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LNG pact is all in the details

After years of work, the huge liquefied natural gas venture in B.C. was crystallized down to a single vital document that was released this week. It’s the project-development agreement between B.C.
Premier Christy Clark has staked her government's future on the development of a viable liquefied natural gas industry in B.C.

Les Leyne mugshot generic

After years of work, the huge liquefied natural gas venture in B.C. was crystallized down to a single vital document that was released this week.

It’s the project-development agreement between B.C. and Pacific NorthWest LNG, a consortium that is leading a long line of enterprises that have spent about $8 billion so far scoping out the possibilities of creating a new industry.

All that time and money would pale compared to what lies ahead if the projects actually proceed. The B.C. government is getting increasingly confident that the first one in the starting blocks is actually going to take off.

It’s still not a sure thing. The company has the right to walk away from the deal and has preserved that option right to the last possible moment before it fully commits. But if the project goes ahead, it will be on the basis of the document made public July 6. Legislation that enables the deal will be debated in a special sitting of the legislature starting Monday. The bill will also cover any future agreements, all of which would be based on the existing one as a template.

The central thrust of agreement is an intricate series of arrangements that provide an almost certain guarantee that four specific costs or benefits that B.C. has set for the industry will not be changed to the company’s detriment for the first 25 years of the project’s lifespan.

Other elements include:

• A lengthy addendum on an LNG natural gas environmental incentive program, designed to back up the claim that B.C.’s LNG will be the cleanest in the world when it comes to greenhouse gas emissions. On ambient air quality in general, B.C. has set interim objectives. But it notes: “When applying the interim objectives ... the adoption of the best available control technology will not be required unless warranted by local ambient air quality.”

• An agreement the company and its partners cannot sue the government of B.C. over the legal basis of the LNG tax regime, although they could go to court on technical interpretations or determinations on the quantum of taxes payable.

• Each party reserves termination rights and each party agrees to broad confidentiality requirements, with some exceptions.

• B.C. commits to consulting and co-operating with the proponent on First Nations’ engagement. Talks on benefit deals are being conducted with 31 First Nations along various pipeline routes and more are expected, including at the facility site, south of Prince Rupert. If there is any devolution of taxing authority to First Nations that would affect the project in the future, the government agrees to consult with the proponent.

• B.C. commits to work on deepening co-operation between federal and various provincial regulatory agencies. LNG projects are now handled by a dedicated team at the provincial Environmental Assessment Office. It’s working with the federal agency to co-ordinate reviews and streamline them to avoid duplication and make the process seamless.

• On filling the thousands of job openings, one of the most significant issues identified in the planning process, B.C. commits to co-operating with the proponent. B.C. notes it is recalibrating the apprentice system and re-engineering the education and training model to be more responsive to labour-market demand. It also notes an understanding with Ottawa to ensure British Columbians and Canadians are first in line for jobs. During the four-year construction phase, B.C. will take reasonable steps to establish job training in Prince Rupert and surrounding First Nations communities.

• B.C. will also keep a watchful eye on property tax rates set by local governments. It commits to facilitating engagement on local taxes and zoning. The goal is to achieve tax rates that “meet the needs of a municipal government while having regard to the interests of the proponent in maintaining the competitiveness of the project.”

• B.C. will also consult and co-operate with the proponent on infrastructure needs. A readiness study is examining what a major new industrial development would mean for roads, airports, hospitals, policing and schools.

But the mechanisms to ensure certainty on government costs are the heart of the deal.

David Keane, president of the B.C. LNG Alliance, said the projects require tens of billions of dollars in capital investment, “therefore require certainty with respect to the fiscal, legal and regulatory framework.”

The agreement provides further clarity and will ensure the B.C. industry can compete globally over the long-term “and will provide thousands of jobs for British Columbians for generations to come.”

It does that by bypassing the conventional parliamentary understanding that current governments can’t bind future governments to positions. All the rates set in legislation passed in the past year could be changed by a future government. So to preclude that, the law behind the agreement will give full protection to the company from any future changes in four areas:

• If B.C. increases the LNG income tax or imposes a new income or capital tax that applies exclusively to LNG any time in the next 25 years, the company would have a right to compensation. Such a change would be recognized as an “adverse change event” and trigger a number of processes.

The result would be an arbitration hearing, held in Vancouver under Canadian law. The main topic would be the “compensatory measure” the company is entitled to in order to be protected from the cost hike.

• A natural gas tax credit was created last year, which can reduce companies’ corporate income tax by up by three percentage points. It was designed to encourage multinationals, which can elect where to pay their taxes, to pay them in B.C., by making the rate more attractive. Any reduction to that credit would qualify as an adverse change, and trigger the same mechanism as above.

• LNG proponents would pay the carbon tax at the same rate as everyone else. But any specific adjustments to the carbon tax that would apply only to the LNG industry would qualify as a “discriminatory carbon tax event” and the compensation process would begin. General increases to the carbon tax would not apply.

• B.C. last year set greenhouse-gas emission standards for the industry that it said are the toughest in the world. They include an intensity benchmark that facilities can either meet or comply with by other means. Those would include buying offsets. Plants that are above the benchmark, but somewhere close to it, can qualify for an incentive program that was adopted in May. It subsidizes some of the cost of offsetting the higher emissions. Any future changes to the standards or the compliance mechanisms or the incentive program that would add costs would qualify as a “discriminatory event” and start the process to arbitration.

There is some small leeway built into the agreement. The new costs imposed would have to total $25 million a year, or $50 million over a rolling five-year period, to trigger the agreement.

If future governments stay hands-off on those components, then no adverse events would be declared and projects would pay taxes and enjoy benefits as they are defined today. But the measures will be heavily scrutinized in the days ahead.

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