Proposed changes to tax rules would make Canadian LNG projects more competitive

  • National Newswatch

The global energy market is volatile right now – and it's hard to know what the coming months hold. But few things are as likely as the world's growing demand for natural gas. That's why we believe that the recent actions by the Government of Canada in support of Liquid Natural Gas (LNG) development in BC is a good public policy, guided by strategic long term thinking.With the recent declines in the price of oil, natural gas doesn't enjoy as large a price advantage as it has in recent years.  Still, that doesn't change some basic facts.  The global market for LNG is expected to grow by more than 40% over this decade, with half of that growth in demand to come in the Asian market.The appeal of LNG for many customers is that it is a cleaner burning form of energy, and when used as a substitute for coal in power generation, means great reductions in greenhouse gas (GHG) emissions.  For the sake of the planet, it's in Canada's interests to want to see wherever possible, more power generation fuelled by natural gas delivered through LNG and less power from coal.Canada has tremendous supplies of natural gas – far more than we could use over the next 100 years.  Selling some of that natural gas abroad makes good economic sense: there will be more jobs in gas development here, revenues for Canadian companies, tax and royalty payments for Canadian governments – and we won't find ourselves only selling to one customer - the US - at a discount. But succeeding at this idea is not a given, Canada needs to take the right actions, at the right time.As the natural gas business globalizes, the trick is to beat global competitors, including the US, to the punch when it comes to negotiating the long term supply arrangements with new customers. Many global players appear very interested in working with Canada to seize the opportunities - working hard on project specifications and costs while trying to manage complex and dynamic global supply and demand factors.Recently, governments in Victoria and Ottawa have both been playing a constructive role in helping create the right conditions for major investment decisions.  In most cases, the projects involve building new gas pipelines, LNG liquefaction, storage and loading facilities, and multi-billion dollar multiple year upstream drilling programs to develop and produce the required natural gas volumes.Governments must play an important role in environmental oversight and in ensuring fair sharing of economic upsides of such projects.   Recently, Ottawa proposed changes in how certain federal taxes would apply to these projects – by revisions to the accelerated capital cost allowance mechanism.  This change does not result in a reduction in the taxes the projects would pay – but a shift so that the amount of taxes that would flow would increase over time, as the projects became fully operational and therefore profitable.The federal government took this idea on board in a thoughtful and constructive way.  They focused on the right questions: how to seek opportunity for Canadians, while not sacrificing the taxpayer's interest in the meantime.We do not see this as a “business subsidy”, and it doesn't remove the risk faced by any of the project developers – who will have billions of dollars of capital invested before seeing any cash flows from the projects.  Over the project life – the total tax benefit of the CCA deductions will be the same.  But it is the way good partnerships work: both sides realizing what the ingredients are for mutual success, and trying to accommodate each other's needs.The proposed changes to the CCA rules will make Canadian LNG projects more competitive globally.  That in turn will encourage additional investment – which will be good for Canadians – and by providing more natural gas to the rest of the world – also help reduce global GHG emissions.Barry Munro, an oil & gas specialist, is a Senior Partner in Ernst & Young's Calgary office.Gary L. Zed, a tax market expert, is Managing Partner of Ernst & Young Canada's Ottawa office.