February 12, 2015 / 10:24 PM / 3 years ago

Canada looking at LNG tax breaks in federal budget: document

Cranes work in the water at the Kitimat LNG site near Kitimat, in northwestern British Columbia on April 13, 2014.Julie Gordon

OTTAWA (Reuters) - The Canadian government is studying the idea of providing new tax breaks in the upcoming federal budget for companies that build liquefied natural gas (LNG) export terminals, according to internal records obtained by Reuters.

Such incentives could help companies move forward with stalled developments in Canada, even as they cut spending around the world in response to plummeting oil prices.

More than a dozen LNG terminals have been proposed in Canada, mostly in the West Coast province of British Columbia. Backed by energy giants like Malaysia's Petronas, Royal Dutch Shell (RDSa.L) and Chevron Corp (CVX.N), the projects would ship cheaper North American gas to Asian markets.

But backers have long complained that development costs for these projects are high and margins are thin. There are no Canadian LNG export plants in operation now.

To help speed development, the Canadian Association of Petroleum Producers (CAPP) wants Ottawa to reclassify LNG export plants as manufacturing assets.

Under their current classification, LNG facilities in Canada can write off 8 percent of their total capital investment each year.

A government memo said that if finance officials accepted the industry proposal, LNG export plants could write off 30 to 50 percent of their capital investment per year.

Manufacturing assets have benefited from the 50 per cent capital cost allowance rate since 2007, which allows companies involved in manufacturing and processing to write off capital investments within two or three years.

The memo, obtained by Reuters under Canada's Access to Information Act, was prepared for the top bureaucrat at the federal natural resources department ahead of a meeting with industry representatives last October.

"We understand the need for clarity on the fiscal environment for LNG facilities to support final investment decisions," said the memo prepared by the natural resource department's energy sector.

"We have examined CAPP's proposal ... and continue our discussions with the department of finance on the matter."

The department, headed by Finance Minister Joe Oliver, compiles and delivers the budget, making major decisions in conjunction with the Prime Minister's Office.

The next federal budget is due in April at the earliest and neither the natural resources nor the finance department would comment on any specific budget proposals or discussions.

THIRD TIME LUCKY?

If implemented, the measure could make the government forgo hundreds of millions of dollars of tax revenue at a time when slumping oil prices are already eating into government receipts.

CAPP estimates that in return, the proposal would spur growth, adding about C$3 billion ($2.4 billion) over 20 years to Canada's gross domestic product. It did not immediately respond to a request for comment.

To be sure, the government rejected the industry's requests for tax breaks for LNG plants in the last two federal budgets and it is not clear whether Ottawa will grant the incentives this time.

Still, Canada's right-leaning Conservative government has deep political roots in the oil and gas-rich west of the country and regularly stresses the importance of the energy industry.

It is also uncertain whether this tax incentive would be enough to spur energy companies to break ground on such projects given volatile markets.

Canadian energy regulators have approved export licenses for 10 LNG projects in British Columbia and are reviewing further 10 applications for proposed terminals on Canada's west and east coasts, but no final investment decisions have been made.

Reg Plummer, a senior economist who retired from the natural resources ministry last year, said the proposal would cost the federal treasury a lot of money while offering investors a benefit of less than 1 percent on their rate of return. He also said officials may consider how this fits in with Canada's international commitment to phase out fossil fuel subsidies.

"Finance (department officials) would be looking hard at that because these are serious bucks we're talking about," Plummer said. "It's sort of helping out (companies) a little bit with some risk, but it's not going to be a make or break for them."

($1=$1.25 Canadian)

Additional reporting by Julie Gordon in Vancouver and David Ljunggren in Ottawa; Editing by Jeffrey Hodgson and Tomasz Janowski

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