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B.C.'s LNG project agreement is a risky business

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The Project Development agreement that the provincial government negotiated with Petronas (Pacific Northwest LNG) and now plans to enshrine in legislation has only one purpose.

It is an agreement very clearly designed to prevent this and any future British Columbia government from increasing LNG-specific taxes or changing LNG greenhouse gas regulations in ways that would increase project costs. Should this or any future government do so they would be legally bound to compensate Petronas in full for the adverse financial impact.

It is, of course, completely understandable why industry would want government to constrain itself in this way. Industry does not like risk, especially political risk, and it will shed whatever risk it can with the negotiating power it has. Given the extraordinary scope of the guarantees that the government has agreed to, Petronas clearly had considerable negotiating power in the development of this agreement.

What isn't understandable though is why even this government, so desperate for LNG development, would agree to these terms.

It is one thing to agree not to increase taxes. It may be that a government less desperate for LNG development would not have had to limit taxes so much. But the fact remains there is a global competition for the siting of new LNG facilities, and British Columbia does need a predictably competitive tax regime if it wants any project to go ahead. There is no cost to British Columbians in taking a small amount in taxes if demanding more would mean there would be no LNG activity and income to tax.

However, it is quite another matter to agree not to change LNG-related greenhouse gas regulations for the next twenty five years or more. That doesn't just shed risk for industry; it imposes potentially huge risks on the people of British Columbia.

The current greenhouse gas regulations would allow a developer like Petronas to emit some 3.2 millions tonnes of CO2 per year at no charge. It could emit another 1.4 million tonnes of CO2 per year at a maximum cost of $12.50 per tonne. And it could emit beyond that at a maximum cost of $25 per tonne.

If a future government should decide, or by national or international agreement be compelled to impose charges on all LNG-related emissions, it would be the people of B.C., not Petronas, that would have to pay the costs of emissions from the Pacific Northwest LNG plant. This project agreement will potentially prevent any future government from recovering the full costs of the LNG emissions, regardless of how large or severe they might be.

If, for example, B.C. and other governments came to agree that a charge of $100/ tonne of CO2 on all LNG-related emissions were needed both to provide sufficient incentive to reduce emissions and to pay for the increasingly expensive investments government has to make to respond and adapt to climate change, Petronas would not have to pay the $320 million or more annual cost of the GHG emissions from its facility.

Given the ever-increasing evidence and concern about climate change, it is not entirely unlikely that governments in the short-to-medium term (certainly within the next 25 years) will recognize the need to impose GHG charges of $100 per tonne. And from a risk management perspective, one has to consider the possibility the cost of GHG emissions and need for charges reflecting those costs could be much higher than that. At $200 per tonne the emissions from the LNG plant would entail costs of $640 million or more per year -- costs that this government's agreement would prevent future ones from recovering.

If LNG facilities are developed, they will generate some benefit. But the benefits, properly measured, will be modest and in many respects short lived. There is no reason to believe or analysis to suggest that these modest benefits justify the risks the government's Project Development Agreement would have us assume.


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