​Drilling down on LNG Canada’s predicted tax bonanza

An LNG industry in B.C. may not be the $100 billion bonanza that former premier Christy Clark once promised.

But even a single LNG project — LNG Canada — is expected to bring in $22 billion for the B.C. government over a 40-year period.

That’s despite the BC NDP government’s scrapping $6 billion worth of special LNG taxes, and continuing to offer deep well credits to oil and gas companies, which allows them to write off some of their drilling expenses, thus lowering the royalties the government would otherwise collect.

David Austin, a lawyer specializing in energy for Stirling LLP, said the B.C. government’s numbers just don’t add up.

Austin said he suspects the government is downplaying the amount of increased natural gas production that the $40 billion LNG Canada project will generate, because downplaying it makes it easier to fit LNG Canada into its climate action targets.

He added it’s likely the LNG Canada plant will generate a lot more natural gas production in B.C. than the government is predicting.

“It’s highly unlikely the calculation of $22 billion in revenues to the provincial government will be correct if there’s only a 60% incremental increase in natural gas production in British Columbia,” Austin said.

An analyst with IHS Markit agreed, but added that a natural gas production boom from LNG Canada likely won’t happen until later this decade.

The first phase of the LNG Canada project — a two-train plant — will produce 13 million tonnes of LNG annually. That will require 1.8 bcf of gas per day.

B.C. produces about 4.5 bcf of natural gas per day, according to the National Energy Board.

The B.C. government estimates that the LNG Canada project will result in only a 60% incremental increase in natural gas production, which is not exactly a bonanza.

But if that’s the case, Austin said, he wonders where the B.C. government expects to see all the increased revenue from. He thinks the B.C. government is underestimating how much new natural gas production will result from the LNG Canada project.

Some of the revenue the government expects to get from LNG would be from land sales and royalties on upstream natural gas.

But natural gas has become so plentiful in North America that prices have cratered over the past decade, drastically reducing what the B.C. and Alberta governments have collected in royalties.

Last year, the B.C. government received only $145 million from natural gas royalties, compared with $1.3 billion in 2008. It received $173 million in 2017 from land and lease sales for oil and gas.

Taking natural gas royalties from 2017 as a comparison, a 60% increase in gas production would increase royalties by $87 million a year, provided natural gas prices remained at the same price.

Over 40 years, that would be about $9 billion in royalties, although an increase in natural gas prices could increase that number significantly.

It’s unlikely a single LNG plant would have a significant impact on North American gas prices, however.

Royalties aren’t the only source of revenue that the LNG plant will generate. But if the provincial government knows how much revenue its taxes on LNG Canada — sales, carbon and income — will generate, it’s not saying.

“We are working with LNG Canada on finalizing the operating performance payment agreement,” a ministry spokesperson wrote. “Once the agreement is signed, we will be in a position to release further information.”

Filings with the Canadian Environmental Assessment Agency (CEAA) offer some idea, however, of how much the project would generate for the province in taxation.

According to the CEAA, direct provincial tax revenue from a two-train project is estimated at $102 million to $146 million annually.

That includes $28 million to $38 million from provincial sales tax, $63 million to $88 million from carbon taxes and $15 million to $20 million from personal income taxes paid by employees.

A four-train project would generate $205 million to $292 million in provincial taxes.

Missing from the CEAA’s calculations is any tax revenue that might be generated from the $6.2 billion Coastal GasLink pipeline that is associated with the LNG project.

When royalties (based on current prices and a 60% increase in gas production) and the upper range of taxes calculated by the CEAA taxes are added, it brings total tax and royalty revenue to about $14.8 billion for a two-train project, and $20.7 billion for four trains over 40 years.

There would also be one-time tax revenue for the province from construction, estimated by the CEAA to be $200 million to $320 million for a plant with two liquefaction facilities (“trains”) and $347 million to $563 million for four trains.

The provincial government’s $22 billion therefore appears to be based on a four-train plant, and in that case, Austin is right – that will require a lot more natural gas production than the government currently estimates.

If the plant were expanded to four trains, LNG Canada would produce 26 million tonnes per year, requiring about 3.6 bcf per day of natural gas. So a four-train plant would require an incremental increase in natural gas production of roughly 2.8 bcf per day.

While the demand for the first two trains could be met with a 60% incremental production, the additional 1.8 bcf per day that two more trains would require would have to come from new or incremental gas production, said Ian Archer, associate director of IHS Markit’s North American natural gas team.

“When you add another 2 bcf per day, that’s a pretty significant volume,” Archer said. “All that gas would then have to be drilled up. You’d probably bring only a small amount of that from the market. That other gas in the market already has a source destination.”

How much additional natural gas production occurs in B.C. – and how quickly the provincial government will profit from it in royalties – depends on how quickly LNG Canada’s partners decide to move forward on Phase 2.

There are economies of scale that would suggest LNG Canada would want to start the second phase when the first phase is nearing completion.

“From a labour perspective and a construction perspective, it’s easier to keep crew on site and have them build trains three and four,” Archer said. “The question would be, do the partners involved in this want to bring an additional 2 bcf a day into market and do they have a market for it?”

— Business in Vancouver

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