Gov't between a rock and an LNG hard place
When it comes to the much trumpeted new industry in the Northwest and its glacial progress towards becoming a reality, I have this image stuck in my head of premier Christy Clark, decked out in a Snow White costume, plaintively singing “Someday my prince will come.”
As in the liquefied natural gas prince.
It is understandable if she feels a wee bit melancholic given the extravagant promises she made prior to the last election.
But I will give her and her government credit for finally facing facts on LNG as in absolutely no mention of the fictional X plants by year Y in the Throne Speech this year and finance minister Mike de Jong not including in his budget speech any LNG Prosperity Fund money in his three-year revenue forecast.
De Jong went further in talking to reporters after the speech by saying he did not expect any LNG tax revenue to be rolling in during the next five years.
He is right on the money – or lack thereof – in saying that.
That’s because none of the projects have yet been green-lighted by proponents and even when they are, it will be four – three at the most optimistic –years before any LNG flows from the new plants.
Granted, on that construction time scale it is theoretically possible one plant could be up and running in 2018 – a year earlier than de Jong has factored in.
But that would require what’s called a Final Investment Decision (FID) being made almost immediately.
And that ain’t gonna happen.
The reason is that the proponents need to have certainty on what their costs and revenues will be before making a positive FID decision – these companies are not about to spend billions of dollars on a wish and a prayer.
The curious thing is the provincial government is not exactly helping them achieve that certainty on the costs side.
Which takes me back to the budget speech in which the government’s proposed LNG export tax regime was unveiled.
It has a two tier structure which will see a 1.5 per cent tax applied in the early years, then up to 7 per cent for the rest of the lifetime of the plants.
Except it is not that simple.
The 1.5 per cent will apply to the revenue less expenses and those expenses include the capital cost of constructing the plant.
And the 7 per cent may not actually be that – see the words “up to” above – and even if it is, it won’t really be because the companies can deduct the total of 1.5 per cent tax they have already paid from the higher rate.
In reading the government’s budget backgrounder #3 on the proposed tax, I noticed that the list of expenditures that would be regarded as capital costs did not include either the pipeline to deliver the natural gas to the LNG plant or the gas-fired power plant needed to liquefy that natural gas.
So I sought clarification from the finance ministry as to whether they did count as capital costs or not. They said they’d get back to me. Three weeks later there has been no answer.
In the interval I came up with another question: the scenario offered in the backgrounder assumed the companies would “fully deduct” their capital costs “by the end of year four,” year one being the start of production.
I asked whether the companies had to fully deduct in that time span or whether they could choose to drag it out, which would make total sense to me - as in delaying the higher tax rate as long as possible.
I did get a reply to that one but unfortunately it was contradictory and then ended with “these are some of the details that will become more apparent and specific when the legislation is introduced.”
So nothing has really been decided? I do not see much certainty in any of this.
And that will remain the case until the government brings down legislation for the tax, now postponed again until the fall. That there is a fall sitting of the legislature, something that has not always been the case, may speak to the urgency of the situation.
But in fairness to the government, it is not the elephant in the room. More on that next time.
Retired Kitimat Northern Sentinel editor Malcolm Baxter now lives in Terrace, B.C.