Crunch time for Canadian LNG as projects await fiscal terms

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As many of the stakeholders in the numerous proposed LNG export projects in Canada come together next month for the Canada LNG Export Conference in Calgary , one of the main preoccupations of the delegates will be the question of when we will finally see the first final investment decisions (FIDs) on actual projects.

This autumn will be a critical time for Canada’s nascent LNG industry, as it awaits finalisation of the fiscal terms that will contribute to providing the certainty needed for these multi-billion dollar projects to go ahead.

Comparisons with the US are inevitable. Both the US and Canada have seen remarkable LNG export stampedes in recent years. However, while the number of proposed projects in Canada is now approaching 20, we have yet to seen the first FID.

In contrast, the US already has one four-train project under construction – Cheniere Energy’s Sabine Pass – and another project, Cameron LNG, has just taken FID and is now entering the construction phase. Moreover, it is now looking likely that another four or five projects could reach FID in the coming twelve months . In other words, by the end of 2015, the US is likely to have enough liquefaction capacity under construction to make it a premier league LNG exporter by around the turn of the decade.

So why no FIDs yet in Canada? One of the main reasons is that the provincial government in British Columbia (BC) – where most of the proposed projects would be located – has been taking its time coming up with a fiscal regime that will achieve a delicate balancing act. On the one hand, BC Premier Christy Clark has made future LNG revenues for her province a centrepiece of her premiership; on the other hand, the fiscal regime has to be attractive enough for project sponsors to feel comfortable that their projects will be profitable.

Addressing policy issues: Last December, in a speech reviewing progress on LNG development in BC, the Minister for Gas Development, Rich Coleman, said: “To get to those FIDs we know we need to address some policy issues. The first is the fiscal framework for the LNG sector. We have developed a tax structure that is competitive and predictable; it will provide a level playing field for industry while ensuring a fair share of the economic return is secured for British Columbians. We expect to be able to announce details soon. Finalising this framework will give industry the certainty they need to invest.”

In February of this year, BC’s Minister of Finance, Michael de Jong, revealed the government’s intentions: “The province continues to develop and implement all the elements of a competitive tax and policy environment to assist with LNG development in BC. To this end, government intends to introduce income-tax legislation later this year applicable to the LNG industry.

“The LNG Income Tax will be a two-tier tax with a tier-one tax rate of 1.5% and a tier-two rate of up to 7%, with the final rates to be determined and confirmed in legislation . . . The BC LNG income tax structure and rates are subject to approval of the legislature. Government intends to have legislation ready for introduction by fall [autumn] 2014, once the complex drafting process is complete. Regulations and additional legislation will follow in 2015.”

In May, at an LNG conference in Vancouver, Christy Clark gave a progress report on agreements that had been reached with Malaysia’s Petronas, which is leading the Pacific Northwest LNG project, and with Woodfibre, during an international trade mission to Asia:

“Petronas is scheduled, as you may know, to be the first major project to reach FID. WoodFibre is expected to be the first LNG plant in operation in BC. And with both companies we agreed to finalise our project development agreements by November 30th at the latest.

Grinding into the details:“That is the last step before getting to FID. And here's what it means. It means that BC will sit down with both companies and grind into the details so that we can make sure we have absolute certainty on the numbers, absolute certainty on all the costs, all the costs that are under government's control and that are specific to LNG. That includes certainty on all taxes and the costs of any regulatory requirements.”

Clark’s trade mission to Asia was just one of many initiatives that have been taken to build ties with potential LNG buyers in Asia. Just last month Coleman signed a Memorandum of Understanding with Wu Xinxiong, Administrator for China’s National Energy Administration, to “strengthen trade and investment” between China and Canada. (They are pictured above, with Christy Clark in the background.)

Asian LNG buyers are being wooed by many suppliers, both existing and potential, so Canadian exports are facing competition on many fronts, not least from projects in the US. If Canada is to become major LNG player any time soon, it now desperately needs the credibility that only final investment decisions on actual projects can bring.

By Alex Forbes

Related events:

Canada LNG Export Forum - Calgary 16-18 Sept 2014