Arctic gas lines essential

TransCanada’s Kvisle says demand for new supplies in North America means projects needed; joins analysts in projecting bleak 2009

Gary Park

For Petroleum News

TransCanada Chief Executive Officer Hal Kvisle has added his name to the lengthening list of those who believe the North American gas market will be in the dumpster for a while yet.

But he also calls for action on the proposed pipelines from Alaska and the Northwest Territories in warning that the current supply glut will eventually run its course.

The continent’s gas bubble could last another six to 18 months, even though prices may have bottomed out at just under US$5 per thousand cubic feet, he told Reuters at a Houston conference.

Kvisle doubted the price slide would extend a “whole lot from where it is today because you start to run into the cost structure pretty soon.”

Noting that North America needs to add 13 billion cubic feet per day of new gas volumes just to meet the current needs of about 75 bcf, he said that as drilling drops in response to prices, the supply-demand balance will not be far off.

As a result, Kvisle said this constant demand for new supply is one reason the Arctic pipelines — both of which have TransCanada as a leading contender to operate the systems — need to be built.

Dysfunctional Canadian system

The government is “very constructive in looking at these things and they’re very committed to improving the regulatory quagmire that we go through, particularly in the north,” Kvisle said, adding he is hoping for more government backing because of the C$3.5 billion of additional costs resulting from the regulatory delays.

He also disclosed that negotiations with the holdout Deh Cho First Nations along the Mackenzie pipeline route are expected to soon result in completion of right-of-way acquisition.

Kvisle said the Canadian government also needs to accelerate the approval process if a decision is made to build an overland pipeline across the Yukon and British Columbia to the Alberta hubs.

Analysts agree

Rick DeWolf of DeWolf Consulting said 2009 will be a “very, very challenging year,” although the rebound could start in late 2009, or into 2010, when prices could return to the $8-$9 level seen in mid-2008.

He said the current supply-demand imbalance should start to correct itself as reduced drilling cuts into production.

DeWolf said some existing producers can survive with gas at $4, but new gas that is close to market needs prices close to $6.50.

Investment dealer Peters & Co. is also looking for a market recovery later this year, strengthening into 2010, although spot prices are likely to last through 2009 until a flattening or recovery in demand is needed to bring storage to more normal levels over next winter.

FirstEnergy Capital analyst Martin King believes 2009 will be a rough year and could be even more “bearish” until supplies start to tighten in 2010 and 2011.

He said the current weakness in gas prices has “exceeded our worst fears,” with FirstEnergy downgrading its 2009 price forecast to $5 per million British thermal units, a drop of $2, and 2010 has been lowered to $7.75 from $8.50.

JP Morgan Chase has cut its 2009 outlook for gas futures by 5.2 percent as the deepening recession cuts into demand in the U.S., Europe and Asia, with JP Morgan’s gas price strategist Scott Speaker forecasting an average price this year of $5.69, down from the $6 forecast in mid-December.

Tristone Capital estimates as much as 800 bcf of North American production could be shut in through 2009 as the industry waits for a price recovery.

The firm drastically lowered its 2009 New York Mercantile Exchange forecast to $4.25 from $7 and its AECO price to C$4.30 from C$6.95, largely because of plummeting industrial consumption in the U.S.