Article – LNG competition rising as Canada offers tax incentives

by 5 November 2014

23 October 2014
Paul Garvey
The Australian

THE challenges facing the next wave of Australian liquefied natural gas projects may have become even steeper after rival developments in Canada won a significant watering down of tax rates.

LNG projects in the western Canadian province of British Columbia will now start at a tax rate of 1.5 per cent while they recoup their capital investment, with the rate to rise to 3.5 per cent after four years and 5 per cent after 20 years.

The province had originally proposed a lift from 1.5 per cent to 7 per cent after just five years.

The favourable terms increased the likelihood of the 18 LNG projects proposed for British Columbia moving into development, which would increase the competition facing proposed Australian developments, such as the Woodside Petroleum-led Browse LNG project.

Macquarie analyst Adrian Wood said the terms would make Australia’s LNG proposals “look that little bit more challenged”.

“At first glance, these more attractive tax terms will add yet more supply-side competition to what is already looking like the most competitive LNG environment we have ever seen,” Mr Wood said.

None of the 18 LNG projects proposed in British Columbia has so far entered construction, but any LNG from the projects would probably compete directly against Australian LNG for customers in Asia.

The Browse project off northern Western Australia is the next Australian LNG project slated for an investment decision.

But one of the key partners in the Browse joint venture, Royal Dutch Shell, is also looking to develop an LNG project in British Columbia and Mr Wood said Shell might now prefer to focus on its opportunity there instead of Browse.

“These new BC tax terms could see Shell’s LNG Canada project pull further ahead of Browse in the company’s pecking order,” Mr Wood said. “Indeed, we believe that some of Shell’s apparent stalling on Browse may have been to get a clearer sense of BC’s fiscal terms.”

The Browse project is currently the most advanced major growth option in Woodside’s portfolio.

However, its remote location and its reliance on unproven floating LNG technology means its future development is far from certain.

Woodside, which is flush with cash from its North West Shelf and Pluto LNG projects, is tipped to be looking widely around the world for acquisition opportunities as it aims to replenish a diminishing reserve base.

Woodside itself has taken an early-stage entry in British Columbia, with the company studying the feasibility of an LNG plant at Grassy Point on the province’s northern coast.

British Columbia’s Finance Minister Michael de Jong said the lower-than-expected tax rate was a reflection of the tougher economics in the LNG sector amid rising construction costs and falling energy prices.

“The market is not as lucrative as it once was,” Mr de Jong told reporters.

A statement issued by the Shell-led LNG Canada venture said the tax framework “provides balance and consideration of the challenges faced by an LNG sector” in the province.

LNG pressure rising

Courtesy of The Australian

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