BC LNG prospects take another blow with new duties on modules

Even before a US$43-billion LNG project involving major Chinese players in Alaska was announced on November 8, companies with LNG developments still in play in B.C. were ringing alarm bells over government policies that could make their plans uneconomic.

B.C. was beaten to the punch by LNG developers in the U.S. Gulf Coast when the last window of opportunity for long-term LNG contracts was open.

Now, Canada faces the prospect of the U.S., backed by China, beating it to the punch once again for the 2025 window – this time with a project that enjoys all the same advantages B.C. developments have, but with the added heft of China and a state government that is an equity partner behind it.

LNG developers like LNG Canada, whose backers include Shell (NYSE:RDS), Mitsubishi (NYSE:MTU), PetroChina and Korea Gas Corp., have been lobbying the province to reconsider the fiscal framework set by the Christy Clark Liberal government.

Whereas LNG producers in Canada would have to pay both carbon taxes and a special LNG tax, their biggest competitors – companies in Australia and the U.S. – have neither.

And now Canadian companies are facing a potential doubling of costs for LNG plants, thanks to new anti-dumping duties.

This summer, the Canadian International Trade Tribunal (CITT) and Canada Border Services Agency imposed anti-dumping duties as a response to complaints by Canadian manufacturers that China, South Korea and Spain were dumping cheap steel into Canada.

Imports of fabricated industrial steel components from China and Korea could be hit with 45% dumping duties.

If those duties are applied to the prefabricated LNG facilities, called “trains,” that would need to be built in China or Korea – which are among the few countries with that expertise – it could add about $2 billion to a project’s costs.

“It could be significant,” said David Keane, president of the BC LNG Alliance, which represents LNG developers in the province. “It could be a few billion dollars.”

FortisBC, the only company to develop an LNG plant in B.C. to date, said in a statement to Business in Vancouver that “if subject to additional taxes,” its “infrastructure investments will not be globally competitive.”

“This could result in British Columbia missing out on the jobs and benefits that come with capital infrastructure investment,” the company said. “It is also important to note that these types of tariffs would impact more than just the LNG industry, but also major construction projects across sectors.”

The trains that chill the gas into a liquid represent about 34% to 38% of an LNG plant’s total capital costs, according to one calculation. Storage tanks and associated facilities are about 10% to 15%.

The now-dead Pacific NorthWest LNG two-train plant was estimated at $11 billion. So a 45% duty on a two-train module would add roughly $1.7 billion to the cost. If duties were applied to storage tanks as well, that would add $500 million more.

“We’re talking about very sophisticated steel components that are not able to be manufactured in Canada,” Keane said. “Even if the components could be built in Canada, there’s no way to transport them to the coast.”

LNG Canada was among the interveners asking the CITT for a determination that the duties would not apply to LNG modules.

But the tribunal refused to clarify whether the duties will apply to LNG modules. LNG Canada therefore has to assume that they might. The company has four consortiums working on competitive bids for fabricating the LNG modules.

“It puts us into a position where, in the absence of the certainty, we have to assume that the duties apply,” said Susannah Pierce, director of external relations for LNG Canada. “From that perspective, you’re almost half of the cost … which is significant when you consider the scale of these modules.

“They’re very complex. The scale and size have never been built in Canada, which is why you need to go overseas. That is why we’re concerned that if these duties apply, it substantially could increase the cost of modules.”

LNG Canada is among a handful of companies that have filed for a judicial review of the duties. LNG Canada and Woodfibre LNG have also filed for a duty remission order through the federal Department of Finance.

“We’re looking for clarity on that issue and would argue that it shouldn’t apply because the prefabricated modules that are built are not currently built in Canada,” said Woodfibre LNG spokeswoman Jennifer Siddon.

Conservative Party Leader Andrew Scheer defends the duties, saying China unfairly subsidizes many of its manufactured products to the detriment of companies like Evraz North America PLC, which owns a steel manufacturing plant in his own riding of Regina-Qu’Appelle.

“In the case of China, where you have a lot of state-owned enterprises...you have a lot of government subsidies artificially lowering the costs, potentially keeping Canadian companies from even starting up,” he told Business in Vancouver November 16, following an address to the Greater Vancouver Board of Trade.

The duties aren’t the only concern, however. Although the BC Liberal government was an ardent promoter of LNG, it also introduced a new tax scheme that put the LNG industry in B.C. at a competitive disadvantage.

Two of B.C.’s biggest competitors – Australia and the U.S. – are already way ahead of B.C. Both have LNG plants already in operation, and more are planned. Neither country has the 3.5% LNG tax that the BC Liberal government implemented. Nor do they have carbon taxes.

When it comes to developing LNG plants in this province, advocates often tout a “B.C. advantage” that includes vast natural gas reserves, short shipping distances to Asia and a cold climate that reduces the energy input costs for chilling natural gas to below -160 C.

Alaska has those same advantages. And now it has the Bank of China, the China Investment Corp., China Petrochemical Corp. (Sinopec) and the Alaska state government partnering on the US$43 billion Alaska LNG project.

Through the state-owned Alaska Gasline Development Corp., the Alaska government has a major stake in the project.

The Alaska LNG project has its challenges, including the high cost of building a 1,200-kilometre pipeline across frozen tundra to bring natural gas from Alaska’s North Slope to a three-train LNG plant in Nikiski on Cook Inlet.

Jihad Traya, manager of natural gas consulting for Solomon Associates, said Alaska LNG could bring the pipeline’s costs down by using Chinese steel, however.

If the project were to be built, it could eat into the market for LNG in China that B.C. producers hoped to capture.

“The B.C. government needs to get its head up out of the sand and realize, if it doesn’t provide fiscal certainty and potentially an equity stake in LNG, it doesn’t have a project,” Traya said.

Even with LNG and carbon taxes, B.C. can compete with Alaska, said Jas Johal, a former BC LNG Alliance staffer and now Liberal MLA for Richmond-Queensborough.

Johal said he also believes there could still be a demand for LNG produced in B.C.

“We’re looking at up to 39 countries building LNG intake facilities, from only 15 in 2005,” he said. “So the world is heading to using more natural gas.”

— Business in Vancouver

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