%, down from 7%, and caps it at 1.5% until the
capital investment needed to build the LNG plants is paid off.
The Wall Street Journal reported on Monday that the province
would lower its LNG income-tax rates to jump start hopes of
becoming a global export hub.
British Columbia's government has sought to strike a balance
between its desire to lure LNG investment with its need for
additional tax revenues. Premier Clark has championed LNG as a
source of job and revenue growth, calling for a C$100 billion
"prosperity fund" funded by direct and indirect taxes.
Malaysia's state-run oil and gas company, which is considered
the front-runner among 18 rival proposals for LNG plants in British
Columbia, has openly pressured the provincial government to
finalize its taxation policy and incentivize industry to start
construction on the as yet unbuilt terminals.
In February, the government of British Columbia unveiled a
provisional policy for a 7% income tax after the capital investment
is paid off. But that was received poorly by the industry, which
hinted that rate would jeopardize operators ability to make a
sufficient return on LNG projects.
The new policy, which will be implemented from 2017, will raise
the income-tax rate on LNG to 5% in 2037 from an initial 3.5%.
Mr. de Jong said the province hopes the federal government will
provide additional incentives to help establish the industry in
Canada. "To the extent the federal government can assist in
creating an environment that encourages this multibillion dollar
investment, I believe that is worthwhile and I believe the federal
government recognizes it as being worthwhile," he said in an
interview.
The head of a lobbying group representing the biggest industry
proponents, including Petronas, Chevron Corp., Royal Dutch Shell
PLC and Cnooc Ltd., echoed those comments, saying the tax policy
was a necessary but not sufficient move toward creating a viable
environment for Canadian LNG terminals.
"We do now have clarity and some certainty around the LNG tax,
but the question is how will that fit into the overall cost
picture?," said David Keane, president of BC LNG Alliance. Mr.
Keane said Canadian projects are competing for capital with LNG
plants in the U.S., Australia, East Africa and Russia.
Earlier this month, Petroliam Nasional Bhd., or Petronas, Chief
Executive Shamsul Azhar Abbas raised the specter of deferring a
decision "for 10-15 years" on his company's proposed 36 billion
Canadian dollar (US$32 billion) LNG plant unless a clearer-and
globally competitive-tax policy came out by month's end.
A spokesman for the Petronas-led project, which is known as
Pacific Northwest LNG, said that the company was reviewing the
proposed provincial tax policy, but signaled that it needed greater
clarity from the federal government as well. "It is imperative that
all levels of government recognize the need to remain competitive
with other jurisdictions around the world that currently, or plan
to, export LNG," spokesman Spencer Sproule said in a statement.
Petronas has said it wants to make a final investment decision
by year-end. But some industry observers said LNG project backers
are unlikely to move ahead with construction amid lingering
uncertainty about incentives from the federal government, such as
accelerated depreciation on capital investments.
"Not having that federal clarity is going to push FID into next
spring for all the major projects," said Chris Theal, president of
Calgary-based Kootenay Capital Management.
Paul Vieira contributed to this article
Write to Chester Dawson at chester.dawson@wsj.com
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