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Back to the future for natural gas

Natural gas contracts trade hands at levels not seen since late 2008

When he was younger, Max Fawcett wanted to make a mint in the markets. Now as the managing editor of Alberta Venture he gets to write about them. Close enough, right? He can be reached at mfawcett@albertaventure.com

Feb 19, 2014

by Max Fawcett

Commodity traders saw something today that they haven’t in more than five years: a $6 price handle on Henry Hub natural gas. Thanks largely to a brutally cold winter in the U.S. northeast and the resulting drawdown of natural gas storage levels, the spot price for natural gas in that part of North America blew past the $6 on its way to posting a nearly 13 per cent gain on the day. As the Wall Street Journal noted today, “U.S. gas inventories are expected to fall to 1.437 trillion cubic feet in an EIA report due Thursday. Supplies haven’t been that low in February since 2004.” And while AECO spot prices haven’t rallied quite as far, they’re still well above the $5 mark, with companies able to lock in 12-month forward hedges at $4.76.

That’s not the only piece of good news out there for Alberta natural gas players. The B.C. government released a tentative framework for its much-discussed LNG tax, and the initial response from industry has been positive. Profits from LNG production will be taxed initially at a rate of just 1.5 per cent with that rate increasing to seven per cent after the capital costs associated with building the shipping terminals have been recovered. As AltaCorp’s morning note, err, noted, the corporate income taxes on LNG production paid at 1.5 per cent are then credited against the seven per cent rate until the original 1.5 per cent in taxes have been recouped. “Under the normal corporate income tax regime, when there are large investments of capital, such as an LNG project, the capital expenditures provide shield from corporate income taxes in the early years. The feds tend to ‘play’ with the allowable tax depreciation rate but leave the base corporate income tax computations alone. Under the B.C. proposal, it is possible that corporate income taxes will be paid in the early years, as there is no absolute ‘shield’ effect, but income taxes in the future years (when the tax shield is normally minimal) will be taxed at 7 per cent rather than 11 per cent.”

As BNN’s Jameson Berkow wrote in his now-daily update – a must read for anyone who’s invested in the Alberta energy sector – the industry appears pleased with the certainty B.C.’s proposal offers, but awaits its finalization. And, he noted, there are some who worry that the government might still be putting the Canadian LNG industry at a structural disadvantage to its peers. “The government had independent consultants compare B.C.’s proposed framework to that of Australia and five U.S. states (Louisiana, Texas, Georgia, Oregon and Alaska) and they concluded the structure is “competitive” but not everyone is convinced. Ed Kallio, director of gas consulting at the Ziff Energy Group, notes Canadian projects already face higher construction costs compared with U.S. proposals to convert existing import terminals and Australian costs may decline if that country’s Prime Minister, Tony Abbott, makes good on his promise to ditch the Australian carbon tax.”

And for those worried about George Soros’s apparent bet against the markets, the Globe and Mail’s David Berman has some advice: relax. Yes, he’s bought $1.2 billion worth of put options on the market, but as Berman writes, “the more you look at Mr. Soros’s bet, the less bearish it looks.” Given the fact that it only makes up 11 per cent of his portfolio, Berman thinks it’s more of a hedge on the market’s direction in the near-term (and, perhaps, an attempt to profit from the correction that seemingly every market watcher thinks is imminent) than a call on its long-term future. “Insuring your house doesn’t imply that you’re anticipating a fire,” Berman writes.

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