Canaport deals help Irving Oil earn millions on LNG plant

A multimillion-dollar property tax concession for the Canaport LNG project in Saint John has helped Irving Oil Ltd. generate significant financial returns from the enterprise,court records obtained by CBC News show.

Aided by the tax break, a lucrative lease on Canaport property and guaranteed dividends it negotiated for itself, Irving Oil has been making millions of dollars at Canaport, even though its partner in the development the Spanish energy giant Repsol has lost more than $1 billionon its investment.

Saint John City Coun.Shirley McAlary says if significant amounts of money are being made by Irving Oil it makes revisiting the municipal tax deal at the site more important.

If we found out and knew for sure there was a lot of money being made by one party I think people would be more motivated to try and do something about this tax arrangement.- Shirley McAlary, Saint John councillor

"If we found out and knew for sure there was a lot of money being made by one party I think people would be more motivated to try and do something about this tax arrangement," said McAlary.

In 2005, Irving Oil struck a deal to have its property taxes at Canaport frozen at $500,000 per year for 25 years, about $7.5 million a year below current rates.

Details of how that deal has helped fuel Irving Oil's financial success at Canaport LNG have emerged from an unpublicized tax case fought in Calgary.

The Canada Revenue Agency disallowed multimillion-dollar business tax credits Canaport claimed in 2006 and 2007, an issue that ended up in federal court in Alberta where Repsol maintains a Canadian office.

It is Repsol not Canaport LNG fighting that case because among several beneficial terms Irving Oil bargained for itself is a provision Repsol alone would pay for unexpected costs at Canaport, such asunfavourable tax rulings.

"The model would dictate that Irving would be paid as if that tax did not exist," explained Repsol executive and Canaport LNG chairman Phillip Ribbeck to the court last October on the effect of losing the tax benefit.

"Repsol Energy Canada would effectively pay that tax."

But in mounting the court case on its own Repsol has revealed much of the once-confidential financial underpinnings of the Canaport development, including its partnership deal with Irving, the lease agreement with Irving for land used in the development and other financial arrangements that guarantee Irving a profit no matter how poorly Canaport LNG performs.

Most striking is the lease agreement, which shows just three months after convincing Saint John to reduce and freeze property taxes at Canaport to $500,000 a year for 25 years, Irving Oil signed a deal that now pays it more than $12 million a year in rent on that land.

'They'll be very upset with that'

Ivan Court, a former Saint John city councillor and mayor, who opposed the tax concession when then Irving Oil president Kenneth Irving asked for it back in March of 2005,says the new financial details will not sit well with the public when it learns how valuable the property really was.

"I think they'll be very upset with that," said Court.

"Here we are struggling as a city because we don't collect the taxes we should from big industry."

But in addition to rent, Ribbeck told the court Irving Oil enjoys guaranteed profits on the operation of Canaport LNG as well.

"There is a continuing commitment to provide dividends to the Irving partners, as well as provide lease payments to the Irving landowner," said Ribbeck.

"Under the terms of the contracts what effectively happens is Irving is provided for a 14 per centreturn on equity."

"Is this an after-tax or a pre-tax return we're talking about?" asked Repsol lawyer Robert McCue.

"After taxes," replied Ribbeck.

Precise amounts being earned by Irving Oil from the profitguarantee are uncertain, but according to Ribbeck and documents filed with the court, it has cost Repsol significantly.

Irving Oil owns a 25 per centstake in the $1.2 billion Canaport development and under the partnership agreement with Repsol, it can count 30 per centof that investment as equity and collect guaranteed after tax returns on that amount.

That likely produces a minimum after tax profit to Irving Oil guaranteed by Repsol in excess of $10 million per year on top of its lease agreement.

Irving Oil did not respond to a request to speak about the financial arrangements at Canaport.

Jan Sieving, aRepsolvice president and spokeswoman,said in an email the company is still in court fighting the tax ruling and is restricted in what it can say.

"Your questions are focused on the statements made as testimony in the tax court case.We cannot comment on matters related to the pending litigation," she wrote.

Also declining comment was former Irving Oil president Kenneth Irving who was in charge of the company during its 2005 negotiations with Repsol.

"I am unable to comment on the business," said Irving in an email to CBC News.

"I am very proud of the people with whom I worked alongside, and to whom most of the credit for any success should be attributed.

"As a person, I'm not so much motivated by who gets credit for achieving what. My greatest satisfaction is found in being surrounded by capable people I deeply trust and respect. In this regard I am, and have been, very fortunate.

"Good luck with your story."

Canaport's troubles

Irving's success with its Canaport LNG investment contrasts sharply with the failure of the business itself.

Canaport was built to export natural gas into the United Statesbut while under construction watched helplessly as the United Statesbecame self-sufficient in the fuel.

According to the U.S.Energy Information Administration natural gas fracking in American shale formations went from producing less than 2 billion cubic feet of natural gas a day in 2005 when Canaport was on the drawing board to more than 25 billion cubic feet per day last year.

That largely killed the need for imports from Canaport and in 2013 Repsol wrote off $1.3 billion it invested in the project and the associated Brunswick natural gas pipeline which runs from Canaport to the Maine border.

"How has Repsol financed the losses?" Ribbeck was asked during his testimony.

"I can't really go into detail, but I can say capital outside Canada has been brought into Canada by Repsol in order to fund those costs."

Building Canaport proved to be a poor investment decision, but in 2005 Repsol was so confident of success it also made an agreement with Irving to buy 100 per centof Canaport LNG's production capacity, whether it shipped gas or not.

"Those monieswould guarantee that the facility was always profitable and therefore the Irving entity would receive a dividend at all times coming out of the Canaport LNG partnership," said Ribbeck, in explaining how Irving Oil makes money even if Canaport sits idle.

"I think what's important for people to understand is that whether the terminal was utilized or not, Repsol Energy Canada has a requirement to pay the fees," he said.

New Brunswick lawyer Peter Hyslop says Irving Oil deserves credit for out-negotiating both Repsol and Saint John in structuring the Canaport LNG deal, but says if any opening exists for the city to renegotiate the tax concession, it should act on it.

"Irving Oil are very good businessmen.They're astute and they're good negotiators and protect their business interests very well I think they're among the best in the world at it," said Hyslop.

"I think if I was the City of Saint John and looking at this and trying to look at a fair way to resolve this situation with Irving Oil they should ask some questions of Irving Oil about the Repsol contract and Irving's own profitability."

The terms of the city's property tax arrangement are outlined in provincial legislation and regulations, which specify it is to apply to property "solely for the receiving and containment of liquefied natural gas." But last year Irving Oil constructed an oil pipeline on the site and began unloading crude oil from ships at the LNG wharf.

Saint John city solicitor John Nugent told council earlier this year that might open the door to renegotiating the deal and Hyslop says given what Irving Oil is making at Canaport the city should at least try.

"The owner of the property if he's making money you know he should carry some of the freight."