When Premier Christy Clark announced more than $100 billion worth of new royalties and taxes for B.C.'s nascent liquefied natural gas industry two weeks ago, she compared B.C. with Australia, where she said costs are a third higher.
Aside from those comparisons being tough to make, they gloss over the fact that B.C.'s current share of the global LNG market is zero, whereas Australia's is about 8% and growing.
"We would argue today [that] LNG in B.C. and Canada is at a competitive disadvantage to the United States and Australia, which is why we asked for the change to another tax classification to level the playing field with other investors and other LNG producers in the world," Geoff Morrison, manager of B.C. operations for the Canadian Association of Petroleum Producers (CAPP), said of the new gas taxes and royalties.
He referred to industry lobbying efforts to have Ottawa classify LNG production as processing, which would give it tax advantages that would reduce upfront costs.
Until recently, the B.C. government had been sending nothing but positive signals to the oil and gas sector, in the hope of attracting the billions of dollars needed to build an LNG industry.
The announcement of increased taxes and royalties for the gas and LNG industry therefore throws a curve ball at the sector, and oil and gas executives in town this week for a major LNG conference – hosted by the province – will no doubt be eager to get some clarity.
In the short term, last week's B.C. budget is banking on new royalties and rising gas prices to increase revenue by $138 million in 2013-14 – this at a time when low North American gas prices have producers reducing production.
The budget included a new 3% royalty on deep-well drilling and the cancellation of a summer drilling program that was designed to keep drillers working past winter. Gas companies will also pay 1% more in corporate taxes, which have been raised to 11% from 10%.
Longer term, the government also plans to implement a new LNG tax. It has yet to explain how the tax would work, but overall, it and other royalties and taxes would combine to generate between $130 billion and $260 billion over 30 years.
That estimate is based on five LNG plants being built – something many industry insiders say is unrealistic. In last year's Canadian LNG: The Race to the Coast, Macquire Research doubted that even four would be built, let alone five.
"We see a very low probability that all four projects move forward, but believe that B.C. will become an LNG exporter by 2020," the report concluded. •
