B.C.’s Shortsighted LNG tax

resources | BCBusiness
The Chevron/Apache Kitimat LNG plant is among a dozen proposed LNG liquefaction and export plants.

Lost in the discussion of LNG taxes is the fact that the proposed levy is an arbitrary surtax on an industry already slated to pay a host of royalties and taxes—an industry that is still deciding whether it wants to come here at all

Industry reaction to the Clark government’s proposed LNG tax that would climb from 1.5 per cent at the start of production to seven per cent once capital costs have been recovered was predictable. No cheering, lots of grousing. As Finance Minister Mike DeJong correctly pointed out, no business is ever going to like a new tax. The universal preference for any new tax rate is zero.
 
But that’s not the issue here. B.C. is pinning almost all its future resource revenue hopes on one segment of the natural gas industry—LNG exports to Asia. Indeed, the provincial government lists no fewer than 12 proposals on the books for liquefying B.C. natural gas for export markets. It’s unlikely that any more than three of those 12 will actually go forward in the best of circumstances, but nevertheless, there’s obviously lots of interest.
 
The problem is, not one of those proposals has invested more than the oil industry equivalent of pocket change. Yes, gas export permits have been granted to some, and all the ducks are being lined up. But no shovels are in the ground and in most cases there’s been no green light yet from boards of directors.
 
With that in mind, it’s difficult to see how any government would suggest any level of additional tax—never mind that it’s a graduated tax—on an industry that is still trying to make up its mind. And make up its mind in a highly competitive global field where it is already recognized that B.C. is a very late entrant with a rapidly-closing window to make something happen.
 
Lost in the rhetoric of what’s an appropriate rate for a new tax is that the industry already pays lots of existing taxes on every facet of its operations, will pay under an existing royalty scheme for the natural gas it exports, will pay both federal and provincial income taxes (as will all its employees), and will pay for a host of permits from three levels of governments.
 
The alternative, should none of these projects go forward, is that none of those royalties, taxes and fees will be paid to anyone, nor will any jobs be created.
 
To justify its new tax, the government relies on a recent Ernst & Young analysis of the tax competitiveness of B.C. compared with Australia and five U.S. states. According to the analysis, B.C. compares favourably with Australia and is better than all five U.S. states.
 
The trouble is, that simply looks at the taxing regimes—it doesn’t look at any other costs associated with the development of a $5-billion or more LNG plant and related facilities in those jurisdictions. If, for example, a $5-billion facility in Texas would cost $7 billion in B.C., then the most competitive tax regime in the world might not be enough to get the plant built in B.C.
 
And there is a telling line in the Ernst & Young report that says, “The scope of the engagement did not include EY commenting on the appropriateness of either the proposed B.C. fiscal framework, or any of the fiscal frameworks in alternative jurisdictions.”
 
That speaks volumes. The provincial government spent months working on this tax to make sure it got it right, but probably did nothing more than sow more uncertainty and more delays. And that’s that last thing this nascent industry needs.

 Don Whiteley is a natural resources writer based in North Vancouver.