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Hope for Alberta gas? Some see gas price recovery; others believe shale gas inventories ‘unsustainable’ Gary Park For Petroleum News
Finding any shreds of hope in the Canadian natural gas sector — especially in Alberta — requires a large dose of belief and optimism.
But hope does exist.
Shares of gas-weighted energy companies staged a mild recovery in September and average commodity prices have shown signs of a comeback.
Along with that good news, Chris Theal, managing director of oil and gas research with Macquarie Capital Markets Canada, is counting on prices climbing in 2010 as the storage surplus begins to shrink and industrial demand recovers as that sector returns to life.
He expects prices of US$7 per million British thermal units in the first quarter of next year, contingent on a turnaround in storage levels over the short-term, partly because of gas shut-ins in Wyoming and Texas and a drop in Alberta production of 1 billion cubic feet per day.
Theal told a Calgary conference that U.S. industrial demand will average about 16.5 billion cubic feet per day in 2009, off 1.2 bcf per day from 2008, but help is on the horizon.
Industrial output, especially in the chemical and metals sector, started to pick up in late summer and a more broad-based recovery is likely next spring, he said.
Montney pace picking up In Canada, the pace is gathering momentum in British Columbia’s Montney development, led by EnCana, Royal Dutch Shell, ARC Energy Trust and Strom Exploration, and Horn River is creating most of the buzz.
The play is now yielding more than 300 million cubic feet per day and operators in the core area are seeing 14 to 45 barrels of liquids per million cubic feet of gas, enough for them to advance plans for liquids extraction plants to capture associated reserves from the high-value stream, Theal said.
Macquarie estimates that at gas prices of C$5-$6 per thousand cubic feet at the AECO hub, Montney producers drilling horizontal wells should collect C$1 million-$1.2 million in royalty relief.
With gas futures on the New York Mercantile Exchange entering the range of US$4.80-$5 per million Btu, some analysts are predicting Canadian prices of up to C$8 in 2010.
In that environment, share and trust unit prices have returned to about the midpoint between 12-month highs and lows, with heavyweight EnCana rising 8 percent in September, although the company is still trailing its year-ago levels by 15 percent.
Bonavista Energy Trust rose 8 percent in September, while Paramount Energy Trust and Enerplus Resources Fund gained 7 percent.
Gas-weighted share levels up Dragan Trajkov, an analyst with Salman Partners, said gas-weighted share levels point to gas prices of US$6-$7 per gigajoule, reinforcing confidence in an economic recovery and return of industrial demand.
He said EnCana’s decision to proceed with its plans, shelved last fall, to divide itself into pure-play gas and oil producers bolsters the confidence in gas markets.
Wilf Gobert, an independent analyst writing in the Calgary Herald, was emphatic that gas is “coming back” after trading at a cyclical low a month ago. Since then gas prices have made a gradual rise to 30 percent below their crude-equivalent from 40 percent.
Over that period AECO prices have grown to C$3.12 from a 2009 low of C$1.96, while the Nymex futures are nudging US$5 from US$2.73 a month earlier.
“Generally, economic forecasts have been upgraded for 2010,” Gobert said. “That helps the outlook for industrial production and thus, for oil and gas.”
He said the answer to the question of whether lower production is a result of well shut-inswill have to wait for winter.
Others question quick turnaround But many experts are ready to dump cold water on the gas outlook.
Jen Snyder, head of North American gas research for Wood Mackenzie, questions whether a quick turnaround is in store.
She told a Canadian Energy Research Institute-Canadian Society for Unconventional Gas conference in Calgary in September that the industry is “operating in a completely different paradigm for North American gas markets now, certainly relative to expectations of three years ago.”
Snyder said her firm is expecting Henry Hub prices of US$4.50-$5.50 per million Btu in 2010 and 2011 and some gains in 2012 and 2013 that will stretch through to 2020 in the range of US$5.50-$6.50.
She said producers have broken the “technological code” needed to economically produce shale gas, inundating the market with a wave of new supplies at the same time the U.S. credit crisis hammered North American demand.
“The question now is how quickly the market can recover and how rapidly new upstream opportunities will emerge,” she said.
Snyder said this year’s deflationary cost environment and greater efficiencies in shale production have allowed investment to continue even in a lower price world, but aggressive development of more marginal plays and higher cost shales has slowed.
She said the shale successes have set the bar for the gas industry in North America, resulting in a lowering of costs at a time when the “cost of virtually everything in the energy value chain was increasing.”
Snyder said that the Marcellus shales in Pennsylvania, where the decline rates in initial test wells are lower than expected, could have a breakeven gas price of US$3.50-$4 per million Btu. Emerging plays in the Haynesville region are yielding similar numbers.
She said there is a “platform for significant supply growth from these shale gas resources even in a difficult demand environment and what we foresee to be a moderate and modest price environment through 2015.”
Inventories called ‘not sustainable’ Porter Bennett, president of Benteck Energy, told the same conference that the surge in shale gas production means North America is building inventories that are “just plain not sustainable” at a rate of about 3 bcf per day, guaranteeing long-term price implications.
He predicted US$3.50 for the upcoming winter, assuming a shut-in of 2 bcf per day of incremental supply, with 2010 looking a “lot like” 2009 and remaining that way until demand rises relative to supply.
The Conference Board of Canada forecasts that gas prices will start to recover in 2010, but warns that the sharp drop in costs for Canadian producers will likely be fleeting as they compete for materials and services at a time of strengthening oil prices.
The board said the Canadian and U.S. economies will be in full recovery mode by the end of 2009 as rising demand meets dropping production, allowing gas inventories to regain their balance with historical norms.
The report predicts revenues for Canadian producers will drop 18 percent this year to about C$46.8 billion, then rebound to C$58.8 billion in 2010, C$72.1 billion in 2011 and C$95.8 billion in 2013.
The board forecasts a modest recovery in drilling during the period, slowing the decline in production to 1.2 percent. By 2013, output will be 16 percent below where it was in 2000.
If the Alberta government restores its original royalty increases, payments will grow to C$83.3 billion in 2013 from C$44.6 billion in 2009, the board said, but profits should climb from C$2.3 billion in 2009 to C$12.5 billion in 2013.
Gerry Goobie, an analyst with Purvin & Gertz, said the gas outlook is “pretty gloomy” after two years of weak prices.
“Will it turn? Almost certainly, but when and how much: That’s the question,” he said. “I don’t think it’s the end of the industry. I think the industry has got a lot of life left in it for future years.”
A report by TD Economics said Alberta’s gas industry is unlikely to regain its former dominant role in the provincial economy because of major long-term challenges accompanied by a glut of new supplies.
As a result, the Alberta government must be prepared to adjust its course and start laying the foundations for other industries to diversify the economy, said Derek Burleton, the bank’s director of economic analysis.
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