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BCBUSINESS.CA OCtOBER 2014 BCBusiness 37 B.C.'s Fair Share F I N A N C E When B.C.'s new LNG tax details are tabled next month, there may be a struggle between balancing profit for the province and being attractive to developers by Jacob Parry I n November, the provincial govern- ment will table the final details of its proposed two-tier, seven per cent tax on profits made from the export of liquefied natural gas ( LNG). The regime, promised in February's provincial budget, provoked prospec- tive developers such as Malaysian oil-and-gas giant Petronas to express concern that a seven per cent tax could be too high for them to green-light their proposals. But for BC Liberals—keen to fulfill their promise of a $100-billion prosperity fund for B.C.—finding a way to capture some of the wealth from $175 billion in proposed private sector capi- tal construction spending is critical. To date, the government has been scant on details, releasing little more than a study—with numbers crunched by EY—that found B.C.'s royalty regime, with the future LNG tax factored in, to be competitive with jurisdictions such as Alaska, Oregon, Texas and Australia. As for the two-tier levy itself, the prov- ince has said it will tax net proceeds at 1.5 per cent in the first three years after production begins; after that, produc- ers will be taxed seven per cent on net proceeds, once they've recovered the money spent on capital expenditures (pipelines, plants and terminals). In essence, it will be a manufacturing tax on gas processed for export. "Think of it like a special tax on pulp and paper mills, or bread production," says Jennifer Winter, a researcher at the University of Calgary's School of Public Policy, contrasting it with the conven- tional means of taxing natural resource extraction: royalties. Adding an overlay of taxes on top of royalty collection, in what is already an expensive place to extract natural resources (most energy- rich states, like Qatar and Russia, pay significantly less for labour), could send many prospective developers packing. "B.C. would be a relatively high-cost producer if it ever got off the ground," she says. Winter wonders whether the proposed regime is really about the government attempting to maximize benefit from a smaller number of pro- posed plants: "It indicates that a lot of the proposed projects are marginal, so the potential tax revenues from [those operators] are not that high." According to an analysis by Pricewa- terhouseCoopers, the province's annual revenue projections—which include the LNG tax, royalty payments and indirect corporate, income and sales tax rev- enues from related economic activity— range from $4 to $11 billion, depending on the number of contracts signed and export facilities built. PwC projects the government's total take to be in the $79- to $162-billion range—from the time the first plant goes online until 2037. But Marc Lee, an economist with the Cana- dian Centre for Policy Alternatives, calls the province's projections—and their lack of detail—"a black box." "The amount of revenues we're getting back in terms of royalties is really low," says Lee, pointing out that the government's take from natural gas royalties was $144 million in 2012-13, whereas projections for annual LNG revenues to government amount to no more than $500 million by 2016. "If you want to encourage more produc- tion, you can subsidize the industry by allowing more generous writeoffs of capital costs and drilling expenses," says Lee. "But at some point you have to ask: what is a fair share, back to B.C., of the profits associated with getting what is basically a public resource out of the ground and exporting it to Asia?" • Natural gas royalties (2012-2013) Natural gas related revenues (2012) Projected natural gas- related government revenues (2015) Projected natural gas royalties (2016-2017) Projected natural gas related revenues (2025-2040) total government revenues (2013) CAD $53.4 b total government revenues (2014) €237.2 b total state revenues (2012) us $13.6 b Government revenues from hydrocarbons CAD $32.05 b Government revenues from natural gas €11.9 b Average annual reve- nue from hydrocarbons (natural gas develop- ment 2024-2041) us $4.4 b CAD $144 m AUD $19 b CAD $580 m AUD $8 b Low CAD $4 b High CAD $11 b Qatar NetherlaNds NATURAL GAS GOVERNMENT REVENUES alasKa The Race for LNG Dollars B.C. Australia