The recent provincial budget in British Columbia included a basic framework for taxes and royalties on the liquefaction of natural gas at LNG facilities in the province. Although the specifics of the LNG tax have not yet been announced, in connection with the budget the province recently released an "Analysis of the competitiveness of BC's proposed fiscal framework for LNG projects" prepared by Ernst & Young for the Ministry of Natural Gas Development.
It is interesting to compare the hypothetical set of assumptions set out in the E&Y Analysis regarding the intensity of development which the province is assuming compared to the historical growth in other countries such as Qatar and Australia.
The E&Y Analysis assumes a "base case" scenario of five LNG export facilities with a combined capacity of 82 million tonnes per annum (MTA) from 2018 to 2037. The E&Y Analysis also considers a "high capacity" scenario assuming 82 MTA for 2018 and 2019 increasing to 120 MTA (reflecting the addition of two facilities) from 2020 through 2037.
In comparison Qatar, the global leader in LNG export to date, grew from zero to 77 MTA of export capacity in 14 years. Similarly Australia, which has seen rapid expansion of its export capacity is poised to add 60 MTA in seven years for a total of 80 MTA by 2018. Comparing the growth numbers in Qatar and Australia to the base case scenario identified in the hypothetical set of assumptions of the E&Y Analysis, the base case seems to be, shall we say, ambitious. This is especially true when considering the challenges facing the LNG trade globally, including escalating capital costs, pricing challenges and increasing competition among potential suppliers.
That being said, the economic impact of LNG development in British Columbia is potentially significant. Recent estimates place the capital cost of greenfield projects at roughly $1.5 to $3 billion per MTA of export capacity and the hypothetical base case scenario implies aggregate capital costs in excess of $100 billion and estimates aggregate royalties and taxes on twenty years of operation to be in excess of $150 billion. If British Columbia is able to achieve development of even a fraction of their hypothetical base case over the next ten to fifteen years the economic contribution to the province will be substantial. The uncertainties facing British Columbia's LNG opportunity are massive – but then there is no doubt that the potential benefits are too.
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