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Competing in the global LNG market: Part Three

Hydrocarbon Engineering,

Fiscal policy

According to EY, fiscal policy plays a key role in determining Canada’s competitiveness in the global LNG market. Government must balance the pressures to achieve a fair return with the need to encourage investment in the sector. This will require collaboration between government and all the relevant stakeholders to identify the most effective framework and ensure BC projects are competitive in a global context.

There is already an established royalty framework that applies to the production and sale of natural gas in BC. The province also has sales tax, fuel tax, and carbon tax regimes and an extensive property tax system.

The 2014 – 15 BC Budget announced a proposed framework for an income tax regime applicable to income from liquefaction of natural gas at LNG facilities in the province. This ‘LNG tax’ will be a two-tier income tax with a tier-one tax rate of 1.5% and a tier-two tax rate that is yet to be determined, but could be up to 7%.

The tier-one tax rate is proposed to apply to an operator’s net income at the commencement of commercial production and to be deductible from the tier-two tax. The tier-two tax is proposed to apply to the net income less the costs associated with the capital investment from the construction of the LNG facility. The tier-two tax would only apply once the capital investment in the LNG facility is recovered.

EY explains that the tax is designed to provide revenue to the BC government from day one of operation and then increase once capital costs are recovered. The current BC mineral tax operated in a similar manner so in some ways the concept of the tax is unfamiliar. However, the LNG tax is expected to encounter additional complexities given the multiple different ways in which LNG can be produced and exported.

The BC government recognizes the need to prepare a tax regime that is globally competitive and, after announcing the proposed framework in the Budget, is working with proponents to ensure that the income tax rate will not deter investment. Recent consultations have focused on the two-tier tax rate and the income base on which the tax can be levied.

People, processes and costs

EY’s report highlights that the costs associated with LNG grow even greater when labour challenges enter the equation. High levels of development and construction activity are causing shortages of skilled labour across the country, e.g. mechanical, electrical and process engineers, construction foreman, welders .etc. Exacerbating this challenge is the increased need for specialized LNG specific skill sets, where experience is limited in Canada. Increased demand for specialized skills will drive costs up and lead to higher salaries, perquisites and training costs.

To help solve the labour challenge, the BC government announced a LNG-labour working group that included 18 representatives from government officials, organized labour, the Haisla Nation and major LNG industry players. The group produced 15 recommendations to tackle apprenticeship, training and other challenges. The report is publicly available and actions are underway to implement proposed recommendations.

Adapted from a report by Emma McAleavey.

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