Budget 2016’s three-year fiscal plan details LNG in B.C.

Photo by Jan Arrhénborg / AGA

VICTORIA, B.C. — In B.C.’s budget announced yesterday afternoon, Finance Minister Mike de Jong didn’t outline any big plans in LNG forecast for the upcoming year. However, the three-year fiscal plan goes into more detail about revenue from natural gas and B.C.

According to the plan, natural gas royalties are expected to decline 15.2 per cent in the 2016-17 — which begins on April 1, 2016 — due to a lower natural gas price forecast.

However, its forecast that royalties will increase at a 38.9 per cent average annual rate over the next two years, reflecting projections for higher prices and production volumes, partially offset by increased utilization of royalty programs and credits.

This forecast assumes an average price of $1.04 per gigajoule, plant inlet in 2016/17, down from $1.31 in 2015/16. The 2016/17 assumption is within the 20th percentile of the private sector forecasters, continuing the ‘prudence incorporated in recent budgets.’

The Ministry of Finance expects prices to rise in the next two years, averaging $1.34 in 2017-18 and $1.61 in 2018-19, in line with the growth of the average of the private sector forecasters.

Natural gas royalty rates are ‘sensitive to prices in the $1.25 and $2.75 range,’ so the net effective royalty rate is expected to rise as natural gas prices increase. The most recent International Energy Agency forecast says global natural gas use will continue on an upward trend, and is expected to be the fastest growing fossil fuel over the next 25, years.

Budget 2016 expects China and the Middle East will be main centres of gas demand growth, and expects the demand for LNG to double by 2030 — as older LNG facilities around the world wind down production, there is expected to be growth in the gap between global LNG demand and the available or anticipated supply.

As market condition declined in 2015, the Ministry of Finance says oil and gas companies from around the world will continue to pursue LNG investment opportunities in British Columbia.

As of January 2016, 18 partnerships have now been approved by the Canadian National Energy Board for export licenses.

Four LNG export facilities have been granted provincial environmental assessment certificates, while four more are at varying stages of the EA process, and four of the natural gas pipelines proposed to support LNG facilities have been granted EA certificates. Budget 2016 calls this a ‘clear sign of progress in this emerging industry for British Columbia.’

To date, the Province has negotiated over 105 agreements with First Nations affected by LNG projects — which is over 40, currently. The Province will continue its consultations with First Nations and affected governments, as ‘each of them have an important role in the province’s LNG future.

Back in Budget 2014, the Province committed to develop and introduce an income tax applicable to the LNG industry in the fall of 2014. Budget 2015 unveiled the Liquefied Natural Gas Income Tax Act that set out the key components of the LNG Income Tax received Royal Assent on November 27, 2014.

The legislation also included an amendment to the Income Tax Act to introduce a Natural Gas Tax Credit for LNG income tax taxpayers with a permanent establishment in British Columbia. The amount of the credit is based on the cost under the Liquefied Natural Gas Income Tax Act of natural gas at an LNG facility inlet.

The Province completed its commitment when the Liquefied Natural Gas Income Tax Amendment Act, 2015, that sets out the administration and enforcement elements of the LNG income tax, received Royal Assent on May 14, 2015 and when regulations supporting the legislation were subsequently deposited.

According to Budget 2016, proponents of LNG have asked the Province for assurance that it will not increase industry-specific taxes or regulatory requirements once the LNG facility has been constructed and the substantial investment made.

In July 2015, the Liquefied Natural Gas Project Agreements Act received Royal Assent, giving the Minister of Finance authority to enter into project development agreements with the LNG industry. These agreements provide financial security to industry from changes to three industry-specific taxes and changes to industry-specific greenhouse gas requirements.

Furthermore, if government makes changes to any of these very specific taxes or regulatory requirements and if those changes are material, the Province may be required to provide compensation under the project development agreements.

Changes to LNG income tax, to the natural gas tax credit, to the carbon tax, to the Greenhouse Gas Industrial Reporting and Control Act and its regulations that apply to liquefaction activities or to the LNG Incentive Program can trigger compensation.

As of Budget 2016’s announcement on Tuesday afternoon in the B.C. Legislature, the Province has signed a project development agreement with Pacific NorthWest LNG.