Oil and Gas Industry Requesting Massive Tax Cuts for LNG Terminals in Advance of 2015 Federal Budget

The Canadian Association of Petroleum Producers (CAPP) is asking the Harper government to consider reclassifying liquid natural gas (LNG) terminals as ‘manufacturing assets’ to provide tax breaks to companies struggling to develop costly facilities in the current oil market.

The oil and gas industry requested similar measures for both previous federal budgets but has so far been unsuccessful. The upcoming budget, however, is under the control of finance minister Joe Oliver, know for his strong support of the oil and gas sector during his time as the former minister of Natural Resources Canada.

In a budget submission to the House of Commons Standing Committee on Finance, CAPP requested “improving Canada’s taxation and regulatory regimes” and noted the federal government can assist industry “by establishing a competitive tax climate to attract investment [and] maintain an effective and efficient energy regulatory regime,”

If granted, the tax breaks – which would allow companies to forego paying 30 to 50 per cent of capital costs per year – could cost the federal government hundreds of millions of dollars.

A Natural Resources Canada memo released to Reuters through Access to Information legislation says the department “understands the need for clarity on the fiscal environment for LNG facilities to support final investment decisions.”

“We have examined CAPP’s proposal…and continue our discussions with the department of finance on the matter,” the memo reads.

The department of finance is expected to release the next federal budget this spring. Major budgetary decisions are made in consultation with the Prime Minister’s Office.

According to Reuters CAPP estimates the tax breaks would add roughly $3 billion to Canada’s gross domestic product from 2015-2035.

B.C.’s fight to fulfill LNG promises

The B.C. Liberal government and premier Christy Clark have made the development of natural gas and the export of LNG a key part of the province’s clean energy platform and economic strategy.

In 2010 the province committed to having one LNG terminal on line by 2015 with three more to follow by 2020. The province eventually updated that commitment to three LNG facilities in operation by 2020.

There are at least 18 LNG terminals proposed for the B.C. coast although a new report recently speculated only two plants will be built due to an “anxiety attack” resulting from plummeting oil prices.

None of the proposed projects has secured full and final investment from sponsors leading firms to predict B.C. may only manage to bring one project on line by 2021, followed by a second in 2023.

Despite the challenges, the B.C. government says they are still on target to meet their current 2020 goal.

B.C.’s minister of natural gas and development, Rich Coleman, admitted in October that his office, along with officials in Alberta, is pushing the federal government to approve the LNG tax breaks. “We’re cooperating with Alberta to try and get this issue raised,” Coleman told Bloomberg.

Colman indicated that B.C. has been vying for a more favourable tax regime for LNG since 2012, but has increased its efforts in the lead up to the 2015 budget because of an increasingly open federal environment.

“There’s nothing concrete, although there is more interest in having the conversation around this tax than there’s ever been,” he said.

B.C. has already introduced two provincial tax breaks for LNG companies. In October the B.C. Liberals announced an LNG income tax rate of 2.5 per cent, down from the former 7 per cent. In addition the province also introduced a new program that will allow companies to drop their corporate income tax rates to 8 per cent, down from 11.

In December Malaysia’s Petronas and its Asian partners, backed away from a proposed LNG terminal, citing low oil prices and high building costs.

The company is part of the B.C. LNG Developers Alliance along with Royal Dutch Shell, BG Groups and Chevron. The Alliance recently petitioned the federal government to support the tax break.

According to federal lobby records, Petronas has been actively lobbying a number of federal departments to solicit support for the new tax regime. Records show Petronas lobbyists engaged in discussions related to the “competitiveness of Canadian LNG projects” and “the appropriate tax policies to support LNG development in Canada.”

Petronas has been pushing the federal government to relax LNG taxes for months.

Given the poor economic environment and B.C. late entry to the LNG market, companies like Petronas – and their main investors – appear to be waiting for a friendlier financial environment.

In a recent report the risk-management consultancy firm Eurasia Group said, “monitoring both oil prices and cost mitigation in coming months will be crucial to determine whether Petronas could still take its investment decision in 2015.”

“If not, it will be unlikely that B.C. would see major LNG production from a mega project before 2020.”

Cuts will cost taxpayers

According to Kin Lo, associate professor at the UBC Sauder School of Business, the change in tax law will ultimately end up costing taxpayers.

“The significance from the federal budget and the taxpayers’ point of view is that [these tax breaks] really can lead up to a lot of money coming, really, out of taxpayers’ pockets.”

“I think companies are pushing for this because they are in a way obligated to in terms of maximizing value for their owners and shareholders,” Lo said. “From their point of view they should try to get this beneficial change in the tax law that would favour them.”

“As to whether it’s justified – that’s a completely different question,” he added.

Reg Plummer, a senior economist recently retired from Natural Resources Canada, told Reuters the tax breaks would mean major losses for the federal treasury. He added the push for LNG development may also raise questions about Canada’s commitment to phase out fossil fuels.

“Finance (department officials) would be looking hard at that because these are serious bucks we’re talking about,” Plummer told Reuters. “It’s sort of helping out (companies) a little bit with some risk, but it’s not going to be a make or break for them.” 

Image Credit: Province of B.C. via Flickr