HOME PAGE SUBSCRIPTIONS, Print Editions, Newsletter PRODUCTS READ THE PETROLEUM NEWS ARCHIVE! ADVERTISING INFORMATION EVENTS PETROLEUM NEWS BAKKEN MINING NEWS

Providing coverage of Alaska and northern Canada's oil and gas industry
August 2008

Vol. 13, No. 33 Week of August 17, 2008

Better days ahead

Canada drillers face bleak winter, but some say gas will soar to $15 in 2009

Gary Park

For Petroleum News

With natural gas prices retreating to a six-month low, industry hopes that the upcoming winter drilling season in Canada will end a two-year tailspin are in doubt, despite new reports that gas is undervalued.

Steve Laut, president of Canadian Natural Resources, told a conference call that gas projects will have a tough time competing with crude oil for capital spending because of softening prices and higher royalties that take effect in Alberta next year.

He said the “returns for oil are significantly better than gas, even at the higher gas price,” and now Canadian Natural is “concerned that we will see a further softening of gas prices.

“Even if they do rebound they may not rebound to levels that will be required (to compete) on a capital allocation basis with oil,” Laut said.

He said the Alberta royalty hikes in 2009 will see “gas drilling in Alberta decline markedly.”

Laut said a month ago he would have been among those forecasting a ramp up in activity, especially in British Columbia.

“I still think B.C. will be very strong, particularly the shale gas plays,” he said. “I don’t believe Alberta will be.”

After peaking at $13.31 a month ago, natural gas has tumbled about 35 percent to under $9 per million British thermal units in New York.

Prices must be $12 with new royalty

Laut said many wells in Alberta need prices above $12 to be profitable under the new royalty regime, although shallow gas will pass the break-even point at $6-$7 under the royalty changes.

He said Alberta gas drilling can no longer compete with British Columbia, where the province has not hiked royalties, or in the United States, where supplies have surged from the rapid development of low-cost shale plays.

Laut said Canadian Natural is well-positioned to add significant value from its gas assets, but the “relative economics of gas and oil need to move to more normal levels before we will choose to do so.”

As Canada’s second largest gas producer, he said Canadian Natural is one of the largest landholders in British Columbia and is well positioned to capture “significant value from the emerging shale plays, “particularly in Montney where we have over 70,000 acres of prime shale lands.”

Quick payouts on heavy oil

Answering a question on the annual cash flow per produced barrel of oil equivalent in Western Canada divided by finding, development and acquisition costs, Laut said there are “very, very quick payouts on heavy oil, primarily heavy oil (at current) prices. We are making in excess of $90 a barrel for heavy oil.”

As a result, rather than drilling more gas wells, Canadian Natural will direct more of its capital in 2009 to oil, especially heavy oil, which he said could be profitable even if oil dropped to $60 per barrel.

Gas prices will go way up

But not everyone is taking such a bleak view of the gas outlook.

FirstEnergy Capital Partners said gas prices are grossly undervalued after the July price dive and should start to recover.

Analyst Martin King said the “massive implosion in gas prices that swept through the market caught everyone by surprise … however, we see the current market are being grossly undervalued … as there simply has been no real change in underlying fundamental drivers.”

He believes gas prices will bottom at $9.

CIBC World Markets also takes an upbeat view, predicting electricity and gas prices will surge as North American utilities shift from coal-fired generation to natural gas.

Although that will drive consumer prices for gas-fired electrical power higher that should also benefit Alberta producers and the provincial government, the report said.

CIBC said gas prices are tied to oil prices, which are forecast to remain strong despite the recent stumbles.

“That means utilities seeking gas to fuel generating plants will have to pay significantly more than at present,” the report said.

CIBC economists Krishen Rangasamy and Benjamin Tal said the shift to gas-generated power will be driven by concerns about the greenhouse gas emissions emitted by coal-fired power plants.

“Simply put, global warming is bullish for gas,” they said. “Many coal-fired-generation capacity plans are likely to be cancelled all over North America and be replaced by nuclear and natural gas facilities.”

Regardless of the current swoon in oil prices, the economists believe crude will average $150 next year and increase even more in the next few years.

The report calculates roughly a 10-to-one ratio between the true price of oil and gas, based on the cost of an equivalent unit of energy. Gas is still below that ratio, but it has crept up from $6 to $9 since last winter.

As oil moves toward $150, the report said gas prices, which usually experience a 12-month lag in adjusting, should climb to a record $15 next year.






Petroleum News - Phone: 1-907 522-9469 - Fax: 1-907 522-9583
[email protected] --- http://www.petroleumnews.com ---
S U B S C R I B E

Copyright Petroleum Newspapers of Alaska, LLC (Petroleum News)(PNA)©2013 All rights reserved. The content of this article and web site may not be copied, replaced, distributed, published, displayed or transferred in any form or by any means except with the prior written permission of Petroleum Newspapers of Alaska, LLC (Petroleum News)(PNA). Copyright infringement is a violation of federal law subject to criminal and civil penalties.