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April 30, 2014
New report shows that $100 billion from liquified natural gas “not likely to be realized given real world conditions”
(Vancouver) A report released today finds that the BC government’s projection of a $100 billion “Prosperity Fund” from LNG exports is based on assumptions that are, in fact, too good to be true.
Path to Prosperity? A Closer Look at British Columbia’s Natural Gas Royalties and Propsed LNG Income Tax, authored by Marc Lee, Senior Economist with the Canadian Centre for Policy Alternatives, puts those assumptions to the test, and finds that the government’s promised returns to the public are little more than wishful thinking.
The report (the first of a series analyzing the economics and environmental impacts of LNG) looks at forecasts for Asian energy markets, the time and cost associated with developing BC’s LNG industry, and the province’s plan to earn royalties from LNG extraction. Path to Prosperity? also represents the first analysis of the LNG income tax, which the BC government outlined in the 2014 Budget.
Looking at these factors, it becomes clear that it would take every best-case scenario to materialize to earn the revenues promised by the government. More realistically:
Asian demand for LNG will be undercut as Japan and Korea reopen nuclear facilities, while China has many domestic and international options for new energy supplies in addition to BC-based LNG. And five countries that account for 70% of LNG imports (India, Japan, Korea, China and Taiwan) are forming a common front on price through a “buyer’s club”, making it far less likely that they’ll continue to pay top-dollar for imported LNG.
The start-up costs for BC’s LNG industry are massive, greatly eating into the gap between Asian and North American gas prices. Meanwhile, many competitors are simply adding capacity to existing facilities, increasing supply and driving prices down.
“The danger is that BC ramps up production at a large cost—including costs of regulatory oversight, infrastructure, and additional public services, for example, as well as environmental costs—but doesn’t receive much benefit in terms of revenue,” says Lee, Co-Director of the Climate Justice Project. “Rather than rely on fantasy projections of LNG investment, BC should go back to the drawing board to develop a regime for LNG development that ensures public benefits.”
The report seeks to provide a more realistic range of what public returns might be, and estimates the LNG income tax revenue at between $0.2 and $0.6 billion per year for a fully mature industry, although creative accounting practices could greatly reduce tax payable. For comparison purposes, BC’s annual budget is approximately $43 billion, In this context, the incremental benefit of the LNG tax is modest.
The report also notes that the structure of the LNG tax allows the industry to incur major cost over-runs—as they have been known to do—and have taxpayers eat the difference. Because companies can fully deduct all capital costs before paying the full 7% LNG income tax, any cost over-runs will be paid for by reduced taxes.
“BC has been rushing to get resources out of the ground regardless of the returns. Without a well thought out plan, the proposed LNG industry is likely to do more of the same. With market prices expected to drop and a poorly thought-out plan for public benefits, it’s time for the government to take a step back and ask themselves if we can do better.”
For more information or interviews with Marc Lee, contact Lindsey Bertrand at 604-801-5121 x233 or lbertrand [at] policyalternatives [dot] ca.
This report is part of the Climate Justice Project, a partnership between the CCPA and UBC, funded primarily by the Social Sciences and Humanities Research Council of Canada, with support from Vancity and Vancouver Foundation.
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