Gas overhang a threat, says NEB Canada’s National Energy Board sees storage space running out by late summer, pushing prices down, triggering possible shut-ins Gary Park For Petroleum News
Canadian natural gas producers may be forced to scale back production by late summer if North American storage space reaches capacity for the first time, driving down commodity prices, said the National Energy Board.
In its inaugural summer outlook, the federal regulator said refilling storage facilities is one month ahead of schedule and, unless that pace changes, the “overhang” could drive prices to US$5 per million British thermal units — the lowest point since September 2004 and 16 percent below current futures prices.
Even worse is a growing sense of gloom among some Canadian analysts that junior producers carrying high levels of debt could be pushed over the brink if their capital spending outpaces their cash flow after a year of watching record levels of activity drive up the costs of drilling and other services by 50 percent.
Typical of those starting to feel the squeeze is Berens Energy, whose bankers have hiked an operating facility to C$57 million from C$45 million while the company has cut its 2006 budget to C$51 million from C$71 million.
Their best hope is the one held out by the NEB which said a cold snap by late November or December could see prices rebound to the $7-$9 range.
Barring a catastrophic hurricane season in the Gulf of Mexico or a scorching summer, the board believes storage will hit its limit by late summer, leading to a gas surplus of 620 billion cubic feet.
To right the market, exports from Canada will have to fall, North American production will have to be trimmed, or consumption will have to rise, it said.
Of those options, the NEB is betting the most likely initial response will be for coal-fired electricity plants in the eastern U.S. to switch to gas, which could displace about 40,000 metric tons of coal a day.
That could also be accompanied by high-cost producers, such as those in the U.S. Rockies, cutting back on production until prices recover.
Paul Mortensen, an NEB analyst, told reporters that the board expects drilling will continue in Canada in the hope of a price recovery by mid-winter, but some producers may delay start-ups or shut in wells while hoping for a more normal winter.
Companies already cutting E&P spending The clouds over the Canadian gas sector have already prompted EnCana, Husky Energy, Apache, Murphy Oil and several junior E&Ps and income trusts to cut their E&P spending, lowering a forecast by Citigroup Global Markets for overall capital spending in 2006 to C$27.8 billion.
That’s still up 8.6 percent from 2005, but short of the 12 percent hike predicted by Citigroup six months ago.
Of the 72 companies with operations in Canada who responded to the survey, 35 percent expect to spend more in the second half of 2006 than the first half and 27 percent expect to trim their budgets.
“It appears there is limited upside potential to Canadian spending plans this year (unless there is a) strengthening of natural gas prices,” Citigroup said. “The price likely to yield 10 percent budget increases, on average, is now C$10.07 (per thousand cubic feet), up slightly from C$9.98 in December and above the current 12-month futures strip of C$8.28.”
The survey found that 52 percent of Canadian respondents expect to spend more on gas than oil, roughly unchanged from a year ago, but well short of the 65 percent among U.S. independents.
Coalbed methane permitting down The first hint of a pullback from unconventional plays because of price uncertainties and rising upstream costs has surfaced in Canada where new well permits have fallen behind 2005.
The Alberta Energy and Utilities Board issued 1,034 coalbed methane permits over the first five months, down just 12 wells from the same period last year, but May’s count was 143 compared with 232 in May 2005, putting a dent in hopes of 4,000 coalbed methane wells this year and 6,000 in 2007.
A disturbing sign has been the drastic scaling back of coalbed methane programs by the largest operators: Devon Canada has licensed eight wells compared with 78 to the end of May 2005; Apache Canada, 70 vs. 103; MGV Energy, 118 vs. 156; and EnCana 196 vs. 259.
Offsetting those trends, rig counts remain ahead of last year’s pace, with 60 percent of the activity targeting gas, and well completions are 20 percent higher than 2005.
David Hyman, an analyst with Raymond James, said in a research note that “field activity levels continue to build toward what is expected to be a very busy summer.
“While natural gas concerns remain rampant, we continue to believe that field level activity will continue to be governed by a longer-term view on pricing, which is still above prior year levels.”
Aside from whatever jitters the prospects for the rest of this year are causing in the industry, the Alberta government is likely to be on edge, having based its 2006-07 budget on average gas prices of $6.78 per million Btu. Currently, gas accounts for 60 percent of the province’s energy royalties and is forecast to reach C$7.15 billion in the current fiscal year, but may need a major adjustment.
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