ANALYSIS-Tax clarity helps, but hurdles remain for Canada LNG exports

VANCOUVER, Feb 20 (Reuters) - A new tax regime proposed for British Columbia's budding liquefied natural gas (LNG) industry has nudged plans for export terminals on Canada's Pacific Coast closer to reality, but it likely won't spur a sudden rush of building.

The British Columbia provincial government wants to build a world-scale LNG export industry. Premier Christy Clark says such an industry would power economic expansion and create 100,000 jobs over 30 years.

In preparation for that, the government said this week it is eyeing a two-tier system to tax profits from the process of cooling Canadian gas into a liquid for transport by ship to overseas markets.

While the tax plan has provided some long-awaited clarity for would-be investors, industry players say the top end rate may be too high, and the province still needs to persuade energy companies it can compete with countries such as Australia and the United States, which are also building up LNG export capacity.

"The LNG tax is just one part of the entire tax basket," said Greg Kist, president of Pacific NorthWest LNG, which is controlled by Malaysian state oil firm Petronas.

That company is on track to make an investment decision by yearend on the construction of an LNG plant on the British Columbia coast, Kist said, noting that the final verdict will come down to cost versus benefits.

"We've continued to talk to the government about all of the elements of the fiscal environment," he said. "Because it's all those elements that will ultimately contribute to whether we have an economic project or not."

The new tax system, to be confirmed with legislation in the fall, is similar to the two-tier royalty used in Alberta's oil sands. Income from LNG plants would be taxed at an initial rate of 1.5 percent, climbing to up to 7 percent after companies recover the cost of building the multibillion-dollar terminals.

The tax would be in addition to existing corporate and other taxes in British Columbia, and a royalty on natural gas production, though the government said its overall tax basket would be lower than what operators pay in Australia and the United States.

Proponents were less confident, pointing out that companies are looking at a myriad of factors beyond just taxes and royalties, and said projects can be derailed by a tax rate that is just slightly too high.

"We have a position that the rate needs to be globally competitive if B.C. is to build a world leading LNG industry," said David Williams, a spokesman for Royal Dutch Shell. "We're concerned that the top end of the range won't achieve that level of competitiveness."


To be sure, comparing rates across jurisdictions around the globe is difficult, as each region takes revenues in different ways throughout the natural gas supply chain.

Top global exporters Qatar and Indonesia, for example, have production-sharing agreements with government, while Alaska is working with industry on a mix of royalties and taxes.

"It's not only difficult, you'd be comparing apples with oranges," Bharat Patel, a partner at PwC's tax services team in Calgary, said of the process of judging British Columbia's LNG tax against taxes in other jurisdictions. "There's no comparison."

Other factors beyond taxes, such as development costs, operating costs and shipping times also play into the equation.

British Columbia has touted its proximity to Asian markets, colder climate and abundant gas deposits as advantages as it looks to tap the global LNG rush. But critics note that there is little existing infrastructure, meaning capital costs are significantly higher that in other regions, and that they could soar if several projects get off the ground concurrently.

Many companies also complain about a shortage of skilled workers, and worry that education incentives will not be sufficient to train the number of people needed to operate LNG facilities.

It all adds up to uncertainties, which delay decisions.

"At the end of the day, the real issue is timing," said David McColl, an energy analyst at Morningstar. "We have to keep in mind Canada's competing on a global stage here and the U.S. is moving very aggressively to export LNG."


About a dozen LNG projects have been proposed for British Columbia's rugged Pacific Coast, as top energy players such as Petronas, Shell and Chevron Corp look to build the infrastructure needed to get cheap Canadian gas to energy-hungry markets in Asia.

Energy regulators have awarded seven export permits so far, but no final investment decisions have been made.

Analysts note that until the actual tax legislation is introduced uncertainty remains about its details, making it unlikely anyone will move ahead definitively until later this year.

Still, British Columbia's government is confident that it can meet its goal of having three terminals up and running by 2020. Based on the province's model, after 10 years of production, a single 12 million tonne per year plant could have generated up to C$1.4 billion in LNG income tax alone.

"There's a lot of unknowns, a lot of gray areas," said John Winter, chief executive of the B.C. Chamber of Commerce. "But it seems like we are prepared to commit to compete."

($1=$1.11 Canadian)

(Additional reporting by Jennifer Kwan in Victoria, British Columbia; Editing by Jeffrey Hodgson and Peter Galloway)