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On October 21, the government of British Columbia announced a tax rate aimed at encouraging investment in the LNG industry on the province’s coast. The hope? To keep companies interested in the prospect of drilling for LNG.
Shell is just one of the companies looking to take advantage of BC’s new tax rate for LNG projects.
On October 21, the government of British Columbia announced a tax rate aimed at encouraging investment in the liquefied natural gas industry (LNG) on the province’s coast. The hope? To keep companies interested in the prospect of drilling for LNG.
Bill 6, known as the Liquefied Natural Gas Income Tax Act, establishes an outline of how the government plans to tax companies looking to set up shop along the West Coast.
In a press conference held right after the announcement, Finance Minister Mike de Jong said the government sees LNG investment in the province as worth billions of dollars. “The whole industry is predicated on the belief that gas, in its liquefied form, will garner a significantly higher price around the world. British Columbians deserve a fair share of that,” he said, adding that the industry is worth billions of dollars to the province.
According to a press release, the initial tax rate will be 1.5 percent, while a tax rate on net income (once capital investment is deducted) sits at 3.5 percent. The tax rate will increase to 5 percent in 2037.
Breaking down the numbers — what’s the difference?
The BC government will be easing taxes on LNG companies and using rates much lower than first proposed in February 2014, when the government put forward a 7-percent rate.
Spurred by “changes to the market,” the new 3.5-percent rate will only impact operating income, with no deduction of net interest expense and depreciation from income. If a company is operating at a loss, no need to worry as it will only be hit by the 1.5-percent rate. The higher tax rate of 5 percent will apply to companies across the board in 2037.
Further helping companies will be an income tax credit available to any LNG Income Taxpayer with a permanent establishment in the province. The credit will be calculated based on the natural gas acquired for the facility, reducing the provincial corporate income tax rate from 11 percent down to as low as 8 percent. For junior companies or those taking an interest in exploring the region, the benefit is huge. Their taxes will only rise once they stop operating at a loss, and with the 2037 time frame they should have plenty of time to find their feet in the market and start harnessing LNG production.
Quick praise after frosty relationship
Malaysian giant Petronas had earlier criticized the BC government over high taxes, saying they would drive the province out of the LNG boom.
In a release in early October, the company issued a warning about what would happen if it didn’t receive a firm commitment from the province on a tax rate and other key principles by the end of October: “[m]issing this date will have the impact of having to defer [Petronas’] investments until the next LNG marketing window, anticipated in 10-15 years.”
The recent announcement has been heralded as a welcome boost by companies operating in the region, from multinational corporations to juniors.
In a statement, Royal Dutch Shell (LSE:RDSA) praised the the newly announced tax rate. “[It] provides balance and consideration of the challenges. We are pleased to have certainty on a final B.C. LNG tax framework,” as per a statement from the company.
“The Highbank board of directors wholeheartedly applaud B.C. Premier Christy Clark and her Ministers on their revised B.C. LNG export levy,” reads a statement by Victor Bryant, president and CEO of Highbank Resources (TSXV:HBK,FWB:V7O). Highbank operates its Swamp Point project gravel aggregate project in Northwestern BC. Its goal is to help the construction industry and a flux of LNG companies into the region will help boost business.
In terms of how many may be popping up, there are 13 proposed LNG projects on the West Coast, and BC is aiming to become the premier supplier of gas to China and Asia as a whole. A 2013 report by the Canadian Association of Petroleum Producers identifies China as having an “insatiable demand for energy” and states that the country “is expected to become a major importer of LNG.”
Hope for a turnaround
Natural gas prices haven’t been a source of pride in the market recently, but there is hope that as oil falters, interest in the energy source could be jumpstarted. The International Monetary Fund has already reported that the potential for shipping LNG could provide a price boost, with price rising even higher in Europe and Asia.
Securities Disclosure: I, Nick Wells, hold no direct or indirect investment in any of the companies mentioned.
