UPDATE 2-British Columbia unveils LNG tax, projects budget surpluses

Tue Feb 18, 2014 6:58pm EST

By Julie Gordon and Jennifer Kwan

VICTORIA, British Columbia Feb 18 (Reuters) - British Columbia on Tuesday provided long-awaited details on a new income tax for its nascent liquefied natural gas (LNG) industry, as Canada's westernmost province released its second consecutive balanced budget.

The coastal province is eyeing a two-tier tax that would apply to income from the liquefaction of natural gas, the process of cooling gas into a liquid to be transported by ship, at facilities in British Columbia.

The first tier, set at 1.5 percent, will apply as soon as commercial production is achieved, while the second tier, pegged at up to 7 percent, would kick in once the operator has recouped the capital investment related to building the LNG facility.

Premier Christy Clark has prioritized the development of LNG export terminals along the rugged Pacific coast, which she has said could boost the provincial economy by as much as C$1 trillion and create some 100,000 jobs over the next 30 years.

Energy regulators have so far awarded seven export permits, but no final investment decisions have been made and production is still years away, prompting some to question the feasibility of the province's big bet on LNG.

"There are some skeptics out there who question whether this industry is real, and whether it will proceed in B.C.," Finance Minister Michael de Jong said in the budget speech. "It is very real."

He added that the framework strikes a balance between the need to maximize tax revenues into government coffers, while also ensuring the province is an attractive and competitive place to develop an LNG industry.

British Columbia is competing with jurisdictions like Australia and the United States to attract billions in investment dollars from the top global energy firms looking to ship cheap gas to energy-hungry markets in Asia.

But de Jong sidestepped questions from reporters on when the government expects terminals to be built and revenues to start rolling in, though he stuck with a "lofty objective" of having three terminals built by 2020.

"I don't want to suggest to you there is going to be a cascade of money flowing into a prosperity fund in the next five years. That's not likely to occur," he said.

The tax regime, which will be introduced into legislation later this year with regulation to follow in 2015, is just part of the broader cost picture that proponents are eyeing before committing billions to LNG projects, said Geoff Morrison, B.C. manager with the Canadian Association of Petroleum Producers.

"Are we there yet? I don't think we're quite there yet," he said. "But the government has made it clear they are willing to work with the industry and we're willing to work with them to make sure we can have the right balance."

British Columbia will also spend C$29 million over the next three years to support the development of the LNG industry, including money for attracting investment, the regulation and permitting process, and environmental protection.

BACK IN BLACK

British Columbia's surplus is projected at C$206 million in 2015-16 and C$451 million in 2016-17, the government said, in its first budget since the ruling Liberals were handed a surprise majority government in a May election.

The province said the revised surplus for 2013-14 is now seen at C$175 million, ahead of the projected C$165 million surplus the government foresaw in the second quarter. British Columbia joins Saskatchewan in a select club as one of just two Canadian provinces with a balanced budget.

In keeping with election promises of economic development and job creation, de Jong said the province will keep the books balanced by controlling spending, working with the private sector on jobs and encouraging economic growth, with a focus on resource development.

"We continue to balance essentially on a razor's edge when you consider a C$44 billion plus budget," he told reporters, adding that ongoing global economic uncertainty could pose a risk to the fiscal plan.

British Columbia is heavily dependent on trade with the United States and Asia, and would be impacted by adverse market conditions in those regions.

Before budget day, de Jong had warned there would be few goodies, though the province did introduce legislation to implement a new early childhood tax benefit and a break for first-time home buyers.

British Columbia, which has a AAA credit rating, said total debt is forecast to reach C$64.7 billion in 2014-15, C$66.9 billion in 2015-16, and C$68.9 billion in 2016-17. The debt-to-GDP ratio is expected to peak at 18.5 percent in the current fiscal year, before falling to 17.8 percent in 2016-17.