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January 9, 2015

LNG Price Trend

Government revenue claims with respect to LNG cannot be realized with today's prices but what is more important is final investment decisions may be postponed until prices recover, meaning there won't be any LNG revenue for BC for years to come.

In December 2014 Reuters reported: "Asian spot LNG prices LNG-AS have more than halved since the start of the year to below $10 per million British thermal units (mmBtu)." It also said that according to David Hewitt, co-head of global oil and gas equity research at Credit Suisse: "Average import prices into Japan, the world's top buyer, are forecast to fall to about $11 per mmBtu next year, down from an estimated $15.50 this year and $16.45 in 2013, if Brent crude averages around $75 a barrel." When Finance Minister Mike de Jong introduced BC's Liquefied Natural Gas Income Tax Act on October 21st he assumed a price of $12.50 per mmbtu at the BC LNG facility outlet (add transportation costs to Asia of at least $0.80/mmbtu to that plant gate price). Brent crude closed under $50 this week. BC isn't going to be able to sell $13.30 mmbtu LNG into a market that is pricing it below $11.00 and just as oil companies are reducing their capital spending in response to falling prices, LNG investors will postpone their decisions.

de Jong issued a news release on the Act together with a slide presentation. That presentation showed an estimate of approximately $800 million per year in provincial taxes and royalties as a result of a 12 million tonne per year LNG facility. I submitted a freedom of information request for the assumptions and calculations that support that estimate and have now received a full response, not a word was redacted.

The ten year projection for the hypothetical 12 MTA plant shows annual government revenue of $250 million in royalties, $293 million in corporate income tax (net of a $15 million in CIT natural gas credit) and $225 million in other taxes (property taxes, provincial sales tax and motor fuel tax). That totals $768 million per year for the first three years after which the LNG tax is assumed to provide a further $54 million a year for the next three years, increasing to $117 million in year 7 and to $125 million per year thereafter for a total in year 10 of $893 million.

If prices in Asia remain under $11.00/mmbtu, then at the plant gate in BC production would have to be economic at under $10.20/mmbtu (netting out shipping costs). Thatís a $1.38 billion hit to the revenue line in the government's hypothetical 12 MTA LNG plant with no offsetting reduction in costs. The government argues short term price fluctuations are not especially relevant when multinationals are making 20 to 30 year multi-billion dollar investment decisions. Tell that to the oil companies that are cutting their capital spending plans for 2015. It is likely that LNG investors will take some time to see how prices trend.